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BPP
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Content reviewed by
ACCA’s examining team

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Approved
Workbook
Foundations in Accountancy /ACCA
Business and Technology (FBT/BT)
For exams from 1 September 2021
to 31 August 2022

Free access to eBook & additional digital content

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Is required for
 WALMEU TE
foundations in
Accountancy/ACCA

Applied knowledge

Business and
technology
(FBT/BT)

For exams in September

2021, December 2021, March
2022 and June 2022

BPP
LEARNING
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Contents
Introduction
Helping you to pass
Introduction to the Essential reading
Introduction to Business and Technology (FBT/BT)
Essential skills areas to be successful in Business and Technology (FBT/BT)

1 Business organisations and their stakeholders

2 Business Environment
3 The legal framework
Skills checkpoint 1
4 The macro economic environment
5 Micro-economic factors
6 Business organisation structure

7 Organisational culture and committees 121

Skills checkpoint 2 145
8 Corporate governance and social responsibility 149
9. The role of accounting 163
10 Control, security and audit 181
11 Identifying and preventing fraud 207
Skills checkpoint 3 223
12 Leading and managing 227
13. Recruitment and selection 251
14 Individuals, groups and teams 271
15 Motivating individuals and groups 291
Skills checkpoint 4 307
16 Training and development 313
17 Performance appraisal 32/7
18 Personal effectiveness and communication 341

19 Ethical considerations 365

Skills checkpoint 5 38]

Index 388
 Digitized by the Internet Archive
in 2023 with funding from
Kahle/Austin Foundation

https://archive.org/details/foundationsinaccOO00unse_l006
Helping you to pass
BPP Learning Media — ACCA Approved Content Provider
As an ACCA Approved Content Provider, BPP Learning Media gives you the opportunity to use
study materials reviewed by the ACCA examining team. By incorporating the examining team’s
comments and suggestions regarding the depth and breadth of syllabus coverage, the BPP
Learning Media Workbook provides excellent, ACCA-approved support for your studies.
These materials are reviewed by the ACCA examining team. The objective of the review is to
ensure that the material properly covers the syllabus and study guide outcomes, used by the
examining team in setting the exams, in the appropriate breadth and depth. The review does not
ensure that every eventuality, combination or application of examinable topics is addressed by
the ACCA Approved Content. Nor does the review comprise a detailed technical check of the
content as the Approved Content Provider has its own quality assurance processes in place in this
respect.
BPP Learning Media do everything possible to ensure the material is accurate and up to date
when sending to print. In the event that any errors are found after the print date, they are
uploaded to the following website: www.bpp.com/learningmedia/Errata.

The PER alert

Before you can qualify as an ACCA member, you not only have to pass all your exams but also
fulfil a three-year practical experience requirement (PER). To help you to recognise areas of the
syllabus that you might be able to apply in the workplace to achieve different performance
objectives, we have introduced the ‘PER alert’ feature (see the next section). You will find this
feature throughout the Workbook to remind you that what you are learning to pass your ACCA
exams is equally useful to the fulfilment of the PER requirement. Your achievement of the PER
should be recorded in your online My Experience record.

BPP Business and technology (FBT/BT) Vv

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 Chapter features
Studying can be a daunting prospect, particularly when you have lots of other commitments. This
Workbook is full of useful features, explained in the key below, designed to help you get the most
out of your studies and maximise your chances of exam success.

Key to icons
5 Key term
QO Central concepts are highlighted and clearly defined in the Key terms feature.
age Key terms are also listed in bold in the Index, for quick and easy reference.

Formula to learn
‘ iv? This boxed feature will highlight important formula which you need to learn for
your exam.

PER alert
A !\ This feature identifies when something you are reading will also be useful for your
PER requirement (see ‘The PER alert’ section above for more details).

Real world examples

These will give real examples to help demonstrate the concepts you are reading
about.

k | Illustration
Illustrations walk through how to apply key knowledge and techniques step by step.

— Activity
\ Z4 Activities give you essential practice of techniques covered in the chapter.

Essential reading
Links to the Essential reading are given throughout the chapter. The Essential
TT}
. reading is included in the free eBook, accessed via the Exam Success Site (see inside
cover for details on how to access this).

At the end of each chapter you will find a Knowledge diagnostic, which is a summary of the main
learning points from the chapter to allow you to check you have understood the key concepts. You
will also find a Further study guidance which contains suggestions for ways in which you can
continue your learning and enhance your understanding. This can include: recommendations for
question practice from the Further question practice and solutions, to test your understanding of
the topics in the Chapter; suggestions for further reading which can be done, such as technical
articles; and ideas for your own research.

BPP
vi Introduction
LEARNING
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Introduction to the Essential reading
The electronic version of the Workbook contains additional content, selected to enhance your
studies. Consisting of revision materials and further explanations of complex areas (including
illustrations and activities), it is designed to aid your understanding of key topics which are
covered in the main printed chapters of the Workbook.
A summary of the content of the Essential reading is given below.

1 Business organisations and stakeholders Types of business organisation, providing

more detail on the various different types
of organisation.

2 The business environment Environmental factors

Social and demographic changes
Cultural trends
Competitive advantage - Porter’s five
forces model

_ 3 The legal framework Termination of employment

4 The macro-economic environment Government policies and obligations

Unemployment

| 5 Micro-economic factors
}
Markets and competition
| Supply
Elasticity
Long-run and short-run cost curves
|
_ 6 Business organisation structure Organisational structure - includes
| important information including
|
outsourcing and offshoring.
|
|| 7 Organisational culture and committees The marketing function - includes more
detail about the marketing mix
The finance function - an important area
||
}

_ 8 Corporate governance and social Principles of corporate governance

| responsibility Developments in corporate governance
Corporate governance regulations
Committees

9 Role of accounting What is accounting?

International Accounting Standards Board
Financial systems and controls

| 10 Control, security and audit Other classifications of internal control

procedures
- Internal checks
- |nternal audit and internal control
systems
- Systems integrity issues for PCs and
networks
- Further information on Fintech
- Distributed ledger technology

BPP Introduction vii

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 Summary of Essential rea
|Chapter ding content :

11 Identifying ana eee a Ae * Fraud controls

ja

*
* Evolving control ens
De
Leading one managing - further details
sectional.
12 fescing or) managing
about the role of managers, including
project management
« The process of management
* Management theory
. Gee, theories
— ee -
13 pecruitment and coleerior * Eoerianent and a Acca
* Interviews |

14 Fraltue tei groups wi teams ° Helyanne

ea ee ; ee e ee =
| 8 Motiverting individuals and groups | ° is design as a motivator

16 Training and Develoomere * Training needs a Bolecttes

¢ Training methods

17 eeformnice copra * Purpose of performance appraisal

fet aun places of res appraisal
————— 2 So —aee + ee — — — |

18 Personal effectiveness and communication | + Boe oral deeopre

° Se ieishale coutlict
= 2 ee eee Mae te : eS -
19 Ethical poneideraene | « The eimeel environment
_* Ethical threats
Se —= SF | ee ceeae
ee = ee =

viii Business and technology (FBT/BT) BPP

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Introduction to Business and Technology (FBT/BT)
Overall aim of the syllabus
To introduce knowledge and understanding of the business and its environment and the influence
this has on how organisations are structured and on the role of the accounting and other key
business functions in contributing to the efficient, effective and ethical management and
development of an organisation and its people and their interaction with technology, data and
information systems.

Brought forward knowledge

There is no brought forward knowledge for this paper.

The syllabus
The broad syllabus headings are:

lA
|
“The Sete organisation, itsS akenclders ond the Sel environment

B Peo organisational structure, eve ane gOvennics

inch “Accounting and reporting systems,‘compliance, control,I,technology anda sec

_
a one wnlelniele lig faghpacels and teams

m Personal effectiveness eineeeiGhtanieeion

| Bore Ethie _ wees and renee

Main capabilities
On successful completion of this exam, you should be able to:

[A Understand the purpose and types of businesses and how they interact with key
stakeholders and the external environment.

Understand business organisation structure, functions and the role of corporate

| governance.

Recognise the functions, systems and new technologies in accountancy and audit in
| communicating, reporting and assuring financial information, including the effective
compliance, internal control and security of financial and other data.

Recognise the principles of authority and leadership and how teams and individuals
are recruited, managed, motivated and developed.

Urcsrrand the importance of personal effectiveness as the basis for effective team
and Crash ond behaviour.

Pecocrite that all aspects of bustvreds one finance should be conducted in a manner
which complies with and is in the spirit of accepted professional ethics and professional
values.

BPP Introduction
LEARNING
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Links with other exams

Strategic Business Leader (SBL) |

ACCA

Business and Technology (BT)

Foundations in
Accountancy

The diagram shows where direct (solid line arrows) links exist between this exam and other exams
following.

Achieving ACCA’s Study Guide Learning Outcomes

This BPP Workbook covers all the Business and Technology (FBT/BT) syllabus learning outcomes.
The tables below show in which chapter(s) each area of the syllabus is covered.

The business organisation, its stakeholders and the external environment

|At | The squroese and types Bf business eroteeann | @hapier 1

| A2 | | rer ccee f business sreennestions =i Chapters .

‘AB ual | Political and legal factors atectne pees 3 | fchapiee 3

|AY | Nacretec onan: factors | | Chantems i

| A5 | Meeeeeonene factors | | Chapter 5

| hé |Co) thts chinensis factors | ) Chapter 2

| A7 |Technological factors Chonter 2

| Ag | Environmental fete Chapter2

|Ag ae Comeannve footer } | Chapter 2 “a

Business organisations structure, functions and governance

B1 The formal and informal business organisation Chapter 6

—B2 _ Business organisation structure and design | Chapters 6, 7

|B3 Organisational culture in business | Chapters 2, 3

|BY | Committees in business organisations | Chapter 7

x Business and technology (FBT/BT) BPP

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BS SUBS and social oes in business Chapter 8

Accounting and reporting systems, ecmeolog uecom planes and cantrols

Ct The relationship elaneat Becountne and other ehanrer rsh

| business functions

| C2 | Accounting sine finance functions within poeiness Chapters 7e 9, 10

C3 | Principles of law governing eooetning and ave Chapter 9

C4 _ The sources and purpose of internal and external Chapter 9

_ financial information, provided by business

C5 | Finance SENG eietnes Mies on telated IT Chapters 9, 10

_ applications

| C6 | Internal controls, authorisation, security and Chapter 10

_ compliance within business

(Cy/ | Fraud and fraudulent behaviour and their Chapter 11

BN One in business, including money ‘cuidetiiaet

C8 | The wa AOR and Teac of Financial Chapter 10

_ Technology (Fintech) in accountancy and reporting

4 Leading and managing individuals and teams

| D1 _ Leadership, management and supervision Chapter 12

| D2 | Recruitment and selection of employees Chapter 13

D3 _ Individual and group behaviour in business _ Chapter 14

| organisations

| D4 Team formation, development and management Chapter 14

| DS | Vieueeme ane Wale and groups Chapters 15

| D6 sock le and training at work | Chapters 16

Review and appraisal of act cuel performance _ Chapters 17

Personal effectiveness and communication in business

E1 _ Personal effectiveness techniques | Chapter 18

74 | Ponconuenées of ineffectiveness at work Chapter 18

|E3 | Competence fmenere and personal Chapter 18

development
|

| EY Sources of conflict and techniques for conflict Chapter 18

| resolution and referral

| E5 Communicating in business Chapters 18

BPP Introduction xi
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 Professional ethics in accounting and business

(Aull | Fundamental ouinelissico of ethical baheviour “Chapter 19

ire | The “ale of Pelee and proreeeondl Baeieelin | Chapter 19

_ promoting ethical and professional standards in the |
| See levellel poole ca |

| F3 “Corporate codes of ethics |

py 19

|Fu | Ethical cones ane dilemmas eae 19

The comets auillclave and study Bude can jes (ound a desing the exam resource finden onaha:
ACCA website: www.accaglobal.com/gb/en.html.

The exam

Computer-based exams
Computer-based examinations (CBEs) are available for all of the Foundations in Accountancy
exams. The CBE exams for the first seven modules can be taken at any time; these are referred to
as ‘exams on demand’. The Option exams can be sat in June and December of each year; these
are referred to as ‘exams on sitting’. For more information on CBE exams and to access Specimen
exams in the CBE software, please visit the ACCA website.

How do CBEs work?

* Questions are displayed on a monitor.
* Candidates enter their answer directly onto the computer.
* Candidates have two hours to complete the examination.
* Candidates sitting exams on demand are provided with a Provisional Result Notification
showing their results before leaving the examination room.
* The CBE Licensed Centre uploads the results to the ACCA (as proof of the candidate’s
performance) within 72 hours.
* Candidates sitting the Option exams will receive their results approximately five weeks after
the exam sitting once they have been expert marked.
* Candidates can check their exam status on the ACCA website by logging into myACCA.

Benefits
* Flexibility — the first seven modules, exams on demand can be sat at any time.
* Resits for the first seven modules can also be taken at any time and there is no restriction on
the number of times a candidate can sit a CBE.
* Instant feedback for the exams on demand as the computer displays the results at the end of
the CBE.
For more information on computer-based exams, visit the ACCA website.
www.accaglobal.com/gb/en/student/exam-entry-and-administration/computer-based-
exams.html

xii Business and technology (FBT/BT)

BEF NG
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Essential skills areas to be successful in Business and
Technology (FBT/BT)
We think there are three areas you should develop in order to achieve exam success in FBT/BT:
(a) Knowledge application
(b) Specific Business and Technology skills
(c) Exam success skills
These are shown in the diagram below.

_. Exam SUCCESS skj/j, _

a,

gpecific BI/FBT Skiff,

Specific FBT/FB skills

These are the skills specific to FBT/BT that we think you need to develop in order to pass the exam.
In this Workbook, there are five Skills Checkpoints which define each skill and show how it is
applied in answering a question. A brief summary of each skill is given below.

Skill 1: Approaching objective test questions

All questions in the BT/FBT exam are OT questions, using a number of different formats.
BPP recommends a step-by-step technique for approaching objective test questions:

_ Answer the easier questions first.

_ Answer all questions.

Start each question by reading the requirement.

_ Apply your technical knowledge to the data in the question.

Skills Checkpoint 1 covers this technique in detail through application to five OT questions.

Skill 2: Learning the models

There are many models in the BT/FBT syllabus that you need to know for the exam. This Skills
Checkpoint provides you with advice on how to learn the models.

BPP Introduction xiii

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BPP recommends a step-by- ate technique for geing the models:

lock at sis Ae overview to see ihe context inioniee tie adel

SoU

Read Te recpnical ee again more2 slowly erecina onniwhat the 7

-. model is eouing and pute euse! olla ie

lect your book and write a summaryAsk as much of fie model as you
can TM
[See ee ere ope Ie Te s 2
Write some ee Hols en yecluversty techniques detailed 1in the Skill.

Mrempe ie Baecion: ip he fuer Spection practice to test your |

eons;

Skill 3: Approaching corporate governance questions

Corporate governance questions involving application of knowledge are not done well according
to the examiner’s reports. Some techniques are introduced in this Skills Checkpoint to help you
succeed better. While the skills are focussed at corporate governance questions, they can be
applied to many other application questions in the BT/FBT exam.
BPP recommends a step-by-step technique for approaching corporate governance questions:

Read ae requirement of the aledion aeeecnline

Read ine scenario. Think about:

* Why does the situation present a threat to good corporate

governance?
« What should/ could be done to reduce the threat?

Read ne opens meudeen in ie Gecical Eliminate oe epee which

are obviously incorrect. Rank the remaining options and choose the most
relevant/ likely eptign ON

Skill 4: Approaching multi-task questions

Section B of the exam contains six multi-task questions of four marks each. In this section you
have to answer many different types of OT question, and details of the different types of question
are given in this skills point.
The questions can be challenging because they tend to contain longer scenarios than the Section
A questions, so you need to manage more information.
BPP recommends a Ue. aad for
ROR pLSae NS multi-task questions:

Recall Sau eee technical theory,

Se SS See . a
Pec tae scenario

a: 4 fect in = doingthe easiest tae finst.

os ee ee = |
Skills Checkpoint 4 covers this Euan in derail through dppliedtians to an exam-eter
question.

Skill 5: Approaching ethics questions

Questions on ethics are likely to feature highly in your exam. Ethics questions are difficult as they
often require some judgement rather than being black and white.

xiv Business and technology (FBT/BT) fle

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A step-by-step technique for attempting these questions is outlined below. It is similar to the
structure we have seen for our other Skills.

| Read the requirements of the question

_ Read through the scenario. Think about:
Whose ethics are under discussion (the company, and employee etc.)
What should they do/ what should they have done if they are
behaving ethically

Read the options in the question:

Eliminate any options that are obviously not correct
Choose from the remaining options based on which are most likely/
most relevant.

Skills Checkpoint 5 covers this technique in detail through application to an exam-standard

question.

Exam success skills

Passing the FBT/BT exam requires more than applying syllabus knowledge and demonstrating the
specific FBT/BT skills; it also requires the development of excellent exam technique through
question practice.
We consider the following six skills to be vital for exam success. The Skills Checkpoints show how
each of these skills can be applied in the exam.

Managing information
You will not have to deal with large amounts of information in each individual question in FBT.
Some of the questions in the exam will present you with a short scenario, particularly in the
Section B questions. The skill is how you handle this information while working under time
pressure.
You must take an active approach to reading each scenario. Focus on the requirement first,
underlining/ highlighting key instructions, including words like “NOT” . Then think about any
technical knowledge that is relevant before reading the scenario for the question. Doing this
means that your mind will be focussed as you read the scenario, which means you will take in the
information better.

Correct interpretation of the requirements

It is important to note the requirement carefully. Look out for the number of options you have to
choose, as not all questions require only one option. Also, beware of tricks, such as the
information being presented in one particular order in the scenario, but being presented in a
different order in the options.

Answer planning
This skill is not so relevant for the skills exams.

Efficient numerical analysis

While there could be a small number of numerical questions on topics such as elasticity of
demand, the majority of questions in BT/ FBT are qualitative in nature so this skills is not as
important as in some of the other ACCA exams.
An important tip in numerical questions is not to look at the options until you have completed the
calculation as you think it should be done. The reason for this is that the “wrong answers” are
chosen carefully to look very realistic, and you may be tempted to choose one of these if you
don’t do the calculation first.

Effective writing and presentation

This skill is not relevant for BT/FBT as all the questions are objective test questions so you will not
have to write.

BPP Introduction XV
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6 Good time management
The exam is 2 hours long. You should therefore spend 1.2 minutes per mark. It is best to work
through Section A first, which should take you 91 minutes, before spending the remaining 29
minutes on Section B.
Don’t get stuck on difficult questions - if a particular question does appear difficult, move on, and
come back to it after you have answered all the easier questions.
Don’t time yourself for each question, but do check every half hour that you have answered 25
marks worth of questions.
Two minutes before the end of your time for Section A, go back and answer all outstanding
questions, even if you have to guess. There is no harm in guessing as there is no negative marking
in ACCA exams, so the worst that can happen is you don’t gain two marks for the question.
If you find that this approach doesn’t work for you, don’t worry — you can develop your own
technique.

Question practice
Question practice is a core part of learning new topic areas. When you practice questions, you
should focus on improving the Exam success skills — personal to your needs — by obtaining
feedback or through a process of self-assessment.

xvi Business and technology (FBT/BT)

BEP
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 Business organisations
INTL
TONED SATA ROP ALE RELI LESTE SERED BELEN AY TELLS IES EE PEL IEATD

and their sta keholders

Learning outcomes
On completion of this chapter you should be able to:

Syllabus Hee no.

Define ‘business organisations’ and explain Al (a)

Yate eu are
¢ hound:

Describe common Me atures Bf Biisiecs Al (b)

ptgonisatons:

Outline nee parinees organisations differ. Al (c)

List ihe mecca and commercial sectors in Al (d)

which business SIG eLuSeki eins ENCNE

genta the Choe types of business Al (e)

organisation and their main characteristics:
(a) Commercial
(b) Not-for-profit
(c) Public sector
(d) Non-governmental organisations
(e) Co- Sie

Beane sehareleete and Saleh ie agency A2 (a)

relationship in business and how it may vary
in different ule of business etieletistet cin:

Denne mtormal: Ponnecten coe external A2 (b)

stakeholders and explain their impact on the
erdonie gion

Identify the main prot holder groupsandthe A2(c)

SISO of each group.

Explain how the different stakeholder groups A2 (d)

interact and how their objectives may conflict
with one another.

Compare the power and influence of various A2 (e)

stakeholder groups and how their needs
should be accounted for, such as under the
Mendelow framework.
Exam context
This chapter lays the foundation for an understanding of what organisations are and how they
are controlled. According to the Study Guide, it is not sufficient to simply understand these topics
— you must also be able to apply your knowledge. It is highly examinable, as shown by the fact
that six marks out of 100 in the pilot paper test knowledge from this chapter.

Business and technology (FBT/BT)

BPP
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Chapter overview
SLES SNE LLORES LES ESN EST LOLI SLI STEELE GLEE ILIIL NOLL RE IER ARE YELL ESV TDN NLT EEA

Business organisations and their shareholders |

q
Sri TELEVISED LERNER
ETS II DEM OTN EI EO TSP
ROI eae BETAS AEE

Purpose of business organisations Stakeholders Information for

control purposes

What all business Types of business Shareholders

organisations have organisation and agency
in common

Key differences Main stakeholder groups

Why organisations exist between profit and not
for profit organisations
Internal, connected and
How organisations differ
external stakeholders
Public sector
organisations
Sectors in which
business organisations Stakeholder conflict
operate
Limited liability
companies
Mendelow's Matrix

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 1 Purpose of business si ead
—————— eee
PEC IROEL RI LI ER
ATI POPELI EOE ETE ALENT STE
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1.1 What all organisations have in common

The common characteristics of organisations are as follows:
(a) They pursue a variety of objectives and goals.
(b) Different people do different things or specialise in one activity.
(c) Organisations are keen to achieve good performance, and meeting or improving their
standards.
(d) Organisations contain formal, documented systems and procedures which enable them to
control what they do.
(e) Most organisations obtain inputs (eg materials), and process them into outputs (eg for others
to buy).

Why organisations exist

Organisations can achieve results which individuals cannot achieve by themselves.

Activity 1: Reason organisations exist

List ways in which organisations can achieve results that individuals cannot achieve by
themselves.

Solution

1.3 How organisations differ

The common elements of organisations were described earlier, but organisations also differ in
many ways. Here are some areas of difference:
* Ownership: private sector vs public sector
* Control: owners vs managers
* Activity: manufacturing vs services
* Profit vs non-profit orientation
* Legal form: limited company vs partnership,
Size: small family business vs small and medium sized enterprise vs multinational
* Sources of finance: shares, banks, government funding
Technology: use of technology, complexity of production

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 1.4 Sectors in which business organisations operate
Organisations work in many different business sectors. Here is a list of the broad categorisation of
industry sectors:

Industry
Agriculture “Producing eae
« pieces eine food

| Menuractorng | Acquiring raw materials ene by the oarecuan of ebotie Gnd

Moe slilelee (upouelins them into a product (eg a car)

Extractive/raw meron | SEACH ane

CbieHining raw materialsSteg julaliste)

|Energy ve Converting one

0 resource es coal in
into another ee electricity)
ge ee eee >= = ——

Retailing/distribution | Pes goods to the iad consumer

SE | a — ee _

Intellectual soe: |Producing intellectual prone (eg ce ponienine: mines

| music
be aes er ee! ere es eeee ee e ee ee |
Service industries | Ihe (Seineels Marae pores banting varios bene |
| | services (eg accountancy, advertising) and public services suchas
| education, medicine

1.5 Types of business organisation

The key categories of business organisation are:
* Commercial
* Not for profit
¢ Public sector
* Charities
* Trade unions
* Local authorities
* Non-governmental organisations(NGOs)
* Co-operative societies and mutual associations

(fe Activity 2: Types of business organisation

4 EE AL A eS ; si iel es

Identify one ‘real-world’ example of each of the above categories of organisation.

Solution

1.6 Key differences between profit and not for profit organisations:
* Owner and other stakeholders
- Sources of funding (eg revenue vs. donations)

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 der wealth while not
* Goals (Primary goal of profit orientated business is maximising sharehol
for profit is the provision of goods/services)
cy
- How they measure performance: profit focus vs value for money/efficien
- Use of technology (eg Apple Inc vs news agency or social club)

1.7. Public sector organisations

are
Organisations owned or run by the government (local or national) or government agencies
described as being in the public sector. All other organisations are classified as private sector.

e Activity 3: Public sector organisations

Identify the advantages and disadvantages of using public sector organisations to provide
services such as the armed forces or the health service.

Solution

ee rt et ET SSS fe SS PAA Shes SSS SS

1.8 Limited liability companies

Limited liability companies (denoted by X Ltd or X ple in the UK) are a separate legal entity from
their owners (shareholders). The key advantage is that the shareholder’s liability is limited to the
amount they have invested into that company.
Other notable advantages of a Ltd/plc company are:
* More money available for investment from shareholders
* Easier to raise capital from banks and other lenders
* Ownership and control are legally separated, investors need not run the company
Notable disadvantages would include
* Greater administrative burden and cost, especially for listed entities
* Lack of privacy as anyone can download the financial statements and other public data
In the UK, limited companies come in two types: private limited companies (eg X Limited) and
public limited companies (X plc):
* Private companies are usually owned by a small number of people (family members), and their
shares are not easily transferable usually.
Shares of public companies (ples) will usually be traded on a Stock Exchange. The directors of
a public company are less likely to hold a significant shareholding in the company.

6 Business and technology (FBT/BT)

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‘Ze Activity 4: Legal form

Florence Nightingale runs a successful and growing small business as a sole trader. She wishes to
expand the business and has acquired Scutari Ltd, a small private limited company in the same
line. After the acquisition, she runs the two businesses as if they were one operation, making no
distinction between them.

Required
What is the legal form of the business she is running?

1.9 Co-operative societies and mutual associations

Co-operatives are businesses owned by their workers or customers, who share the profits. Here
are some of the features they have in common.
* Open membership
* Democratic control (one member, one vote)
* Distribution of the surplus in proportion to purchases
* Promotion of education
Although limited companies also have some measure of democratic control, this is on the basis of
one share, one vote. So one shareholder could dominate a company if they hold a majority of
shares. This would not happen in a co-operative.
Mutual associations are organisations that exist for the mutual benefit of their members.
Examples include savings and loan organisations (building societies in the UK) where the members
are the savers who deposit their savings in the organisation. Since there are no external
shareholders to pay dividends to, the profits of the organisation are enjoyed by members in the
form of more favourable interest rates.

Real life example

The best example of a co-operative in the UK is the Co-operative Foodstores Ltd. Another example
is the Co-operative Funeral Services Ltd.

~
Pel
Essential reading
~

See Chapter 1 Section 1 of the Essential reading for more detail on types of business organisation.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

2 Stakeholders
1
VBSEREEYT TRE SHRISERS PSOE
span RSENS ONSTAR SEMAN TRADI ARIES PSEA TNS
TOSS R DATEL SE TT EIDE A SE TS ST TE
i
aN Stakeholder: A person or group of persons who have a stake in the isc cilie
EA OETA PAPE FAA SORES ELIE TIE SI NOE AEN DPE LE ITT POET BOLTED RLY TET TE NON CL EI ETL TI TIT LES AS IL A ON TE =
|
KEY CERO

/\\ | PER alert |

| In order to fulfil performance objective 2, you must demonstrate that you can identify the key
stakeholders that an organisation has, and understand their needs. You can apply the
lWAG tie obtain from this chapter to pee demonstrate this competence.
ae

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 2.1 Stakeholders and agency
varies from
An organisation’s managers act as agents for the stakeholders, whose influence
a company therefore fefers to the
organisation to organisation. The agency relationship in
ers) as the principal : and those
separation between an organisation’s owners (the sharehold
managing the organisation on their behalf (the company directors) as their agents’.

2.1.1 Main stakeholder groups

Primary

Stakeholders oN hat s at stake? : ‘What do they typically

business ; ee __ expect of the business?
Shareholders (or partners or Money invested | Areturn on their investment
proprietor) so that their wealth increases:
| * Steady, growing profits
paid out by the business
* Growth in capital value of
their share of the business

What do they typically _

expect of the business?
Directors/managers Livelihoods, careers and _ Fair and growing
Employees and trade unions reputations / remuneration
Career progression
_ Safe working environment
Training, Pension
p—~ ——————+- we - 4
Customers Their custom Products/services that are of
| good quality and value
Fair terms of trade,
Continuity of supply
Ho ————

Suppliers and other business | The items they supply Fair terms of trade, Prompt
partners payment
Continuity of custom
= —— ee a Sa
Lenders Money lent A return on their investment:
* Interest
7 we ele of capital
Government and its agencies | National infrastructure used _ Reasonable employment and
by business |other business practices
The welfare of employees _Steady or rising stream of tax
|Tax revenue || revenue
The local community and the | National infrastructure used
z
public at large by business
|other
|
!
Reasonable employment
business practices
and
|

a = The welfare of emmplouses, |

The natural environment The environment shared by all |Reasonable environmental
|
and other business practices
2

8 Business and technology (FBT/BT)

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2.2 Internal, connected and external stakeholders
Johnson and Scholes (2005) identified three types of stakeholder: ICE
(a) Internal:
Corporate management
Employees

(b) Connected:
Primary
Shareholders
Debt holders (eg bank)
Intermediate (business) and final (consumer) customers
Suppliers

(c) External:
Immediate community/society at large
Competitors Secondary
Special interest groups
Government

2.3 Stakeholder conflict

Since their interests may be widely different, conflict between stakeholders can be quite
common. Managers must take the potential for such conflict into account when setting policy and
be prepared to deal with it if it arises in a form that affects the organisation.
A relationship in which conflict between stakeholders is vividly characterised is that between
managers and shareholders. The relationship can run into trouble when the managers’ decisions
focus on maintaining the corporation as a vehicle for their managerial skills while the
shareholders wish to see radical changes so as to enhance their dividend stream and increase the
value of their shares. The shareholders may feel that the business is a managerial corporation
run for the benefit of managers and employees without regard for the objectives of the owners.
The conflict in this case can be seriously detrimental to the company’s stability.
(a) Shareholders may force resignations and divestments of businesses, while managers may
seek to preserve their empire and provide growth at the same time by undertaking risky
policies.
(b) In most cases, however, managers cannot but acknowledge that the shareholders have the
major stake as owners of the company and its assets. Most companies therefore focus on
making profits and increasing the market value of the company’s shares, sometimes at the
expense of the long-term benefit of the company. Hence long-term strategic plans may be
‘hijacked’ by the need to make a sizeable profit in one particular year; planning horizons are
reduced and investment in long-term business prospects may be shelved.
Clearly, each stakeholder group considers itself in some way a client of the organisation, thus
broadening the debate about organisation effectiveness.

2.4 Mendelow’s Matrix

Stakeholders can be mapped on Mendelow’s Matrix in terms of:
- How interested they are in the company’s strategy (would they want to resist it)
* How much power they have over the company’s strategy (would they be able to resist it)
The matrix can be used to:
* Track the changing influences between different stakeholder groups over time. This can act as
a trigger to change strategy as necessary; and
- Assess the likely impact that a strategy will have on different stakeholder groups.

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 Its aim is to assess:
+ Whether stakeholders’ resistance is likely to inhibit the success of the strategy; and
* What policies or actions may ease the acceptance of the strategy.
Figure 1.1: Mendelow’s matrix
Level of interest

A B
eg Casual labour eg Core employees
Action: Minimal Effort Action: Keep Informed

(e D
eg Institutional shareholder | eg Main suppliers
Action: Keep Satisfied Action: Key Players

An organisation can make strategic gains from effectively managing its stakeholder relationships
and it needs to measure levels of satisfaction amongst its stakeholders. Measurement will not be
easy but ideally a combination of qualitative and quantitative measures needs to be established.

10 Business and technology (FBT/BT) Y BPP

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Chapter summary
——— A ATER TERIA AP NE RRB SSIS ISA ES AS SS IE RITES SOREN ES STIS

_ Business organisations and their shareholders |

if CO e e e &

“ERLESILENT
ERE UE LET LL DIY OSB PEI TET ETEEVDER SLD BOA LSD SE SE BEE IED SETI OD -_ /

Purpose of business organisations Stakeholders Information for

control purposes

What all business Types of business Shareholders and * Control is achieved

organisations have in organisation agency through feedback
common * Commercial * Stakeholders are
* Organisations are ¢ Not for profit persons who have a
social arrangements * Public sector stake in an
which pursue ¢ Charities organisation
collective goals ¢ Trades unions * Managers act as
* Most are preoccupied ¢ Local authorities agents on behalf of
with performance ¢ Non-governmental the owners of the
* Organisations allow organisations organisation (the
people to specialise * Co-operatives principals)

Why organisations exist Key differences between Main stakeholder groups

* Organisations can profit and not for profit ¢ Shareholders
achieve results which organisations + Directors/managers
individuals cannot * Owners and other * Customers
achieve by themselves stakeholders * Suppliers
* Goals « Lenders
+ Performance * Government and its
How organisations differ measurement agencies
¢ Organisations differ in * Public
many ways including * Natural environment
profit vs non profit and Public sector
legal form organisations
* Owned or run by local Internal, connected and
or national external stakeholders
Sectors in which government + Internal—management
business organisations and employees
operate
| * Connected —
* Agriculture Limited liability shareholders,
* Manufacturing companies customers, suppliers,
* Extractive/raw * Separate legal entity lenders
materials ¢ Private (Itd) or public « External—competitors,
¢ Energy limited companies government, society
* Retail/distribution (ples) i
¢ Intellectual production
Stakeholder conflict
* Service industries
¢ Managers vs
shareholders
« Stakeholders are
clients of the
organisation

Mendelow's Matrix
¢ Stakeholder classified
by power and level of
interest

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 Knowledge diagnostic
2st OSI DSA NEN ILIS ISIE UTIES ESAS TS IMT PEI ss SSS ALA PDAS DNEUAN SISOS PEAY SOI RES ARSE SEEN BEY TERI ETH LIELILSLITLE LI IIS NTP ITED ELLER LILIENE ENED,

. Why do organisations exist?

Organisations can achieve results which individuals cannot achieve themselves.

. Types of organisation
Key types of organisation include commercial, not for profit, public sector and non-governmental
organisations (NGOs).

. Limited liability companies

Limited liability companies are separate legal entities from their owners.

. Stakeholders and agency

Stakeholders are persons who have a stake in an organisation.

. Stakeholder conflict
Managers must take into account the stakeholder’s power and interest, and focus on balancing
the needs of the different stakeholder when making strategy.

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Further study guidance

Question practice
Now try the following from the Further question practice bank [available in the digital edition of
the Workbook]:

Number
O1 | Exam Section A | 1 min |
tbe es fll ee ee | OS eee oi a
Q2 Exam Section B || |1 min
sesso et x r :

| O3 Exam Section C 2 | 2 mins |

O4 |Exam Section D 4 |5 mins

Further reading
There are two articles on the ACCA website entitled “Not-for-profit organisations |” and “Not-for-
profit organisations II” that are relevant to material in this section. You are strongly advised to
read these articles in full as part of your preparation for the FBT exam.

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14% Business and technology (FBT/BT)
BFF
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Activity answers
SLE SCR RATE RTT NE ETERS IIE PIPERS SAIS CU A
OSE SL STANCES SIAN Ngee
ae EPRI . ESD MET— SSCP —_—EN SETI MPI LLY SL fh IEE OEE PE BE OIE NECA ALTE I I

Activity 1: Reason organisations exist

Ways organisations can achieve results:
(1) Organisations overcome people’s individual limitations, whether physical or intellectual.
(2) Organisations enable people to specialise in what they do best.
(3) Organisations save time, because people can work together or do two aspects of a different
task at the same time.
(4) Organisations accumulate and share knowledge.
(5) Organisations enable synergy: by bringing together two individuals their combined output
will exceed their output if they continued working separately.

Activity 2: Types of business organisation

Here are some examples, but clearly this is not an exhaustive list:
Commercial: BPP
Not for profit: BUPA
Public sector: The National Health Service
Charities: Cancer Research
Trade unions: GMB Trade Union
Local authorities: North Yorkshire County Council
Non-governmental organisations (NGO) Red Cross
Co-operatives: The Co-operative Group Ltd

Activity 3: Public sector organisations

Advantages:
Economies of scale
Fill the gap left by the private sector
Cheaper service so available to a significant proportion of society
Disadvantages:
Government influence
- On funding
- Onrunning
Inefficiencies are not addressed

Activity 4: Legal form

This is quite a tricky question. For example, if suppliers have contracts with Scutari Ltd, the
contract is with the company; Florence is not legally liable for the company’s debts. If their
contracts are with Florence, they are dealing with her personally. Florence has to make a choice.

(1) She can run the entire business as a sole trader, in which case Scutari Ltd’s assets must be
transferred to her.

(2) She can run her entire business as a limited company, in which case she would contribute the
assets of her business as capital to the company.

(3) She can ensure that the two businesses are legally distinct in their assets, liabilities, income
and expenditure.

1: Business organisations and their stakeholders 15

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16 Business and technology (FBT/BT) BPP
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 Business Environment

Learning outcomes
On completion of this chapter you should be able to:

Syllabus
reference
no.

Explain aon ihe politica system antlgovernment policy ofreet te organisation. A3 (a)

Exolcin ‘ie ech and long-term effects of social and Bemocriene trends on Aé (a)
business outcomes and the Seciileianle:

Deseribe the niece & Erancea in Social structure, values, ates andtasteson Aé (b)
the Sue fesse tien

enn and Saale Tonmeasures that een mayWists in response to ihe Aé (c)
medium and Case-term sliglescJed of SITE Le late change.

ean the porcnnel AYES of technological change on the SSeS Satire A7 (a)
and strategy:
(a) Downsizing
(b) Delayering
i) CSET

reccrpe the fecen or reormouer erred and eenncion Aisee A7 (b)

development on business processes and the changing role of the business and
Heculieree as a result of Meoalnelee he) advances.

List ways in ae the basiness can ariel orAse acer Be itsBiicical A8 (a)
environment.

paces ways in ener eee can epacienmore Seteente maa apocar to A8 (b)
limit aoe Ce to the environment.

identify the bonetits ef economic sustainability to Sarenolder: A8 (c)

Identify a bucnesss fence weaknesses, ee one threats (SWOT) ina = A9 (a)

market and the main sources of competitive Sheniclatelees

eentie thenmain eleven: within Porter’s value chain and explain the meaning of a_ A (b)
value network.

Explain the factors or forces that influence the level of competitiveness in an A9 (c)
industry or sector using Porter’s five forces model.
 Syllabus
reference
no.

Describe the activities of an organisation that affect its competitiveness: A9 (d)

(a) Purchasing
(b) Production
(c) Marketing
(d) Service

Exam context
Organisations need to understand and appreciate the environment in which they operate in order
to maximise their potential competitive advantage. The models in this chapter form the
foundation of knowledge that you will need in ACCA exams.

18 Business and technology (FBT/BT)

roe
Bre
Chapter overview
GLENS LEVP SEYNED
PSOE AEN GOED EL SSIES ALS EN SLID
g 7
:The business environment |
{
"aes
ci 2 Fi BROLIN SE REOEERSRR

Analysing the environment Political factors Technology

Elements of the environment Economic impact of government Impact on organisations

Models to assess Regulation Impact on the accountant

the environment |

Social and demographic factors

Environmental factors SWOT analysis

Natural environment Strengths and weaknesses

Sustainability Opportunities and threats

Using a SWOT analysis

Converting resources: the value chain Competitive forces

Adding value

The value chain

Value network

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 1 Analysing the environment
1.1 Elements of the environment
.
The environment can be described as everything which is beyond the organisational boundary
Management cannot control the environment; however it influences all aspects of organisational
activity and so must be viewed strategically. It comprises a number of different elements:
Figure 2.1: Environment

_. Goods to
Materials ==» Sup ~ customers
Pollution
to labour

General
environment

Physical environme™

The general environment covers all the political/legal, economic, social/cultural and
technological influences in the countries in which an organisation operates.

f iz Activity 1: Relevance of the environment

Consider a company specialising in building houses.

Generate as many ideas as you can as to factors in their environment that affect their business.

Solution

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1.2 Models to assess the environment
Structures or frameworks have been developed which help organisations to analyse the
environment. In this chapter we look at three key models which can be used to assess a
company’s environment:
(a) PESTEL analysis (Section 2 below) is used as a framework for identifying the factors that
influence the macro environment:
Pp Political
E Economic
S$ Social/Cultural/Fashion
T ~~ Technology
E Environmental
L Legal
(b) The Value Chain is used to analyse the activities that a business performs to identify how
they add value to the customer.
(c) Porter’s Five Forces model analyses the competitive nature of a particular industry.

Political factors
Government policy influences the economic environment, the framework of laws, industry
structure and certain operational issues. Political instability is a cause of risk as it means that
businesses’ longer-term plans cannot be achieved. Different approaches to the political
environment apply in different countries. International trade is subject to a further layer of
international law and regulation.

eel Economic impact of government

Porter notes several ways whereby the government can directly affect the economic structure of
an industry. They are explained below:

_ Capacity | Government policy can encourage firms to increase or cut their

| expansion | capacity.
| (a) The UK tax system offers ‘capital allowances’ to encourage
|
investment in equipment.
| (b) Avariety of incentives, funded by the EU and national governments,
exist for locating capacity in a particular area.
'(c) Incentives are used to encourage investment by overseas firms.

_ Demand |* The government is a major customer.

| |+ Government can also influence demand by legislation, tax reliefs or
| | subsidies.
_ Emerging _ Can be promoted by the government or damaged by it.
_ industries

| Entry barriers | Government policy can discourage firms from entering an industry, by
restricting investment or competition or by making it harder, by use of
| quotas and tariffs, for overseas firms to compete in the domestic market.

| Competition (a) The government’s purchasing decisions will have a strong influence
| on the strength of one firm relative to another in the market (eg
| armaments).
(6) Regulations and controls in an industry will affect the growth and
profits of the industry — eg minimum product quality standards.

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 (c) Asa supplier of infrastructure (eg roads), the government is also in a
position to influence competition in an industry.
'(d) Governments and supra-national institutions such as the EU might
| impose policies which keep an industry fragmented, and prevent the
concentration of too much market share in the hands of one or two
producers.

2.2 Regulations
In some industries, governments regulate the adoption of new products. This is well illustrated by
the pharmaceuticals industry, where new drugs or medicines must in many countries undergo
stringent testing and obtain government approval before they can be marketed.
National and supra national (e.g. WTO) bodies also affect the operating activities of some
organisations, for example:
> Anti-discrimination legislation
* Health and safety legislation
« Product safety and standardisation
* Workers’ rights (eg unfair dismissal, maternity leave)
* Training and education policies (which can determine the ‘standard’ of recruits)

Activity 2: Political factors

State in what ways government policy might affect a pharmaceutical company.

M4,
Essential reading

See Chapter 2 Section 1 of the Essential reading for more detail on the ways in which the political
factors may impact on businesses.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

Social and demographic factors

Changes in social attitudes impact the demand for goods and services, and so opportunities
open up or close down. For example, there have been significant changes in attitudes to:
(a) Health
(b) The environment
(c) Diversity
Changes in the population can influence businesses over the longer term, for example the large
spike in the birth rate after the second world war in many countries has meant that these
countries now have a larger number of senior citizens (often referred to as the ‘baby boomers’)
and many countries are experiencing a fall in birth rates.
Organisations are impacted by social and demographic factors in two ways:
(a) The population affects an organisation’s supply of labour and hence its policies towards
recruiting and managing human resources.
(6) Social and demographic factors influence the buying behaviour of individuals and
households.

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3.1 Impact on labour force
Organisations must take account of a range of factors when managing its labour force:
(a) What skills do we need? — recruitment, retention, motivation
(b) What skills are available:
(i) Internally?
(ii) Externally?
(c) How does the education system contribute to our labour supply?

3.2 Impact on buying behaviour

The impact of social and demographic trends on businesses include:
(a) Growing markets (eg for sports-related goods or holidays for senior citizens)
(b) Employee health (and its impact on employers’ productivity)
(c) Declining markets for unhealthy products (eg tobacco)
(d) Consumers switching to products that conform to their beliefs (eg switching to electric cars to
reduce carbon emissions)
(e) More flexible working patterns

UL)
Essential reading

See sections 2 and 3 of Chapter 2 of the Essential reading for more detail on the ways in which
social, demographic and cultural changes may impact on businesses.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

3.3 Government response to demographic change

Demographic changes vary from region to region. In Europe, North America, and much of Asia
and Latin America, populations are ageing, as improvements in healthcare increase life
expectancy, while in many countries birth rates are falling. This can lead to the following
challenges:
(a) Asmaller proportion of the population will be working while a larger portion of the population
will rely on support in the form of pensions and healthcare.
(b) There may be a shortage of labour as the number of people of working age falls.
Governments need to plan for these long-term changes. Measures that governments might take
include the following:
(a) Encouraging people to work beyond the statutory retirement age. Incentives such as more
flexible pension arrangements, whereby people do not lose their pensions if they continue to
work.
(b) Provision of training to update the skills of older workers.
(c) Increasing the statutory retirement age to reflect longer life expectancy.
In some countries, particularly on the African continent, a huge increase in the birth rate is
forecast, which will lead to growing and much younger populations. This will mean that a higher
portion of the population will be of working age. However, governments will still have challenges,
and will need to:
(a) Ensure provision of sufficient housing for the larger populations.
(b) Pursue policies that will lead to a growth in jobs (eg encouraging direct foreign investment).
(c) Providing relevant education and training to give the workforce the skills they require.

2: Business Environment 23
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 Ly Technology
4.1 Impact on organisations
in the
Information systems and information technology have played a significant role
development of the modern business environme nt.

Figure 2.2: uss of Information technology on business structures

New structures through |

| Downsizing ] Delayering |Outsourcing

seth SS SEE SE GI SN ROSELLE EEO DELL LL LILLE ALLE EL

ELDEST ITED LITLE

Delayering: The removal of layers of middlenie ls ieee or staff lower down the
| hierarchy are empowered to make decisions previously made by middle managers.
| Downsizing: Reducing the headcount in an organisation by making redundancies. This has
been driven by developments such as automation, where routine tasks that were once
performed by labourers are now performed by robots.
Outsourcing: The contacting out of specified operations or services to an external vendor.
Eocene eee ANSE TES REASON SCENES RIN EES IEE CRE AY ETI NEGROPSEET INES
RESSERS TIE SIA NI ANNE IE BIE IEE IR SEI
ON EE EP |] SS
DAIL DEAL EDI ISOLA 2
ee ee

Modern communications ‘anne nice decentralised eoreenee possible, rine

decision-making to be passed down to ‘empowered’ workers or outsourced to external companies.
This has been assisted by improved management information systems.
Delayering has gone hand in hand with a trend towards downsizing whereby large numbers of
managers and staff have been made redundant.
There has been a trend in recent years for businesses to outsource peripheral activities to
specialist organisations, enabling the business to focus on its own core activities. Activities that
are commonly outsourced include (but are not limited to) IT services.
When finalising arrangements for outsourcing IT the following factors need to be considered:
(a) Is the system of strategic importance? Yes, tend towards keeping it ‘in house’
(b) Can the system be relatively isolated? Yes, tend towards outsourcing
(c) Do we understand the systems enough to manage the service agreement?

4.2 Impact on accountants

The following technological advances are also having an impact on the role of the accountant:
(a) Routine processing
(b) Digital information and record keeping
(c) New skills required and new ways of working
(d) Reliance on IT
(e) New methods of communication and of providing customer service
(f) The view of information as a valuable resource
(g) The view of information as a commodity

Activity 3: Technology and the accountant

Discuss how you think technology will change the role of the accountant.

24 Business and technology (FBT/BT)

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 Environmental factors

5.1 Natural environment

There is increasing concern about businesses’ relationship with the natural environment.
Businesses may suffer significant costs and a loss of reputation if problems arise.
Much business activity takes place at some cost to the environment. Examples of impacts on the
environment include:
(a) Depletion of natural resources
(b) Noise and aesthetic impacts
(c) Residual air and water emissions
(d) Long-term waste disposal (caused by excessive product packaging)
(e) Uncompensated health effects
(f) Change in the local quality of life (through for example the impact of tourism)
Failing to take sufficient account of environmental impact can have a significant impact on the
business as well as the outside world.

Activity 4: Limiting damage to the environment

Suggest actions that a manufacturing company could take that would reduce the damage it
causes to the environment.

Solution

Sustainability.
ooeiahataeieeienedienenenemmentatneanmemmannemeniaimmmmmmmemmeeaemanmmamneeimmenmmaiammensamennm |

i suetainabilitg: NGsung fe meds ofthe saeaheaes

without compromising the ability of future |
generations to meet their needs.
Environmental sustainability: The ability of organisations to operate without harming the
environment irreversibly
Social sustainability: The ability of organisations to have a positive impact on society, for |
ae
ee
el
example by creating employment and treating employees and other stakeholders fairly. |
Economic sustainability: The ability of the organisation to provide a return to shareholders
over theae term.
ATR SWE EOFURE USERS ETI SRE SEP PRE ITE POTTED OE TEE TU A anata
DREN ASE EHS OE IAL STD LO IN ESSN PII

Businesses are recognising that in order to be Lee eal eee hes need to consider not
only short-term financial performance, but the wider impact they have on society and on the
environment. The three types of sustainability are therefore interlinked.
Many organisations publish sustainability reports which aim to show their impact on society
rather than just financial returns to shareholders. Typically, reports include the following:
* The impact the organisation has on the environment (eg the volume of carbon emissions
generated)

2: Business Environment 25
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 * The use of scarce resources, such as raw materials and energy
~ The use of and development of intangible resources such as human capital
* Relationships with employees and other key stakeholders
In the short term, operating in a sustainable and environmentally friendly fashion may increase
the costs of a business. However, over the longer term, there can be numerous benefits.

Real life example

Oil giant BP states in its sustainability report “Our ambition is to become a net zero company by
2050 or sooner, and help the world get to net zero.” (BP 2019)

Activity 5: Sustainability and stakeholders

What are the benefits to each of the following stakeholders of a business aiming to achieve
economic sustainability?
* Shareholders
* Employees
* Customers
* Suppliers
* The local community

SWOT analysis
The sections above discussed the external environment and the factors that might affect
organisations. As part of the strategic planning process, organisations may analyse the internal
and external environments, and then summarise these using SWOT analysis.
SWOT analysis is a method of environmental analysis which looks at an organisation’s internal
strengths and weaknesses as well as external opportunities and threats:
Figure 2.3: SWOT analysis

[
Strengths Weaknesses

Internal to Conversion
the company

| |

Exist
independently Conversion
of the company
Opportunities Threats

6.1 Strengths and weaknesses

An internal appraisal will identify:
(a) The areas of the organisation that have strengths that should be exploited by
suitable
strategies

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 (b) The areas of the organisation that have weaknesses. Businesses can either avoid strategies
that might be affected by their weaknesses, or find ways to overcome them - for example
developing new capabilities. This is what is meant by converting weaknesses into strengths.
The strengths and weaknesses analysis is intended to shape the organisation’s approach to the
external world. For instance, the identification of shortcomings in products could lead to a
programme of product development.

6.2 Opportunities and threats

The external appraisal identifies opportunities that can be exploited by the organisation’s
strengths and anticipates environmental threats against which the company must protect itself.
Opportunities
(a) What opportunities exist in the business environment?
(b) What is their inherent profit-making potential?
(c) Can the organisation exploit the worthwhile opportunities?
(d) What is the comparative capability profile of competitors?
(e) What is the company’s comparative performance potential in this field of opportunity?
Threats
(a) What threats might arise to the company or its business environment?
(b) How will competitors be affected?
(c) How will the company be affected
It may be possible to turn a threat into an opportunity by developing new strategies to overcome
the threat that may lead to greater opportunities?

6.3 Using a SWOT analysis

The SWOT analysis can be used in one of two ways.
(a) The organisation can develop resource-based strategies which enable the organisation to
extend the use of its strengths. For example, a supermarket chain extends its range of own
branded goods from food to other areas.
(b) The business can develop positioning-based strategies. In other words, identifying what
opportunities are available and what the firm has to do to exploit them.

Converting resources: the value chain

Michael Porter (1985) says that competitive advantage is achieved by the way a firm organises
and performs activities to add value.

7.1 Creating value

Organisations create value when they do something that customers are willing to pay for. Take a
restaurant for example:
Figure 2.4: Value creation in a restaurant

Buying Cooking | Serving >»

A restaurant’s activities can be divided into buying food, cooking it and serving it. There is no
reason why customers cannot do all these things themselves at home. However, customers are
happy to pay the restaurant more than the cost of the resources. The ultimate value a firm
creates is measured by the amount customers are willing to pay for its products or services above
the cost of carrying out value activities. A restaurant’s activities can be divided into buying food,
cooking it, and serving it. There is no reason why customers cannot do all these things themselves
at home. However, customers are happy to pay the restaurant more than the cost of the

2: Business Environment 27
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 »

customers are willing to

resources. The ultimate value a firm creates is measured by the amount
of carrying out value activities .
pay for its products or services above the cost
performing the
A firm is profitable if the realised value to customers exceeds the collective cost of
activities.

7.2 The Value Chain

Porter’s Value Chain (1985) groups an organisation’s various activities into a value chain:
Figure 2.5: Porter’s value chain

Human resource management &

Support f.
o-
activities Technology development 2

Procurement

Inbound Outbound | Marketing

Operations
logistics logistics & sales

Primary activities

The margin is the excess the customer is prepared to pay over the cost to the firm of obtaining
resource inputs and providing value activities. It represents the value created by the value
activities themselves and by the management of the linkages between them.
Primary activities are directly related to production, sales, marketing, delivery and service.

Inbound logistics | Receiving, handling and storing inputs to the production system:
| warehousing, transport, inventory control, and so on

Operations Convert resource inputs into a final product. Resource inputs are not |
only materials. People are a resource, especially in service industries
SS be ne

Outbound logistics Storing the product and its distribution to customers: packaging,
| testing, delivery, and so on

Marketing and sales Informing customers about the product, persuading them to buy it, and
|enabling them to do so: advertising, promotion, and so on

Service _ Installing products and\or the act of performing the service for the
|
_ client or customer. Includes all aspects of post-sales service delivery
aS ee a el = — SS SS

Support activities provide purchased inputs, human resources, technology and infrastructural
functions to support the primary activities.

Procurement Acquire the resource inputs to the primary activities (eg purchase of
(purchasing) _ materials, subcomponents equipment)

Technology Product design, improving processes and/or resource utilisation

development

Human resource
management
sho eee A

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 Activity
|Firm introsvaictecs Planning, finance, quality control: Porter believes they are crucially
| | important to an organisation’s strategic capability in all primary
he | activities

hice: connect the activities of the value chain.

(a) Activities in the value chain affect one another. For example, more costly product design or
better quality production might reduce the need for after-sales service.
(b) Linkages require co-ordination. For example, Just In Time requires smooth functioning of
operations, outbound logistics and service activities such as installation.

7.3 Value networks

Activities and linkages that add value do not stop at the organisation’s boundaries. For example,
when a restaurant serves a meal, the quality of the ingredients — although they are chosen by the
cook — is determined by the grower. The grower has added value, and the grower’s success in
growing produce of good quality is as important to the customer’s ultimate satisfaction as the
skills of the chef.
According to Johnson et al, (2019), an organisation’s value chain is connected to the value chains
of suppliers, distributors and customers in what may be referred to as a value network.
A value network extends the idea of a value chain beyond the boundaries of a business. It
recognises that there is a network of businesses that together generates value for the ultimate
customer. These businesses exchange both tangible (for example goods) and services with each
other. Examples of services include knowledge such as collaborative design.
Figure 2.6: Value Networks

ues .
ee 7 Distributor/ “
+> arSig sf retailer value chain ap
Se &
Bis
-

ae et
Organisation's
. . '
Customer
value chain value chain

Supplier
value chains

Activity 6: Value Chain

Draw two Value Chain diagrams and in each section make notes on what you would expect to see
within the value chain for:
(1) A fast food restaurant
(2) Acelebrity chef’s restaurant

Competitive forces
Michael Porter (1980) argues that the pressures of five competitive forces, specific to the industry
or organisation, will determine long-term shareholder returns.

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 The model may be used in two ways:
(a) To understand the inherent attractiveness of an industry
tion, actions may be
(b) By understanding the impact of each individual force on an organisa
taken to mitigate that force.
Figure 2.7: Porter’s Five Forces

| Potential entrants |

Threat of
new entrants

Bargaining p $< ___.. Bargaining

power of | Industry competitors | power of ee

customers \
suppliers
Suppliers neem | | mes CUStOMErS |
a - —
Rivalry among H \
]
eee existing firms |

Threat of substitute
products or services

| Substitutes |

(a) Substitutes. The threat that alternative products or services will equally satisfy customer
needs, eg substitutes for travelling to France: ferry, plane, train or even swimming!
(b) Potential entrants. The threat posed by an outside organisation that may try to penetrate
the marketplace. Examples of barriers include economies of scale, product differentiation,
capital costs, distribution channels.
(c) Buyer power. The power customers have to reduce prices and increase quality or to simply
shop around. This depends on switching costs to change provider, the customer’s relative size,
and the number of buyers.
(d) Supplier power. The power suppliers have to increase prices and reduce quality. This depends
on, for example, monopoly power and switching costs and relative size of supplier.
(e) Competition and rivalry. The inherent level of rivalry and competition in the industry between
existing firms.

PER alert
PER performance objective PO3 requires you to demonstrate practical experience of strategy |
and innovation. This would mean that you need to be familiar with your employer’s business,
the sector in which it operates and the wider business environment, as covered in this chapter.
Coe
FS
Re5i S.A ES SRC ESA SESS CTP SS ETE CSTE NA NT ——

44,
Essential reading

See Chapter 2 Section 4 of the Essential reading for more detail on Porter’s five forces model.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

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Chapter summary
gf LDL SELES LN IIE IP
EASIER TTAB LLL

The business environment j|

Nit OSDIR
SEER MERLINRAD RESEDA TREES 08

Analysing the environment Political factors Technology

I
. Elements of the environment Economic impact of government Impact on organisations
* Everything which is beyond the * Capacity expansion + Delayering
organisational boundary * Demand + Downsizing
+ Influences all aspects of + Divestment and rationalisation + Outsourcing
organisational activity + Emerging industries
* Entry barriers
+ Competition Impact on the accountant
Models to assess the
+ Automation of routing
environment processing
+ Pestel analysis is used for Regulation « Greater use of IT
analysing the macro * Anti-discrimination + A threat to the traditional role
environment. Pestel stands for: + Health and safety of the accountant
— Political + Workers’ rights
— Economic + Product safety
— Social/cultural/fashion
— Technology
— Environmental Social and demographic factors
— Legal + Impact on the labour force
+ Value chain analyses activities * lmpact on buying behaviour
to identify how value is added + Government measures in
« Five forces model analyses the response to long term
competitive nature of a demographic changes
particular industry

Environmental factors SWOT analysis

Natural environment Strengths and weaknesses

+ Business activity causes damage to the + Exploit strengths
environment + Improve weaknesses

Sustainability Opportunities and threats

+ Environmental sustainability + Can business exploit opportunities
+ Social sustainability + How will company be affected by threats?
+ Economic sustainability

Using a SWOT analysis

+ Resource based strategies
+ Positioning based strategies

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 Converting resources: the value chain _ Competitive forces

Adding value * Substitutes

« Value: customers pay more than cost * Potential entrants
+ Buyer power
| * Supplier power
The value chain * Competition and rivalry
¢ Primary activities
— Inbound logistics
— Operations
— Outbound logistics
— Marketing and sales
— Service
* Support activities
— Firm infrastructure
— Human resource management
— Technology development
— Procurement

Value network
* Supplier value chains
* Organisation's value chain
¢ Distributor value chain

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 Knowledge diagnostic
es OTSA eA ARN SEED SPO SEALE SAY ANSON RTE? IRS AT PDE ESE PNW OLESEN SSRN ESOL SEEN SPE UAB IDE IEA CADIS IE

— . Relevance of the environment

The environment influences all aspects of organisational activity so must be viewed strategically.

. The PESTEL model

The PESTEL model is used to analyse the macro environment. Pestel stands for Political, Economic,
Social, Technological, Environmental and Legal.

. Political factors
Political factors include the economic impact of the government and the legal and regulatory
framework.

. Social factors
Social factors examine how changes in society such as demographic changes and changes in
culture impact businesses, in particular the supply of labour, and changing demand for products
and services.

. Technological
Developments in IT pervade organisations and have led to delayering and downsizing, resulting in
flatter organisations.

. Environmental
Sustainability refers to operating in a way that does not compromise the needs of future
generations, and can be discussed under three categories: environmental, social and economic.

. SWOT analysis
SWOT analysis is a useful tool for summarising the results of the internal capabilities of an
organisation (strengths and weaknesses) and the external environment (opportunities and
threats).

. Value chain
Porter’s value chain model helps to analyse the different activities that organisations perform to
help identify which of these are the drivers of value.

. Five forces model

Porter’s five forces model highlights the competitive forces that determine how attractive a
particular industry is.

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 Question practice
Now try the following from the Further question practice bank [available in the digital edition of
the Workbook]:

Exam Section A
ee
Q6 | Exam Section A
eee a eee eee Be aeenero:See Seer
Exam Section A |2 2 mins
_namenciminnes a

Own research
Select a country of your choice and imagine that you are thinking of starting a new
manufacturing business there. Using the internet, do a PESTEL analysis of the country. On the
basis of your analysis, conclude whether it would be a good place to start your business

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Activity answers
SSS ESS ET ce ems

Activity 1: Relevance of the environment

Environment factors affecting business:
* Demographics — (demand for retirement homes/four bed houses/high rise flats).
* Government policy on provision on new homes in the country or changes in governments.
* Changes to building regulations concerning the building of new homes eg solar panels being
fitted to flats of a certain size.
* New technology to increase efficiency of property, or to increase efficiency of building
property.

* Conditions in supporting industries, for example the banks and how willing they are to lend,
influences demand for new homes.
* Economic factors such as changes to transaction tax/stamp duty threshold and taxes levied
on house builders

Activity 2: Political factors

Ways government policy might affect a pharmaceutical company:
* The government must authorise most new drugs (eg for safety before they can be sold).
* The government, through the health service, is a major purchaser of drugs, so has significant
buying power.
* Health education policies affect consumer demand.
* Funding of universities affects the science base for recruitment.
* Employment practices in all industries are influenced by the political attitudes of the
government.
Note. The above is not an exhaustive list, and you may have listed other factors.

Activity 3: Technology and the accountant

The role of the accountant is already changing in the following ways:
* Many of the routine aspects of bookkeeping are performed automatically or by non-
accountants (eg sales in retail businesses are recorded by the electronic point of sales systems
at checkout, bank transactions feed into accounting systems from the bank).
¢ Much of the internal management information was traditionally provided by the management
accountant. With the increase in analytical tools and databases, managers may produce their
own reports directly from the system.
* Accountants are likely to have a more strategic role, helping plan the information needs of the
organisation and interpreting information.

Activity 4: Limiting damage to the environment

The following are some actions that a manufacturing company could take to reduce the damage
it causes to the environment:
(1) Improve energy efficiency to reduce consumption of fuels, which produce carbon emissions.
Energy efficiency can be improved by using more energy efficient machinery.
(2) Switching to renewable sources of energy such as solar or wind energy.
(3) Recycling waste rather than sending it all to landfill sites.
(4) Using filters and other equipment to reduce the toxicity of emissions.
(5) Reduce packaging in final products, or introduce reusable packaging.

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 >

(6) Educate staff to be conscious of energy usage (eg turning off lights when they leave the
office).

Activity 5: Sustainability and stakeholders

The benefits to stakeholders of a business aiming to achieve economic sustainability include the
following:
* Shareholders: If the business is sustainable, shareholders will enjoy a return on their investment
over the longer term.
- Employees: Employees will have greater job security and career progression. They may also
enjoy personal development if the company invests in training.
* Customers: Customers will have a reliable supply of the goods they buy.
* Suppliers: If the business is sustainable then suppliers will also prosper as demand for inputs
will continue.
* The local community will benefit because a successful business has a positive impact on the
local economy, allowing supp orting businesses to develop.

Activity 6: Value Chain

Support activ ies - Fast food "Celebrity restaurant

Firm Reecructas Oddly eaniral |Quality assurance
Technology development High degree of innovation, to | High degree of innovation, to

_| drive down cost | create SRLS, ‘special’

HR Management nite an amekiled ares Hire chef s with vast

and train them in the experience, less training
corporate way; | required;
Low quality uniforms; | High quality uniforms;
HSN ele by reward Motivate by gece wer
1 — -=_——

| Procurement Enel in bulk en eer |Buying from local farms;

suppliers; _ Focus on ethically sourced
Less focus on healthy happy meat, eggs etc
“| aaimeals
|---~-~----—

Inbound Logistics Delivered en masse, once a _ Delivered more frequently to

week ensure Shgente
Operations NO eekea inAibatehast Feoeked to order;
Quality in producing the | Quality in creating a meal
same Sele ou time eeu to ne consumer
emicound oe rottianer foie ihe rece “Staff wait on their customers
to the table and collects
condiments and napkins
| Ne
|
~ — ee |
Bales are marketing Branding cups, containers Word of mouth
and eee
i
After sales care | Limited ‘Is everything alright with
Bout meal’ Uy
}

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 The legal framework
RIADDNR EL ORIEL DLL DPE LE SELD PLE EOD LILLIES EGE PODS IEPPALLAIL BLIP = FORINT
ILE DERI SIO LILLIE LEIS

Learning outcomes
On completion of this chapter you should be able to:

Syllabus
reference no.

Explain how the political system and government policy affect the A3 (a)
eigonisclions:

Describe the sources & Meat een insoles supra-seagtol etal bodies, A3 (b)
national and SELES Sune

elbpine cael the law protects the eriplates ind the implleatons. af A3 (c)
pa SHC UAL Jee eliay for the manager and the sclpeKelNTeM oleh

Sen tY the principles ofdata preteen and security. A3 (d)

Explain in the on promotes and protects Peon sar seein in the A3 ()

eli eee

Recognise the Feeeara ingB3 ie new eie ance actos oa AS (f)

sempliance with lows on sci protection. Sou and health and safety.

Outline pune. of consumer protection, such as sale of eeode and anes A3 (g)
contract.

Exam context
It is important for business managers, including accountants, to be aware of the key laws that
apply to the organisations that they manage. This chapter includes information about the laws
relating to four key areas that will be relevant to most business organisations. In the Specimen
Exam there were two questions in Section A relating to material covered in this chapter.
 Chapter overview
eh STRTANS ED EEE YS ANTE OEE ASE
RETILNY
f

‘ The legal framework i

fi
it E
& IAEA ORHAN SLE RTE SEE EASLEY

Sources of legal authority Employment law Health and safety law

Protection of employees Importance of maintaining

health and safety at work

Termination of employment |
| Employers’ duties

Implications for the employer

Employee duties

Data protection and security Contract law and

consumer protection

Data Protection Principles

| Contract law

The rights of data subjects |

| Sale of goods and services

Data security

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 Sources of legal authority
The legal framework in which organisations operate derives from:

(a) Parliamentary legislation

(b) Government regulations

(c) Treaty obligations

(d) Official regulations
(e) International bodies
Key legislation for business organisations includes:
Employment law (see 2 below)
Health and Safety (see 3 below)
Data Protection (see 4 below)
Sale of Goods (Consumer Rights) (see 5 below)

Employment law
2.1 Protection of employees
Employment law aims to protect the interests of employees. Generally, employment laws tend to
cover the following areas:
Recruitment in particular to ensure employers do not discriminate against particular groups
Minimum pay legislation to ensure employees do not get exploited
Parental rights (e.g. maternity and paternity leave) to ensure that employees are able to
provide care for their children
Working conditions, including health and safety (below), maximum hours of work, holidays
Discrimination including equal pay for women to ensure employees are not discriminated
against on the basis of factors such as gender, age or ethnicity among others
Bullying and harassment at work to ensure that managers treat employees with respect
Discipline and grievance procedures to ensure that employees are only dismissed if the
employer has a valid reason for dismissing them or in case of redundancy
Redundancy provisions requiring employees to be compensated in the case of redundancy.

2.2 Termination of employment

When terminating an individual’s employment, businesses need to ensure that they do this in
accordance with the law. Failure to comply with relevant laws could lead to the business being
found guilty of:
Wrongful dismissal
Unfair dismissal

Wrongful dismissal: Where an employee is dismissed and the employer has breached the
terms set out in the employee’s contract. An example would be failure to give the employee
their contractual period of notice.
Unfair dismissal : Where the employee has been dismissed for an arbitrary reason, the onus is
on the employer to prove that it was a fair dismissal

tL}
Essential reading

See Chapter 3 Section 1 of the Essential reading for more detail on termination of employment.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

BPP 3: The legal

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2.3 Implications for the employer
add to the costs of
Some employers claim that employment laws are overly generous and
take on more staff. Other employe rs believe that the
business, while also discouraging them to
their employe es are treated well.
laws are fair and that it is important that
employment
Employers may need to employ HR experts to ensure they do not unwittingly breach
laws.
Failure to comply with employment law could lead to the employee taking action against the
employer. In the UK employees may take an employer to an employment tribunal, which is an
independent body that aims to resolve disputes. An employment tribunal will listen to the
employee’s complaint and if they agree that the complaint is valid, they can require the employer
to do one of the following:
- Pay compensation —
* Improve working conditions
* Reinstate the employee if appropriate
Alternatively, employees may take employers to court, although the costs of this may be
prohibitive.
Failure to comply with employment law may also give the organisation a bad reputation.

Real life example

In January 2020, TV presenter Samira Ahmed won a gender discrimination case against the BBC
at an employment tribunal. She claimed that the work she performed as presenter of the BBC’s
‘Newswatch’ programme was of ‘equal value’ to work performed by male presenter, Jeremy Vine
who presented ‘Points of View’, yet Mr Vine was paid almost seven times the salary that Ms Ahmed
received. Ms Ahmed claimed £700,000 in back pay.

Health and safety law

3.1 Importance of maintaining health and safety at work
* An employer has legal obligations under domestic laws.
* Accidents and illness cost the employer money.
* The company’s reputation in the marketplace and society may suffer.
The major legislation in the UK covers a number of Acts of Parliament. EU law is important in
member states. The most important piece of legislation in this area in the UK is the Health and
Safety at Work Act 1974 (HMSO, 1974). Remember that UK law will not feature in the exam but you
do need to be aware of health and safety best practices.

3.2 Employers’ duties

A senior manager must be specified as responsible for ensuring that problems are solved and
rules observed.
(a) All work practices must be safe.
(b) The work environment must be safe and healthy.
(c) All plant and equipment must be maintained to the necessary standard.
(d) Information, instruction, training and supervision should encourage safe working practices.
Employers must provide training and information to all staff.
(e) The safety policy should be clearly communicated to all staff.
(f) Employers must carry out risk assessments, generally in writing, of all work hazards.
Assessment should be continuous. They must assess the risks to anyone else affected by
their work activities.
(g) They must share hazard and risk information with other employers, including those on
adjoining premises, other site occupiers and all subcontractors coming onto the premises.

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 (h) They must introduce controls to reduce risks.
(i) They should revise safety policies in the light of the above, or initiate safety policies if none
were in place previously.
(j) They must identify employees who are especially at risk.
(k) They must employ competent safety and health advisers.
The Safety Representative Regulations provide that a safety representative may be appointed by
a recognised trade union, and for safety committees to be set up at the request of employee
representatives. Safety representatives are entitled to paid time off work to carry out their duties.

3.3 Employee duties

(a) Take reasonable care of themselves and others
(b) Allow the employer to carry out their duties (including enforcing safety rules)
(c) Not interfere intentionally or recklessly with any machinery or equipment
(d) Inform the employer of any situation which may be a danger (this does not reduce the
employer's responsibilities in any way)
(e) Use all equipment properly

Real life example

Cemex UK Operations Ltd was fined £1 million in 2019 after an accident in which a worker was
killed at a site in Scotland. The conveyor on which the employee was performing repairs
unexpectedly activated, and the employee was partly crushed by the conveyor’s centring
machine. The UK’s Health and Safety Executive (HSE) concluded that Cemex should have made
sure the centring machine was isolated before any repair was carried out. A lack of adequate
health and safety compliance had led to a tragedy that could have been easily prevented.

( Activity 1: Health and safety

1 What are costs of accidents to an organisation?

2 Which areas of health and safety would fall under the responsibility of the employer?

4 Data protection and security

Information about individuals (data subjects) stored on computer files and processed by
computer could be misused. The internet, social media and big data technologies mean that
increasingly large amounts of personal data are available and could potentially harm an
individual. In 2018, the EU issued the General Data Protection Regulation (GDPR) which applies to
all EU member states. The UK issued an updated Data Protection Act to bring its own laws into
compliance with the GDPR. You are not required to know any particular law in detail, but just to
understand the principles of data protection and security.
xt Dern cen aa PE EP SEARSEE I POE SIO NT SS SODA
OE EDEN STE SS A RE TT I EOI

aN ' Data subject: A data subject is a person who can be identified, directly or indirectly, from data
tr
TERM
|held 3
|

Real life example

In 2018 the Royal Dutch Lawn Tennis Association sold personal data about its members, without
their consent, to two of its sponsors. The data included names, gender and addresses. The
sponsors contacted some of the members by post or telephone to make them some tennis related
offers. The association was fined €525,000 by the Dutch Data Protection Authority for breach of
the GDPR.

3: The legal framework 41

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Za Activity 2: Data risks SurgtPA REC TNE TULARE : RI FARINA n0 pe SVN
se eer AIEEE KSEE LIENERT IDE ERLE ACELI
SEATS ADEE

tions keep personal

Outline some of the potential dangers that data subjects face when organisa
information about them.

Solution

4.1 Data Protection Principles

The UK Data Protection Act includes six Data Protection Principles with which data users must
comply:

Lawfulness, fairness Data can only be held if there are valid grounds to do so. Data can i
|
and transparency _ only be used fairly and with clarity, openness and honesty in how the |
|
data is used ee the start.
ERA ae sence me =
|
Prureess Mmnitation Baia cee must ee made aware ai ae purposeLS recording ie |
|

| data from the time it is first collected. This purpose must be specified,
explicit and legitimate. Should data need to be used for a different
| purpose in future then consent from the data subject must be
obtained unless there are ego grounds to do so otherwise.
RIOR a Tak le ital ie IN a eh CA
= a beSi ely el = estat hierind = |
Data mintnicaten Obata ge must be ae (sufficient to fulfilihe Dunbar icant
(connected to the purpose for holding it) and not excessive (the
| minimum needed to Hs ioe pinose)
a eaSE ee ee - a en tee eens = a — 4

Accuraeu| Der held tet be pecurae ee not micieccnc. heceonante steps

should be taken to ensure there are no inaccuracies. Any data that is
aber to Be inaccurate or Disiee ae must be corrected. |
— —— een x — —_= = i
1 se a - —— Se Se

crores Haveeulrora | Bee must waees ina a, longer than is ase for haepurpose it was |
_ collected and processed. There should be a justifiable data retention |
| policy that can be justified. Data that is not needed must be deleted
| or she ale

Integrity and Aoeremnars soaunituinmeasures ace re pak thes felons arise in

confidentiality | connection with the data must be taken.
(security) |1
|

4.2 The rights of data subjects

The Act establishes the following rights for data subjects:

To be informed |Data subjects must be informed about how their personal data is
|collected and used. Information that must be shared includes (for

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 |example) the purposes that their data is used for, what the retention
| period is and who the information is shared with. Individuals must be
_ given this information at the time that their personal data is collected
or within a month if the data was collected from another source.

|Access | acne eS ae ene to Weaies ionncHon held eae ean

_ either verbally or in writing. The requested information must be
| supplied within one month, and (in most circumstances) there should
be no ee for it.
= a ze
| Rectification pee ibe e
can poten inaccurate or peed ere uenl mall
about them to be rectified. Incomplete information must be made
| complete. The request can be made verbally or in writing and it must
_ be completed within one month. Only in limited circumstances can
the peuest be refused.
—————$ ——— ——

Erasure | This is eon as the Fone‘to 6e fortaten ere Reece may request _|
_ information held about them be destroyed. This request can be made
_ verbally or in writing. This right only applies in certain circumstances
and a reply mustBe sent to De sate sup ccs within one emonth.
F ane — + —— Sas ——— ——

Restrict processing | imehe Specocan ne “sgiretenk placed on Aes processing a eae

data or have it suppressed altogether. The data can still be held, but it |
must not be processed. They can request the restriction verbally or in
writing. The right only applies in certain circumstances and the
individual must as ene a eens within one month.

Pata portability iBOE Nee, canmenue to be sent the Aee| held Beat them, so
they can reuse it in a different service. For example, data held by an
online banking app can be requested and transferred to another app |
that can make use of it ues as a money manager nUpe app).

| To object Data eibeee can object to ihe processing of their data. Where ie |
data is used in connection with direct marketing there is an absolute
right to object. Where the data is used for other purposes, this right
can be refused if there is a compelling reason to do so. The objection |
can be made verbally or in writing and a reply must be sent to the
data sulioes within one inteiaienl

| Atronated econ pOiher data protecnch none are Brana toWate Sistas where og
| making and profiling held about them is used to make automated decisions about them, or
where data evaluation about them is automated. For example where |
| decisions are made by bank computer systems as to whether or not
|to lend money to an individual. The uses of data in this way is limited
_ and the individual must be given information about the processing.
| They also have the right to request human intervention or to challenge
| decisions made following such processing.

4.3 Data security

The key risks affecting data are:
(a) Human error - means that incorrect information is stored about individuals due to human
error.
(b) Technical malfunction
(c) Deliberate/malicious action
(d) Hacking - hacking means unauthorised access to data, either from within the organisation,
or from outside, via the internet.

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 Using the Internet brings numerous security dangers:
often
(a) Viruses - malicious programmes that are designed to disrupt the systems. They are
spread via email.
(b) Deliberate damage caused by disaffected employees
(c) Damage caused by hackers
(d) Downloading of inaccurate information and/or virus ridden software
(e) Internal information may be intercepted, but this can be avoided by encryption
(f) Communications link could break down
Data stored electronically is at risk of a security breach. At particular risk is:
(a) Information regarding the business's standing and competitive advantage
(6b) Personal and private information
(c) Information regarding the business's security
(d) Information integral to the outcome of deadlines (eg tenders)
When data is transmitted over a network or telecommunications link (especially the internet) there
are numerous security dangers:
(a) Corruptions such as viruses on a single computer can spread through the network to all of
the organisation’s computers.
(b) Disaffected employees have much greater potential to do deliberate damage to valuable
corporate data or systems because the network could give them access to parts of the
system that they are not really authorised to use.
Controls relating to data security are described in the chapter on control and audit.

Activity 3: Data Protection

Your managing director has asked you to recommend measures that your company, which is
based in the UK, could take to ensure compliance with data protection legislation.
Required
Suggest what measures should be taken.

Solution

Contract law and consumer protection

Two areas of law that are relevant to the consumer are contract law and laws relating
to the sale
of goods. You are required to be aware of the principles of such laws. What is written below
is
based on English law, but most countries adopt similar principles:

5.1 Contract law

When consumers buy goods from a retail store, or online, they are entering into
a contract with
the seller of the goods. |

44 = Business and technology (FBT/BT)

ae
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 A contract must have three elements for it to be legally enforceable:
(a) Consideration — normally money offered, as in a contract of employment but equally as in
the case of bartering, it could be a cow, a bag of rice or even the promise of a service.
(b) Offer and acceptance — there must be an offer and an acceptance by the two parties. Under
UK law, the offer is made by the consumer and is accepted by the retailer.
(c) Intention to enter into a legally binding contract — this could be written or verbal. In the sale
of goods it is normally assumed by the action of taking the goods to the till and paying for
them.

Activity 4: Elements of a contract

A woman was walking down the High Street when she saw a bedside table in the window of a
furniture shop, with a price of £30 displayed. The woman went into the shop and told the owner
she wanted to buy it. She paid for the table at the cash register, and the bedside table was
delivered to her home the following day.

Required
Identify each of the three elements of the contract above?

Solution

5.2 Sale of goods and services

An important area of contract law is the law concerning the sale of goods. UK legislation also
covers contracts where the supply of services is the major part of the contract. For example,
contracts of repair, where the supply of goods may be incidental to the provision of a service.
Imagine that you are about to enter into a contract for the purchase of some goods. What might
you be concerned about?
* You may want the goods delivered for a particular occasion or date.
« Are the goods stolen, ie does the seller have a right to sell the goods?
* You would expect the goods to be the same type and quality as the description or any sample.
* The goods should be of reasonable quality and suitable for their purpose.
The UK’s Consumer Rights Act 2015 (TSO, 2015) legislation covers these matters and a number of
other important issues. When a consumer enters into a contract for the sale of goods, the
following terms are implied, which means the consumer can assume the seller has complied with
them:
* Seller’s right to sell the goods — must have legal title to sell goods
* Description of the goods — goods correspond to description
- Satisfactory quality — for the purpose intended of such a good, free from minor defects and
safe.

3: The legal
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Chapter summary
(BERNER
Tessa ATEDELA NAAR A ASAE STN Ae AROSey,
%
J]

| The legal framework

ONCE SALTED
LE TESCO LENS YT RE SITE

Sources of legal authority | _ Employment law | - Health and safety law

+ Legal framework Protection of employees Importance of maintaining

* Key legislation for business * Recruitment health and safety at work
organisations * Minimum pay * Legal obligations
* Working conditions * Cost of accidents
* Discrimination * Reputation
* Discipline and grievance m3

| Employers’ duties
Termination of employment * Senior manager nominated as
+ Wrongful dismissal responsible
¢ Unfair dismissal * Work practices and
environment must be safe and
healthy
Implications for the employer + Staff should be trained on safe
« Need to know employment working practices
laws + Employers must carry out risk
« Employers may be taken to assessments
court for breaches * Employ competent health and
safety advisers

Employee duties
* Take reasonable care
* Allow employer to enforce
safety rule
+ Not interfere with machinery
+ Inform employer of any
dangerous situations

Data protection and security Contract law and

: [ consumer protection

Data Protection Principles The rights of data subjects Contract law

+ Lawfulness, fairness and * To be informed * Consideration
transparency + Access + Offer and acceptance
* Purpose limitation * Rectification + Intention
* Data minimisation + Erasure
* Accuracy * Restrict processing |
* Storage limitation + Data portability Sale of goods and services
* Security * To object 4. + Implied terms
+ Automated decision making — Seller has legal title
and profiling
— Goods correspond to
| description
— Satisfactory quality
Data security
* Risks

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 Knowledge diagnostic
SINS a EERE UBS CODER: RA RLSEIBee
IEDR 7 GEIGER TELA EDR IESE AMEE SNES
IOS STINET T A OILS ANNE NRE ESE IE RENE EESMT

. Legal framework
Laws and regulations that organisations must comply with come from various sources including
parliament, treaty obligations and regulations.

- Employment law
Employment law aims to protect the interests of employees and includes regulations relating to
fair recruitment, minimum pay, acceptable working conditions, anti-discrimination measures, and
discipline and grievance procedures.

. Termination of employment
When terminating employment, employers should avoid wrongful dismissal, which means
breaching the employee’s employment contract, and unfair dismissal which involves dismissal for
arbitrary reasons.

. Employment law and employees

Failure of employers to adhere to employment laws could lead to fines or compensation to
employees, and may harm the employer’s reputation.

. Health and safety laws

Health and safety laws are important to employers because there can be fines or punishment for
breaches, costs of accidents can be high and a business's reputation might be harmed if they do
not take health and safety seriously.

. Employee's responsibility
Employees also have responsibility for health and safety issues, such as taking reasonable care
themselves, and allowing employers to perform their work relating to health and safety.

. Data Protection Act

Data protection aims to protect living individuals from the harm that they can suffer from
personal information being held about them by organisations. The six principles of the UK data
protection act are:
* Lawfulness, fairness and transparency;
¢ Purpose limitation - data will only be held for specified purposes;
* Data minimisation - the amount of data held about an individual will not be excessive;
* Accuracy - the data held should be accurate;
* Storage limitation - the data should not be held for longer than necessary; and
* Security - actions should be taken to ensure that the data is held securely.

C
3: The legal framework 47
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 Further study guidance

Question practice
Now try the following from the Further question practice bank [available in the digital edition of
the workbook]:

ship Section A 7

CoC ee Cac a
O10 a ea Section A. 2 2 mins

On vai | Exam Seen ; 2 2 mins

Q1l2 =~=~—_—
aan
Exam Section B [4 - 5 mins

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Activity answers
NAINA OES EE TREES EYEE NN CENA HPAP TEMS LENS IEE IOSTLE EO EPSCINEIS SIE EINE ENE
RE SSIESO LL POD LIED EMR AI

Activity 1: Health and safety

1 Cost of:
* Stopping production; repairs to machinery
* Poor morale
* Being sued, compensation, increased insurance
* Recruitment/training
* Bad PR

2 Employer’s responsibility:
* Health and safety assessments/risk assessment
* Regular checks
* Health and safety training

Activity 2: Data risks

Potential dangers of data being held include:
* Identity theft: where criminals use the data subjects’ identity to fraudulently make
transactions in the subject’s name (eg taking out bank loans in the name of the data subject)
* Theft of assets: for example, if bank account details and passwords are stolen, criminals can
transfer money from the victims’ bank accounts
* Privacy: people have a right to privacy. This right can be breached if data held about them is
passed on to other companies or individuals without their consent
* Reputation: private or confidential information could be publicised, leading to a loss of
reputation or even blackmail.
« Loss of employment or failing to obtain new employment because of confidential information
becoming available to employers (eg spent criminal records).
* Being targeted by advertisers online or by telephone
* Inaccurate information being held about an individual leading to adverse consequences

Activity 3: Data Protection

Measures could include the following.
* Obtain consent from individuals to hold any sensitive personal data you need.
* Supply individuals with a copy of any personal data you hold about them if so requested.
* Consider if you may need to obtain consent to process personal data.
* Ensure you do not pass on personal data to unauthorised parties.
* Have a policy about when personal data will be destroyed.
* Ensure adequate security is in place to prevent breaches of data

Activity 4: Elements of a contract

Consideration — the store’s bedside table and the customer’s money
Offer and acceptance - telling the owner she wanted to buy the table was an offer, and the
owner agreeing, and taking it to the cash register was acceptance by the owner.
Intention — consent to entering into a legal contract is assumed when goods are paid for
Note. Some of you may have thought the bedside table merely being displayed in the shop
window for £30 is an offer, however, under UK law, this is known as an Invitation to Treat.

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 Skills checkpoint 1
Approaching objective
test (OT) questions

Chapter overview

Learning
the models

Approaching Approaching
Bane corporate
questions governance
questions

Approaching
multi-task
questions

Effective writind
2nd presentatio™

Introduction
The exam contains two sections. Section A consists of 16 objective test (OT) questions worth one
mark each and 30 objective test (OT) questions worth two marks each. Section B contains six
multi-task questions worth four marks each. The multi-task questions are made up of OT
questions and therefore being able to answer OT questions effectively is extremely important.
OT questions
OT questions in Section A are single, short questions that are auto-marked and worth one or two
marks each. You must answer the whole question correctly to earn the marks. There are no partial
marks.
The OT questions in Section A aim for a broad coverage of the syllabus, and so all areas of the
syllabus need to be carefully studied. You need to work through as many practice OT questions as
possible, reviewing them carefully to see how correct answers are derived.
 of the BT/FBT exam:
The following ty pes of OT questions commonly appear in Section A

| ee &

Multiple choice (MCQ) - Choose one correct answer from two or three options in the
_ case of 1 mark questions, or one correct answer from four
}

_ options in the case of 2 mark questions.

| Eg Q1 of the specimen exam |

|Multiple Co (MR) |These are a type of multiple choice question where you need — |

| to select more than one answer from a number of given op- |||
| _ tions. The question will specify how many answers need to
| | be selected. It is important to read the requirement
|
carefully. |
Eg Q8 of the specimen exam
|

| Multiple response matching | This question type requires you identify which of two or
_ (MRM) | more categories each item in a list belongs to. For example,
| - a question might provide a list of controls, and ask you to
| _ identify for each control whether it is a general control or an |
| | application control.

Section B questions will include six multi-task questions. These will also use OT questions, but a
wider range of question types will be used in the Section B questions. The approach to these will
be discussed in Skills Checkpoint 4.

Approach to OT questions
BT/FBT Skill: Approach to OT questions
A step-by-step technique for approaching OT questions is outlined below. Each step will be
explained in more detail in the following sections as a ‘mini exam’ is answered in stages.
STEP 1 Answer the easy questions first. Some questions are just simple knowledge type questions and take no more
than half a minute, while others might include a scenario and require more thought. By doing the easier
questions first, you leave yourself longer to deal with the harder questions.
STEP 2 Answer all questions. There is no penalty for an incorrect answer in ACCA exams; there is nothing to be
gained by leaving an OT question unanswered. If you are stuck on a question, as a last resort, it is worth
selecting the option you consider most likely to be correct and moving on. Make a note of the question, so if
you have time after you have answered the rest of the questions, you can revisit it.
STEP 3 Read the requirement first! The requirement will be stated in bold text in the exam. Identify what you are
being asked to do, any technical knowledge required and what type of OT question you are dealing with.
Look for key words in the requirement such as, ‘which TWO of the following’ or ‘which of the following is
NOT‘, etc.
STEP 4 Apply your technical knowledge to the data presented in the question. Take your time working through
questions and make sure you read through each answer option with care. OT questions are designed so
that each answer option is plausible. Work through each response option and eliminate those you know are
incorrect.

Exam success skills

The following exam success skills are particularly relevant for the BT/FBT exam:
* Managing information. It is easy for the amount of information contained in a particular
question to feel a little overwhelming. Active reading is a useful technique to avoid this. This
involves focusing on the requirements first on the basis that, until you have done this, the detail
in the scenario will have little meaning and will seem more intimidating.
* Correct interpretation of requirements. Identify from the requirement the type of OT question.
This is especially important with multiple response options (MRO) to ensure you select the
correct number of response options.

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 * Good time management. Complete all questions in the time available. One-mark OTs should
~ take 1.2 minutes and two-mark OTs should be allocated 2.4 minutes. However, some questions
may take longer than others so just make sure that you complete ali of the Section A questions
within 91.2 minutes (75 marks x 1.2 minutes). This will leave you with 28.8 minutes to complete
Section B where you should allocate 4.8 minutes (4 marks x 1.2 minutes) to each of the six
questions.
These skills will now be demonstrated using a ‘mini exam’.

Skill activity
(a) According to Mendelow’s matrix, stakeholders with high interest and low power should be:
(1 mark)
O- Kept informed
O Satisfied
O- Ignored
Note. This is an MCQ requiring one correct answer to be selected. The question does not
require reading any scenario and so can be answered relatively quickly, leaving extra time
for more complex questions.
(6) BCD Cois a large trading company. Steve is the administration manager and is also
responsible for legal and compliance functions. Sheila is responsible for after-sales service
and has responsibility for ensuring that customers who have purchased goods from BCD Co
are fully satisfied. Sunny deals with suppliers and negotiates on the price and quality of
inventory. He is also responsible for identifying the most appropriate suppliers of plant and
machinery for the factory. Sam is the information technology manager and is responsible for
all information systems within the company.
According to Porter’s value chain, which of the managers is involved in a primary activity as
opposed to a support activity? (2 marks)
O Steve
O Sunny
O Sheila
O Sam
Note. This is also an MCQ. However, it has four potential options and requires you to read a
scenario before answering. It is therefore likely to be more time consuming than the previous
question.
(c) Indicate whether the following will cause a shift in the demand curve for a normal good, or
a move along the existing demand curve: (2 marks)

Shiftindemand Move along the demand

curve
An increase in household
incomes

A change in tastes towards

SS eae di

A rise in the price of the good

a ; ; |
hE ES SS ee

A rise in the price of substitute

goods

Note. This is an MRM question. You need to indicate which of two possible consequences each
event will lead to. In Section A questions you need to get all parts correct to get the two marks
available. This means that if you get one of the four wrong, you will lose the marks.

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 es expected of an accountant?
(d) Which TWO of the following are the professional qualiti
(2 marks)
O Moderation
O. Authority
O Independence
© Scepticism
both right to
Note. This is an MRO asking for two answers to be.selected. You must get them
obtain the 2 marks.
in an
(6) esses Comprise all those individuals or groups who have a legitimate interest
organisation’s activities.
Which word or phrase correctly completes this sentence? (1 mark)
Key players
Stakeholders
Shareholders
Note. This is a multiple choice question where you have to identify which word fits a gap in a
sentence.
STEP 1 Answer the questions you know first.
If you are having difficulty answering a question, move on and come back to tackle it once you have
answered all the questions you know.
Questions 1 and 5 should be relatively quick to do as they are just pure tests of knowledge — you
either know the answer or you don't. It would make sense to answer these two questions first as it
is likely that you will be able to complete them comfortably within the time allocated to each one.
Any time saved could then be spent on the more complex questions that require more thought.
STEP 2 There is no penalty for an incorrect answer in FIA/ACCA exams so there is nothing to be gained by leaving
an OT question unanswered. If you are stuck on a question, as a last resort, it is worth selecting the option
you consider most likely to be correct, and moving on. Make a note of the question, so if you have time after
you have answered the rest of the questions, you can revisit it.
For the MCQs, you have a 33% or 25% chance of getting the answer correct (depending on the
number of options) so do not leave any unanswered. MRs and MRMs can also be guessed.
STEP 3 Read the requirement first!
The requirement will be stated in bold text in the exam. Identify what you are being asked to do, any
technical knowledge required and what type of OT question you are dealing with. Look for key words in the
requirement such as ‘Which TWO of the following...’, “Which of the following is NOT...’
Question 4 requires you to choose two options not just one.
STEP 4& Apply your technical knowledge to the data presented in the question.
Take your time working through scenarios, and be sure to read through each answer option with care. OT
questions are designed so that each answer option is plausible.
Let’s have a look at a few of the questions in detail.
Question (1)
This is the sort of question where even if you can’t remember the theory, you can have an
educated guess. If people have high interest, you are not likely to completely ignore them, as they
may cause trouble for the organisation, so you can eliminate that. Since the people have low
power, it would not be necessary to keep them satisfied. The correct answer is therefore keep
informed. A lot of questions in BT can be answered by trying to apply some logic.
Question (2)
This question essentially tests whether you know what the primary activities are in Porter’s value
chain. The first thing to do is read the requirement, which asks which of the managers is involved
in the primary activities of Porter’s value chain. The next thing to do, before reading the scenario,
is to think about what the primary activities are (they are inbound logistics, operations, outbound
logistics, after sales service and sales and marketing). Having done this, when you read the
scenario, you will know exactly what you are looking for. This is active reading. This is much more

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time efficient than starting the question by reading the scenario before reading the requirement.
The correct answer is Sheila.
Question (3)
The risk with this question is that if you get one of the four items wrong you will lose all the marks.
This is the type of question you should leave until the end, unless you are very confident about
this area.
Question (4)
This question is essentially a test of knowledge, so you either know it or you don’t. The correct
answer is:
* Independence
* Scepticism
Moderation — whilst admirable in many contexts — is not a professional quality specifically
identified as expected of an accountant.
Authority can be an admirable quality but is not specified as a professional quality expected of
an accountant.
Question (5)
The answer is stakeholders. This is a definition of stakeholders. This is the type of question where
you either know the answer or you don't.

Exam success skills diagnostic

Every time you complete a few questions, use the diagnostic below to assess how effectively you
demonstrated the exam success skills in answering the questions. The table has been completed
below for the ‘mini exam’ activity to give you an idea of how to complete the diagnostic.

| Managing information _ Did you read each of the five requirements first?

|
|
| _| Did you actively read the scenario for each question making a
note of relevant points? Eg, in question (2), ensuring you read the
|| Rea eer oer before rng the scenario.

| Correct reyactene of Did you denuty ae correct tecnica ion eae needed to
requirements | answer each requirement? Again question 2 is a good example,
|
as thinking about what the primary activities are is useful before
|
| reading the scenario.
| Did you identify what type of OT question you were dealing
_ with? For example, knowing that only one correct answer is
| bogie for a Musics -choice gelSalon
|
on od time management | Did you manage to answer mal five auectone Mihi 9.6 nine? (8
| marks in total x 1.2 minutes.
Did you manage your time well by answering Questions (2) and
| (3) after answering the easier questions (1), (5) and (4)?

Most important action points to apply to your next question

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 Summary
Being able to answer OTs is very important for the BT/FBT exam. Key skills to focus on throughout
your studies will therefore include:
- Always reading the requirements first to identify what you are being asked to do and what
type of OT question you are dealing with.
* Actively reading the scenario, making a note of key data needed to answer each requirement.
* Answering OT questions in a sensible order, dealing with any easier discursive style questions
first.
¢ Applying some logic to questions where you do not know the theory.

56 Business and technology (FBT/BT)

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 The macro economic
SRD BENASSI OEY LL SELLE ESE ALES LE DLELEDGE TEICLEEE IAL EGAP DELILE ILIV DEEN ESA LELEAE IEE OLE GEER ETE
HERE LLALESIS DLE POLE LES

environment

Learning outcomes
On completion of this chapter, you should be able to:

Syllabus reference no.

Define macroeconomic > policy sid explain its

it objectives. A4 (a)

Eola he, main eoemnont fiite level BeSUSE seirnennin A4 (b)

the economy and how variations in the level of business activity
affect individuals, ACUSELIS) © and businesses.

ieee ne ines aeeconomic issues on ie eee hea Alt (c)

household and the business:
(a) Inflation
(b) Unemployment
(c) Stagnation
(d) LS icioivenpenne ms Segue

peceee ne main types of economic policy that may be Au (d)

implemented by government and supra-national bodies to
maximise economic welfare.

Beene the pee of focal and Home sation measures A4 (e)

on the individual, the household and sins

Exam context
These topics are the areas that professional accountants are expected to be familiar with, and as
such, should be expected to come up in the exam.
 Chapter overview
Ps aeeae LAPT AT,

| The Macro Economic Environment 5

DBE
Senne
FOES ANT Seas Vea SL es

Government _ | Fiscal |} _ Monetary © _ National income and |

policies and | _ policy policy economic growth —
obligations | es od | key terminology

Introduction to Taxation Objectives of

macro-economics monetary policy

| Tax and income levels |

Factors which affect Instruments of
the economy monetary policy

Phases inthe | Inflation and Unemployment

business cycle — its consequences

Inflation The rate of

: unemployment

Why inflation |
is a problem Consequences of
| unemployment

Measures of inflation

Causes of inflation

58 Business and technology (FBT/BT)

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 1 Government policies and obligations
1.1 Introduction to macro-economics
Macro-economics is the study of the combined effects of the decisions of individual economic
units and looks at a complete national economy as a whole.
The policies of macro-economics describe the actions a government takes to control economic
issues ie inflation, economic growth.
Governments seek to manage the national economy, and this may include the following aims:
(a) To achieve economic growth
(b) To control price inflation
(c) To achieve full employment
(d) To achieve a balance between exports and imports
Governments spend money raised by taxation and borrowing on a variety of items. Decisions by
governments on spending and taxing affects the economy in many ways. Eg if the government
builds a hospital:
(a) Suppliers to government — building company wins the contract, they then employ more staff.
(b) Knock-on effect of government spending throughout the economy — the builders they employ
will spend their income in shops so the shops’ revenues will also grow.
(c) Taxation affects consumers’ purchasing power — the builders pay income tax on earnings and
VAT on what they buy. Lower rates means people can afford more goods and services.
(d) Taxes on profits affect investment returns — the building company pays tax
(e) Public sector investment benefits some companies — eg a hospital equipment company
(f) Public sector investment has a longer time scale and less quantifiable benefits — healthy work
force
(g) Government influences are outlined in the diagram which follows.

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 Figure 4.1: Impact of government on the economy ; ,
ee

( 7 eeecare: demand are

|
| Cereal economic eee Cost of finance J—————+
| Epoliey ! \ ae

“age Be Taxation ——————

\ y, :

Protection vs Free Trade aes

ed

|
| ~
| |
{Grants, incentives, eoonetee _—
j 1 } } | i
! Indust ae ST ae > eae a
I <=
|Industry Ppo (eg investor
|
preiecion conga Ey)

| LEntryfarce’eens es

| |Environment and | (Dist

ae ibRR,
ti ee
| [ infrastructure polly ee
EAE SSS
GOVERNMENT
| es
ee ORGANISATION
rc ae

| Workplace regulation, |
pn are te employment law
( 1 a eR ee
Social policy Eis a Bs a neal wee SoA
| enna Teas Labour SEN? skills, education —
eR /

= ForeignpolicySa EU and WTO

V ablations |
enone
q \Aneereesenernnsennees ———

| Export promotion to aihes® |

| [ aid recipients
ree rn a a ee

1.2 Factors which affect the economy

The economy is rarely in a stable state because of the various changing factors which influence it.
These include investment levels, the multiplier effect, inflation, savings, confidence, interest rates
and exchange rates.

1.2.1. The multiplier in the national economy

The concept of the multiplier is that an injection of a certain size into the economy leads to a
much larger increase in national income. For example, the government may decide to inject $1
billion into the economy by borrowing money and spending it on an infrastructure project. The S1
billion injection will lead to an increase in national income that is much larger than $1 billion. It will
increase the wages of the workers on the infrastructure project, so they will spend that money,
which will increase the income of the businesses where they spend it. These businesses will then
have higher income which they will spend, and so on.

1.2.2 Aggregate supply and demand

Aggregate demand: The total demand in the economy for goods and services is called the
aggregate demand and it is made up of several components of the circular flow. These
components include consumption, investment, government spending and exports minus imports.
Put simply, the aggregate demand curve represents the sum of all the demand curves for
individuals and businesses in a country.

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 Aggregate supply: The aggregate supply refers to the ability of the economy to produce goods
and services.
Aggregate demand can be calculated using the following formula;
AD=C+1+G+(X-M)
AD = aggregate demand
C = consumption
| = investment
G = government spending
X = total exports
M = total imports

4,
Essential reading

See Chapter 4 Section 1 of the Essential reading for more detail on the flows of income throughout
the economy.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

2 Fiscal policy
° oe. : : | rats ,
aN Fiscal policy: The use of government spending and tax policies to influence the level of
ple demand in an economy.
ee a es |

The formal planning of fiscal policy (ie tax and spend policies) is set out annually (eg in the UK in
the ‘Budget’) which has three components:
(a) Expenditure planning
(b) Revenue raising
(c) Borrowing
If expenditure exceeds revenues the government will need to borrow. In the UK this is known as the
‘Public Sector Net Cash Requirement’ (PSNCR).
Cost push inflation occurs where the costs of factors of production rise regardless of whether or
not they are in short supply. This appears to be particularly the case with wages.
If you spend more than you earn you will be overdrawn. This is the same for a government. For
example, if a government spends more on building roads than it earns via taxation, it will be
running a ‘budget deficit’. When the government's income exceeds its expenditure it can repaying
earlier borrowings, this is known as having a ‘budget surplus’.
Governments can use fiscal policy to change the level of demand in the economy.
If a government decides to use fiscal policy to influence demand in the economy, it can choose
either expenditure changes or tax changes as its policy instrument.
Increase demand by government:
(a) Reducing taxation, but does not change its spending, then demand is stimulated
(b) Spending more, but not altering taxation
Reduce demand by government:
(c) Increasing taxation or reducing spending

Real life example

During the COVID-19 pandemic, many governments increased spending to increase demand in
the economy after the level of economic activity fell due to the pandemic. In the UK, the

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 paid half the price of a meal at
government even introduced a scheme where the government
to support the hospitality industry.
participating restaurants and pubs in an attempt

2.1 Taxation
Taxation:
(a) Is a key source of revenue for the government
(b) Serves to discourage certain activities that the government wa nt to highlight as being
unhealthy or undesirable (eg tax on tobacco)
(c) Redistributes income and wealth (eg income support)
A good tax system should be:
* Flexible
« Efficient
* Able to attain its purpose
Taxes can be either direct or indirect.
aE TES ERODED IST LESS DHE ~ LENE esearch
eusese ek SES ENCANA
IRATE REDE
. EEA HSE CESS EDA IEE LO SOI SS ESAS ESE ESL SOE ANE EST EE

Direct taxation: Paid directly to the Revenue authority eg income, capital gains and |
inheritance tax.
Indirect taxation: This is collected by the Revenue authority via a third party (a ‘supplier’) who |
_ passes the tax on to consumers (eg sales taxes, VAT). [
peso,

Indirect taxes can be:

(a) Specific taxes charged as a fiscal sum per unit sold (eg a petrol tax per litre)
(b) ‘Ad valorem taxes’ charged as a fixed percentage of the price of the item (eg VAT and other
sales taxes)
A government must decide how it intends to raise tax revenues, from direct or indirect taxes, and
in what proportions tax revenues will be raised from each source.

2.2 Tax and income levels

Note the following distinctions.
(a) A regressive tax takes a higher proportion of a poor person’s salary than of a rich person’s.
Television licences and road tax are examples of regressive taxes since they are the same for
all people.
(b) A proportional tax takes the same proportion of income in tax from all levels of income.
(c) A progressive tax takes a higher proportion of income in tax as income rises. Income tax as a
whole is progressive, since the first part of an individual’s income is tax free due to personal
allowances and the rate of tax increases in steps in the UK from 20p in £1 to 45p in £1 as
taxable income rises.
Direct taxes tend to be progressive or proportional. Income tax is usually progressive, with high
rates of tax charged on higher bands of taxable income. Indirect taxes can be regressive, when
the taxes are placed on essential commodities or commodities consumed by poorer people in
greater quantities.

Activity 1: Taxes

The government of a certain country decides to introduce a poll tax, which will involve a flat rate
levy of $200 on every adult member of the population.
Required
This new tax could be described as
O Regressive
O. Proportional

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 O Progressive
O Advalorem

Monetary policy

Monetary policy: The use of money supply, interest rates, exchange rates and credit control
to influence aggregate demand.
EI TD LT TS TTT STD ET EAN
LED LCE EET AAT TT SY AE SC A

Objectives of monetary policy

Monetary policy can be used as a means towards achieving ultimate economic objectives for
inflation, the balance of trade, full employment and real economic growth. To achieve these
ultimate objectives, the authorities will set intermediate objectives for monetary policy.
In the UK, the ultimate objective of monetary policy in recent years has been principally to reduce
the rate of inflation to a sustainable low level. The intermediate objectives of monetary policy have
related to the level of interest rates, growth in the money supply, the exchange rate for sterling,
the expansion of credit and the growth of national income.

3.1.1 Money supply targets

To monetarist economists, the money supply is an obvious intermediate target of economic policy.
This is because they claim that an increase in the money supply will raise prices and incomes and
this in turn will raise the demand for money to spend. The current trend is to call this quantitative
easing, a policy whereby a government prints more money in order to stimulate the economy.

3.2 Instruments of monetary policy

* Changing interest rates — higher rates lead to us saving more and so spending less and vice
versa. This can be done through open market operations (issuing or buying bonds)
« Changing reserve requirements (the minimum balances held by banks) — increased reserves
held by banks means less can be lent to customers as credit and so we have less to spend.
¢ Intervention to influence the exchange rate (buying or selling currency) — overseas goods
become relatively more expensive for us if the £ is weaker and so we buy less of them.
Monetary control aims to control inflation which helps:
* Provide greater economic certainty through low inflation — so can plan better
* Ensure business confidence and so stimulate investment — through stable prices
* Stimulate economic growth and international competitiveness that should provide higher
incomes

Activity 2: Effects of policy

How are businesses affected by fiscal and monetary policy?

National income and economic growth - key

terminology

Aggregate demand: The total planned or desired consumption demand in the economy for
| consumer goods and services and also for capital goods, no matter whether the buyers are
| households, firms or government.

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4.1 Full-employment national income
If one aim of a country’s economic policy is full employment, then the ideal equilibrium level of
national income will be where AD and AS are in balance at the full employment level of national
income, without any inflationary gap — in other words, where aggregate demand at current price
levels is exactly sufficient to encourage firms to produce at an output capacity where the
country’s resources are fully employed.

4.2 Equilibrium national income

Demand for goods and services is in balance with available supply

4.3 Deflationary gap

Where there is unemployment of resources prices and wages should go down (then we could
afford to buy more and so increase demand and so employment would improve). But people do
not want their wages to go down even temporarily. This then creates the deflationary gap where
prices stay fairly constant and output and demand change.

4.4 Stagflation
Occurs where there is a combination of high unemployment and high inflation caused by a price
shock (eg crude oil price rises in the early 1970s) and inflexibility in supply.

Phases in the business cycle

The business cycle is the continual sequence of rapid growth in national income followed by a
slowdown. An economy will naturally rise and fall without government intervention.
The four main phases of the business cycle are:
(a) Recession (point A on the graph below)
(6) Depression (point B on the graph below)
(c) Recovery (point C on the graph below)
(d) Boom (point D on the graph below)
(e) Recession etc, etc ...
Figure 4.2: Business Cycle
Output | Actual output

Trend in output

Time

In the ‘recession’ phase:

* Consumer demand/confidence falls.
* Investment projects begin to look unprofitable.
* Orders are cut, inventory levels reduced.

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 * Some companies unable to sell their inventories become insolvent.
If during the recession phase there is a lack of stimulus to aggregate demand a period of
‘depression’ will set in.
‘Recovery’ is usually slow to begin due to a general lack of confidence in the economy:
* Governments look to boost demand (using fiscal/monetary policy)
* Together with confidence, output, income and employment rise.
* Investment flows into the economy.
Once the actual output has risen above the trend line the ‘boom’ phase of the cycle is entered:
* Capacity and labour become fully utilised
* Further rises in demand lead to price rises
* Business is profitable and high inward investment occurs.

Inflation and its consequences

High rates of inflation are harmful to an economy. Inflation redistributes income and wealth.
Uncertainty about the value of money makes business planning more difficult. Constantly
changing prices impose extra costs.

6.1 Inflation
Inflation is the name given to an increase in price levels generally. !t is also manifest in the decline
in the purchasing power of money.
Historically, there have been very few periods when inflation has not been present. We discuss
below why high rates of inflation are considered to be harmful. However, it is important to
remember that deflation (falling prices) is normally associated with low rates of growth and even
recession. It would seem that a healthy economy may require some inflation. Certainly, if an
economy is to grow, the money supply must expand, and the presence of a low level of inflation
will ensure that growth is not hampered by a shortage of liquid funds. (Liquidity is the ease with
which assets can be converted into cash.)

6.2 Why is inflation a problem?

An economic policy objective which now has a central place in the policy approaches of the
governments of many developed countries is that of stable prices. Why is a high rate of price
inflation harmful and undesirable?
Redistribution of income and wealth
Inflation leads to a redistribution of income and wealth in ways which may be undesirable.
Redistribution of wealth might take place from accounts payable to accounts receivable. This is
because debts lose ‘real’ value with inflation. For example, if you owed $1,000, and prices then
doubled, you would still owe $1,000, but the real value of your debt would have been halved. In
general, in times of inflation those with economic power tend to gain at the expense of the weak,
particularly those on fixed incomes.
Balance of payments effects
lf a country has a higher rate of inflation than its major trading partners, its exports will become
relatively expensive and imports relatively cheap. As a result, the balance of trade will suffer,
affecting employment in exporting industries and in industries producing import-substitutes.
Eventually, the exchange rate will be affected.
Uncertainty of the value of money and prices
lf the rate of inflation is imperfectly anticipated, no one has certain knowledge of the true rate of
inflation. As a result, no one has certain knowledge of the value of money or of the real meaning
of prices. If the rate of inflation becomes excessive, and there is ‘hyperinflation’, this problem
becomes so exaggerated that money becomes worthless, so that people are unwilling to use it
and are forced to resort to barter. In less extreme circumstances, the results are less dramatic, but

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 allocation is
the same problem exists. As prices convey less information, the process of resource
less efficient and rational decision-making is almost impossible.
Resource costs of changing prices
In times
A fourth reason to aim for stable prices is the resource cost of frequently changing prices.
of high inflation, substantial labour time is spent on planning and implement ing price changes.
Customers may also have to spend more time making price comparisons if they seek to buy from
the lowest cost source.
Economic growth and investment
It is sometimes claimed that inflation is harmful to a country’s economic growth and level of
investment. Although some studies have indicated that the adverse influence of inflation on
economic growth and investment appears to be small in the short term, it could affect a country’s
standard of living fairly significantly over the long term.

6.3 Measures of inflation

The rate of inflation is measured by price indices. A ‘basket’ of items which represent average
purchases around the country is priced regularly and this forms the basis of a price index.
In the UK there are now two key price indices:
(a) Retail Prices Index (RPI)
This index includes prices for all goods and services (including housing costs) purchased by
UK consumers.
(b) Consumer Prices Index (CPI)
This index, which excludes housing costs (council tax, rent), is calculated on the same basis
as the rest of Europe.
Additionally, you do need to be aware of the following indices which are sometimes useful:
(c) RPIX
This is the underlying rate of inflation excluding mortgage interest payments.
(d) RPIY
This is RPIX as adjusted for the effects of any VAT changes.

6.4 Causes of inflation

The following can cause inflation:
* Demand pull factor
* Cost push factors
* Import cost factors
* Expectations
* Excessive growth in the money supply
Of these causes, the most significant are the first two, demand pull and cost push inflation.
r=

Demand pull inflation: Inflation resulting from a persistent excess of aggregate demand over
q
aggregate supply. Supply reaches a limit on capacity at the full employment level.
}
Cost push inflation: Inflation resulting from an increase in the costs of production of goods
_ and services, eg through escalating prices of imported raw materials or from wage increases. Ses
SESSA
2B

6.4.1 Demand pull inflation

Demand pull inflation occurs when the economy is buoyant and there is a high aggregate
demand, in excess of the economy’s ability to supply.
(a) Because aggregate demand exceeds supply, prices rise.
(b) Since supply needs to be raised to meet the higher demand, there will be an increase in
demand for factors of production, and so factor rewards (wages, interest rates, and so on)
will also rise.

a
66 Business and technology (FBT/BT) BPP
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 (c) Since aggregate demand exceeds the output capability of the economy, it should follow that
demand-pull inflation can only exist when unemployment is low. A feature of inflation in the
UK in the 1970s and early 1980s, however, was high inflation coupled with high
unemployment.

6.5 Cost push inflation

Real life example

A significant concern for investors and analysts around the world right now is the absence of
inflation, despite several years of quantitative easing which has significantly increased the level of
money supply. Some analysts believe that deflationary forces — such as the increase in the global
workforce caused by the rapid industrialisation of China — have acted as a brake on inflationary
pressures, but that brake may start to weaken in the near future. Recent increases in the price of
gold have been taken as evidence of a general belief that inflation will increase in the future — ie
inflation will increase because people think it will.

7 Unemployment
7.1 The rate of unemployment
The rate of unemployment in an economy can be calculated as:
Number of unemployed
Total workforce
x 100%

The number of unemployed at any time is measured by government statistics.

lf the flow of workers through unemployment is constant then the size of the unemployed labour
force will also be constant.

7.1.1 Flows into unemployment

Flows into unemployment are:
(a) Members of the working labour force becoming unemployed
(i) Redundancies
(ii) Lay-offs
(iii) Voluntarily quitting a job
(b) People out of the labour force joining the unemployed
(i) School leavers without a job
(ii) Others (for example, carers) re-joining the workforce but having no job yet.

7.1.2 Flows out of unemployment

Flows out of unemployment are:
+ Unemployed people finding jobs
* Laid-off workers being re-employed
* Unemployed people stopping the search for work.

7.1.3 Unemployment statistics

In the UK, the monthly unemployment statistics published by the Office for National Statistics
_ (ONS) count only the jobless who receive benefits.
The ONS also produces figures based on a quarterly survey of the labour force known as the
International Labour Organisation measure (ILO measure) that provides seasonally adjusted
monthly data. This figure is considered to be more useful because it is also an internationally
comparable measure.

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7.2 Consequences of unemployment
|
Unemployment results in the following problems.
much output as it
(a) Loss of output. If labour is unemployed, the economy is not producing as
could. Thus, total national income is less than it could be.
lose
(b) Loss of human capital. If there is unemployment, the unemployed labour will gradually
its skills, because skills can only be maintained by working.
(c) Increasing inequalities in the distribution of income. Unemployed people earn less than
employed people, and so when unemployment is increasing, the poor get poorer.
(d) Social costs. Unemployment brings social problems of personal suffering and distress, and
possibly also increases in crime, such as theft and vandalism.
(e) Increased burden of welfare payments. This can have a major impact on government fiscal
policy.

7.3 Causes of unemployment

Unemployment may be classified into several categories depending on the underlying causes.

| Real wage un- | This type of unemployment is caused when the supply of labour exceeds the
employment =| demand for labour, but real wages do not fall for the labour market to clear.
| | This type of unemployment is normally caused by strong trade unions which |
| _ resist a fall in their wages. Another cause of this type of unemployment is the |
{
| minimum wage rate, when it is set above the market clearing level.

|Frictional
| are not enough jobs to go round, but because of the friction in the labour
||
- market (difficulty in quickly matching workers with jobs), caused perhaps by
_alack of knowledge about job opportunities.
In general, it takes time to match prospective employees with employers, and
individuals will be unemployed during the search period for a new job.
Frictional unemployment is temporary, lasting for the period of transition
from one job to the next.

Seasonal This occurs in certain industries, for example building, tourism and farming,
| where the demand for labour fluctuates in seasonal patterns throughout the
year. |

Structural | This occurs where long-term changes occur in the conditions of an industry.
A feature of structural unemployment is high regional unemployment in the |
location of the industry affected. The primary cause is a significant reduction
in the level of demand.
\- awl es == a = on = es = — 7 = — a ———-—-}

Technological | This is a form of structural unemployment, which occurs when new

technologies are introduced.
| |(a) Old skills are no longer required.
| | (b) There is likely to be a labour-saving aspect, with machines doing the job
that people used to do.
| | With automation, employment levels in an industry can fall sharply, even
|when the industry’s total output is increasing.
| Cyclical or _ It has been the experience of the past that domestic and foreign trade go
| | , ;
| demand- _ through cycles of boom, decline, recession, recovery, then boom again, and
| deficient | soon.
@ During recovery and boom years, the demand for output and jobs is
| high, and unemployment is low.

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 Category
_(b) During decline and recession years, the demand for output and jobs falls,
and unemployment rises to a high level.
|Cyclical unemployment can be long term, and a government might try to
|reduce it by doing what it can to minimise a recession or to encourage faster
economic growth.

Seasonal employment and frictional unemployment will be short term. Structural unemployment,
technological unemployment and cyclical unemployment are all longer term, and more serious.

Activity 3: Types of unemployment

RECUR RENSSELAER ee alee .

Match the terms ‘Structural unemployment’, ‘Cyclical unemployment’ and ‘Frictional

Unemployment’ with the definitions below:

Unemployment arising from a difficulty in

matching unemployed workers with available
| jobs |
=a pe mreeaeres = oe 1
ee ee ee ee : < a

Unemployment occurring in the downswing of |

| an economy in between two booms |

Unemployment arising from a long-term

| decline in a particular industry

Essential reading

See Chapter 4 Section 2 of the Essential reading for more detail on unemployment.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

Objective of economic growth

8.1 Economic growth
Economic growth may be measured by increases in the real gross domestic product (GDP) per
head of the population.
It is not unusual to find economic growth measured simply as increases in total GDP, regardless of
inflation and changes in population size. Over periods in which the population changes relatively
little, this approach is satisfactory.
Economic growth may be balanced, when all sectors of the economy expand together, or
unbalanced. Less developed countries in particular find it difficult to achieve economic growth,
because many of the factors necessary for growth are absent in these countries.
Actual economic growth is the annual percentage increase in national output, which typically
fluctuates in accordance with the trade cycle. Potential economic growth is the rate at which the
- economy would grow if all resources (eg people and machinery) were utilised.

8.2 Actual growth

Actual growth in the long run is determined by two factors.
+ The growth in potential output (in other words the aggregate supply)

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 » The growth in aggregate demand (AD)
in Section 2.2 and Figure 3.
These factors should move in step with one another as we explained

8.3 Potential growth

the economy
The causes of growth in potential output are the determinants of the capacity of
(the supply side) rather than actual spending (the demand side) and are as follows.

(a) There may be increases in the amount of resources available.

(i) Land, raw materials. Land is virtually in fixed supply, but new natural resources are
continually being discovered.
(ii) Labour (the size of the working population). The output per head will be affected by the
proportion of the population which is non-working.
(iii) Capital (eg machinery).
(b) Increases in the productivity of resources may result from technological progress or changed
labour practices, for example.

8.4 Factors needed for sustained economic growth

Sustained economic growth depends heavily on an adequate level of new investment, which will
be undertaken if there are expectations of future growth in demand. After investment has taken
place on the basis of expectations, the level of income will increase, by the operation of the
multiplier. But there is no reason why the actual level of income should end up increasing as much
as the investing businesspeople thought it would. It follows that investment, a factor in growth, is
dependent on business confidence in the future, which is reflected in expectations of growth in
consumption.

8.5 Natural resources

The rate of extraction of natural resources will impose a limit on the rate of growth. Production
which uses up a country’s natural resources, such as oil, coal and other minerals, depletes the
stock of available resources.

8.6 Technological progress

Technological progress is a very important source of faster economic growth.
* The same amounts of the factors of production can produce a higher output.
* New products will be developed, thus adding to output growth.
There can be technical progress in the labour force. If workers are better educated and better
trained they will be able to produce more. For example, if there is a fault in the production
process, a skilled worker will be able to deal with it quickly, whereas an unskilled worker might
have to call for a superior instead.
Technological progress can be divided into three types.
(a) Capital saving: technical advances that use less capital and the same amount of labour per
unit of output
(b) Neutral: technical advances that require labour and capital in the same proportions as
before, using less of each per unit of output
(c) Labour-saving: technical advances that use less labour and the same amount of capital per
unit of output.
If technological progress is of type (c) and the new technology seems to be labour-saving, then
unemployment will rise unless there is either a simultaneous expansion of demand or a reduction
in hours worked by each person. In the latter case there is no productivity increase associated
with the technological progress.
Technological progress may therefore stimulate growth but at the same time conflict with the goal
of full employment. A further consequence of this could be that those people in work would
benefit from economic growth in the form of higher wages, but those people put out of work by
the new technology would be left with a lower income. There is thus a danger that the rich will get

70 _— Business and technology (FBT/BT)

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 richer and the poor will get poorer in spite of economic growth, and this would be regarded by
many people as an undesirable development.

8.7 External trade influences on economic growth

An improvement in the terms of trade (the quantity of imports that can be bought in exchange for
a given quantity of exports) means that more imports can be bought or alternatively a given
volume of exports will earn higher profits. This will boost investment and hence growth. The rate of
growth of the rest of the world is important for an economy that has a large foreign trade sector.
If trading partners have slow growth, the amount of exports a country can sell to them will grow
only slowly, and this limits the country’s own opportunities for investment and growth.

8.8 Advantages and disadvantages of economic growth

Economic growth should lead to a higher income per head which can in turn lead to higher levels
of consumption and a better standard of living.
A country with economic growth is more easily able to provide welfare services without creating
intolerable tax burdens on the community.
There are possible disadvantages to growth, however.
(a) Growth implies faster use of natural resources. Without growth, these resources would last
longer.
(b) Much economic activity tends to create pollution, such as acid rain and nuclear waste. It
leads to emissions which threaten to produce disruptive climatic changes through an increase
in the ‘greenhouse effect’. It results in more roads, new and larger towns, and less unspoilt
countryside.
(c) There is a danger that some sections of the population, unable to adapt to the demands for
new skills and more training, will not find jobs in the developing economy. This structural
unemployment might create a large section of the community which gains no benefit from
the increase in national income.
(d) In order to achieve growth, firms need to invest more and this requires financing. This finance
can only come from higher savings which in turn require the population to consume less. In
the short run, therefore, higher growth requires a cut in consumption.

The balance of payments

The balance of payments account is a country’s bank account with the rest of the world. It relates
to foreign exchange movements in a country. It consists of a current account for trading activities,
a capital account and a financial account.
The current account is sub-divided into:
(a) Trade in goods
(6) Trade in services
(c) Income from:
(i) Residents employed in other countries
(ii) Returns on capital investment in other countries
(d) Transfers from
(i) Interest payments to/from bodies in other countries
(ii) Non-government payments to/from bodies in other countries.
The capital account comprises public sector flows of capital (eg government loans to other
countries).
’ The balance on the financial account comprises flows of capital to/from non-government sector
(eg investment in other countries).
The sum of the balance of payments accounts must always be zero (excluding statistical errors in
collecting the data known as the ‘balancing item’) via the financial account.

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 When commentators speak of a balance of payments surplus or deficit they are only referring to
the current account, which is also known as the balance of trade.
* Deficit: importing more than exporting, ie country buys more than it sells.
- Surplus: exporting more than importing, ie country sells more than buys.
A problem arises for a country’s balance of payments when the country has a deficit on current
account year after year, although there can be problems too for a country which enjoys a
continual current account surplus.
The problems of a deficit on the current account are probably the more obvious. When a country
is continually in deficit, it is importing more goods and services that it is exporting. This leads to
two possible consequences.
(a) It may borrow more and more from abroad, to build up external liabilities which match the
deficit on the current account, for example encouraging foreign investors to lend more by
purchasing the government’s gilt-edged securities.
(b) It may sell more and more of its assets. This has been happening recently in the US, for
example, where a large deficit on the US current account has resulted in large purchases of
shares in US companies by foreign firms.
Even so, the demand to buy the country’s currency in the foreign exchange markets will be weaker
than the supply of the country’s currency for sale. As a consequence, there will be pressure on the
exchange rate to depreciate in value.
If a country has a surplus on the current account year after year, it might invest the surplus
abroad or add it to official reserves. The balance of payments position would be strong. There is
the problem, however, that if one country which is a major trading nation (such as Japan) has a
continuous surplus on its balance of payments current account, other countries must be in
continual deficit. These other countries can run down their official reserves, perhaps to nothing,
and borrow as much as they can to meet the payments overseas, but eventually they will run out
of money entirely and be unable even to pay their debts. Political pressure might therefore build
up within the importing countries to impose tariffs or import quotas.

72 Business and technology (FBT/BT)

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L
Chapter summary
RL ALENT EOE LEL IIOP ILE TILL D NM TNE LENIN TNEGAOL LS TIEN. DETER IEE IIE
CITIES
TTT,
%
a
The Macro Economic Environment |

Government Fiscal Monetary National income and

policies and policy policy economic growth —
obligations key terminology

Introduction to * Expenditure planning Objectives of monetary « Aggregate demand

macro-economics * Revenue raising policy and supply equilibrium
* Aims of governments * Borrowing * Inflation ¢ Full employment
¢ Impact of tax and i ¢ Balance of trade national income
spending ¢ Full employment ¢ Equilibrium national
Taxation * Real economic growth income
| ¢ Direct * Inflationary gap
: Factors which affect the * Indirect « Deflationary gap
economy | Instruments of monetary * Stagflation
» ¢ Multiplier policy
+ Aggregate supply Tax and income levels * Money supply targets
« Aggregate demand * Regressive tax « Interest rates
¢ Proportional tax * Reserve requirements
* Progressive tax + Exchange rates

_ Phases in the Inflation and its consequences Unemployment

_ business cycle

+ Recession Inflation Measures of inflation The rate of

* Depression « Increase in all price * Retail prices index unemployment
* Recovery levels « Consumer prices index * Calculation
*» Boom * Decline in the * RPIX « Flows into
purchasing power of « RPIY unemployment
money « Flows out of
unemployment
Causes of inflation + Unemployment
Why inflation is a * Demand pull factors statistics
problem * Cost push factors
* Redistributes wealth ¢ Import cost factors
¢ Balance of trade ¢ Expectations Consequences of
declines + Excessive growth in the unemployment
¢ Uncertainty money supply « Loss of output
¢ Resource costs ¢ Loss of human capital
* Economic growth and « Increasing inequalities
investment * Social costs
* Increased burden of
welfare payments

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 Knowledge diagnostic
BREN PRERENDER
ENE ISSSE E ISTE INNS ELLIE

. Government policy
Governments manage the economy by using fiscal policy, monetary policy and supply side
policies. These are designed to get a desired balance between the four main economic objectives
— growth, inflation, employment and balance of payments.

. Business cycle
The economy will pass through four phases in the business cycle and governments will seek to
manage these changes in demand to achieve greater economic stability.

. Inflation
Inflation is rising prices and is usually measured by an appropriate index. High inflation is
damaging to an economy by creating uncertainty and making goods uncompetitive in export
markets.

. Unemployment
Unemployment has several costs that governments seek to mitigate; there are several causes of
unemployment, and different measures are used to monitor and reduce it.

. Economic growth
Economic growth is measured by increases in real gross domestic product (GDP) per head of
population.

. Balance of payments
The balance of payments can be considered as the UK’s bank account with the rest of the world,
and is affected by a number of factors, the most obvious of which are changes in foreign
exchange rates.

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Further study guidance

Question practice
Now try the following from the Further question practice bank [available in the digital edition of
the workbook]:

‘Number ———sievel ~=—~S~sé«Marks

Oe TF itanssions- 2 2 mins
O14 | eranrcccicn A =a 2 $ 2 ait 2 mins

Q15 | Exam Section A | | - | 1 min

Q16 7 |SannGeotene Cae ‘ | Sti oa ;

BPP 4: The macro economic environment 75

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 Activity answers

Activity 1: Taxes
The correct answer is: Regressive
A flat-rate poll tax, with no concession for the lower paid, would take a higher proportion of the
income of lower-income earners than of higher-income earners. This is a regressive tax system.

Activity 2: Effects of policy

Businesses are affected by a government’s tax policy (eg corporation tax rates) and monetary
policy (high interest rates increase the cost of investment and depress consumer demand).

Activity 3: Types of unemployment

Structural/Cyclical/Frictional:

Structur al/Cyclical/ Frictiona I:: : :

Unemployment arising from a difficulty in _ Frictional unemployment
matching unemployed workers with available
jobs
otAe ———_—— ————— —— — —— |

Unemployment occurring in the downswing of | Cyclical unemployment

| an economy in between two booms

Unemployment arising from a long-term - Structural unemployment

| decline in a particular industry

76 Business and technology (FBT/BT)

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 Micro-economic factors
RIE LLL NLL ELE TEEN ELLE ELELIEBE ESDP LIED EDEL LILES LOLI ALLELE IES LIE LE,POEEBERA ELATED LEELA PSLED IEE DE TEED IDE DBE

Learning outcomes
On completion of this chapter you should be able to:

Syllabus reference no.

ae the concept of apse ad supply oe goods an services. A5 (a)

sEipiain lactic of Aenea Ene the impact ef substitute aad A5 (b)

seine Soa leech

Geo: the economic Pere eun oncosts in the one an longterm. A5(c)

Define Boer Souneah tay aieeoelp moncnciede Smesicer A5 (d)

and monopoly.

Exam context
As you read through this chapter, make sure you understand the concepts of the market and how
it impacts on individuals and businesses and how it influences the decisions they make in respect
of production and consumption.
 Chapter overview
g ANAAS ARCANE TANG NN ——"*
i a
i_ Micro economic factors
a
|
: i

4has NRE RUBS IRBREEDER

BIS EGA
AEE SOR EI LAI y

Market and competition Demand _ Supply ©

Types of competition Shifts of the demand curve

Micro environment

The equilibrium price | Elasticity — Long-run and short-run curves —

Changes in the equilibrium price Price elasticity of demand Short run supply curve

Factors affecting price Cost plus price

elasticity of demand |

| Long run supply curve

Income elasticity of demand

Cross elasticity of demand

78 Business and technology (FBT/BT) BPP

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 Market and competition
1.1 Market
A market involves the buyers and sellers of a good who influence its price. Markets can be
worldwide, as in the case of oil, wheat, cotton and copper for example. Others are more localised,
such as the housing market or the market for second-hand cars.
SSATP SAATABE
ASS LIS EASE DEE ASR ASS CEO 2 SERN a RS EE WO A SE SEE YESS
ESO SEP ETS

ntial buyers and potential sellers (suppliers) of a good or

described as:
* Perfect competition
* Imperfect competition
* Monopolistic
* Monopoly
* Oligopoly

1.2 Types of competition

1.2.1 Perfect competition
Perfect competition is characterised by:
¢ Many small (in value) buyers and sellers which, individually, cannot influence the market price
* No barriers to entry or exit, so businesses are free to enter or leave the market as they wish
* Perfect information such that production methods and cost structures are identical
* Homogeneous (identical) products
¢ Nocollusion between buyers or sellers
The consequences of perfect competition include:
* Suppliers are ‘price takers® not ‘price makers’; that is they can sell as much as they want but
only at the market-determined price
* All suppliers only earn ‘normal’ profits
* There is a single selling price

1.2.2 Imperfect competition

Is defined as any market structure that does not meet the conditions of perfect competition. An
example of this is monopolistic competition.

1.2.3 Monopolistic competition

Monopolistic competition is characterised by:
* Many buyers and sellers (as in perfect competition)
- Some differentiation between products (not homogeneous as in perfect competition)
* Branding of products to achieve this differentiation
¢« Some (but not total) customer loyalty
* Few barriers to entry
* Significant advertising in many cases
_Consequences of monopolistic competition include:
* Increases in prices cause loss of some customers
* Only normal profit earned in the long run (as in perfect competition)

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1.2.4 Monopoly
product. It is often used,
A monopoly describes the situation where a market has only one
however, to describe a firm that has a very high share of the market.
own prices which can
The consequence of not controlling monopolies is that they can set their
lead to ‘super-normal profits’.

1.2.5 Oligopoly
have a
An oligopoly occurs when a market has a few dominant producers. These producers will all
high level of influence and a high level of knowledge on their competitors’ strategies.

Oligopolistic markets are often characterised by complex product differentiation, high barriers to
entry and significant influence over prices.
lf there are only two firms in an oligopoly, these are referred to as a duopoly.

1.2.6 The market mechanism

The interaction of demand and supply for a particular item.
In a free market, the price mechanism signals demand and supply conditions to producers and
consumers. It therefore determines the activities of both producers and consumers, influencing the
levels of demand for and the supply of goods.

Real life example

It is important to remember that the concepts described above are attempts to model the real
world, and as such they are unlikely to be an exact description of any market you come across in
practice. However, they are often close enough for us to be able to use them to get an
understanding of how people and organisations are likely to behave in a given set of
circumstances.
For instance, when we look at the retail market for petrol, it is usually thought of as an oligopoly -
refining and distributing oil is a complex and expensive process carried out by a small number of
organisations (in the UK you’d probably be thinking of BP, Shell, Texaco and maybe one or two
others), requiring enormous investment, and hence has high barriers to entry.
Other industries however may prove more problematic when it comes to describing their market: if
you think for a moment about buying and selling books on eBay, it is perhaps easiest to think of it
as a perfect market — but is that true? Even something as standardised as a book would have
variations in its design, quality, layout and so on, meaning that books cannot really be
considered as homogenous. Also, there could be large retailers on eBay with the ability to
dominate and influence the market — if something proves popular, they may be able to flood the
market, reducing the selling price in order to gain market share, and remove competitors.

1.3 The micro environment

In the previous chapter we dealt with the issue of the macro environment, looking at the big
picture, such as the influence of government on the economy as a whole, and how big issues like
inflation, unemployment and taxation impact on the economy of the country. Now we are going
to look at the picture in more detail, by considering the impact of decisions on an individual
organisation, and by looking at how the immediate environment will affect its ability to trade
profitably. This immediate operational environment is commonly referred to as the micro
environment, and while it will be specific to each and every organisation, it is possible to identify
a
number of common elements such as customers, suppliers and competitors.

~
=
~
Essential reading

See chapter 5 Section 1 of the Essential reading for more detail on markets.
The Essential reading is available as an Appendix of the digital edition of the Workbook.
— aaeeneel - = a e

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 2 Demand
ANA REPS NE ee
°
: Beers, The Sie of aane that potential Hitenacere would buy, or attempt to buy, if
KEY
TERM _ the price of the ass were at a certain level.
ERROR Roar eS RON DET RARE NSE SO SILT NAT “ a Ser

Itiis waren best to think of demand in this way — how much people are prepared to pay to
acquire a particular item — rather than to think in vague terms of somebody wanting something.

2.1 The demand curve

Suppose that the following demand schedule shows demand for biscuits by one household over a
period of one month.

*
Price faa
f r kg mie |Quantityae eee at he price Saas)

es 1 cee 96
ia 2 +S-Cetialt
3 i 6.25 |
tsuneo arta 8 adiedceminnasiteidnaialt a |
ea inet Ee vie nee i 2.3 ;

ee atic its) bon et | cl iftnl dl

This is simply a table showing the quantity that people are willing to buy at a particular price. As
is often the case in real life, the cheaper the item is, the more people are prepared to buy it.
We can show this schedule graphically on a demand curve (Figure 5.1), with:
(a) Price on the y axis; and
(b) Quantity demanded on the x axis.
Figure 5.1 Demand for biscuits

4q----r------ f—--—---—-»< Demand curve

0) 1 Z 3 4 5 6 7 8 9 10 Quantity (kg)

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 Activity 1: Demand curves

Refer to Figure 5.1.

6 kilograms at
Let’s say the price of biscuits is currently £3 per kg, and demand is approximately
fell to £2 per
that price. What would be the (approximate) demand for the commodity if the price
kilo? And what would be the demand if the price rose to £4 per kilo?

pie Factors influencing demand

What factors determine demand?
« Price
* Inter-related goods: substitutes and complements
* Income levels: normal and inferior goods
* Fashion and expectations
« Income distribution

Substitute goods: Goods that are alternatives to each other, so that an increase in the
demand for one is likely to cause a decrease in the demand for another. Switching demand
| from one good to another ‘rival’ good is substitution.
Complements: Goods that tend to be bought and used together, so that an increase in the
| demand for one is likely to cause an increase in the demand for the other.
Veeueneaeaese
cee tah eTRIRSET SW BO! OF CE SFIS PSPS SEABIRD RS No ONCE ISLIS AREN
ECE
en

example, we would not expect an increase in the price of televisions to affect the demand for
bread. However, there are goods for which the market demand is interconnected. These
interrelated goods are referred to as either substitutes or complements.
Examples of substitute goods and services
* Brands of the same commodity, like Coca-Cola and Pepsi-Cola
* Tea and coffee
* Some different forms of entertainment
Substitution takes place when the price of one good rises relative to a substitute good.
By contrast, complements are connected in the sense that demand for one is likely to lead to
demand for the other.
Examples of complements
* Cups and saucers
* Bread and butter
* Motor cars and the components and raw materials that go into their manufacture

Activity 2: Substitutes and complements

What might be the effect of an increase in the ownership of domestic deep freezers on the
demand for perishable food products?

2.3 Shifts of the demand curve

Here we are looking at a movement of the curve because of some change in the market which
alters customers’ perceptions of how attractive a particular product actually is — anything
included in the list above is able to do this, and it results in different levels of demand at a
particular price.

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 Figure 5.2 Outward shift of the demand curve
Price of
the goods
(£)

0 Qo Q, Quantity demanded

* Movements along a demand curve are caused by changes in the good’s price.
* Shifts of thedemand curve are caused by changes in any of the other factors which affect
demand for a good, other than its price.

2.3.1 Demand, fashion and expectations

A change in fashion or tastes will also alter the demand for a product. For example, if it becomes
fashionable for middle-class households in the UK to drink wine with their meals, expenditure on
wine will increase.
There may be passing ‘crazes’, such as roller blades or skateboards. And tastes can be affected
by advertisers and suppliers trying to ‘create’ demand for their products. However, the effect of a
product becoming fashionable will be that demand for it rises without its price having to be
reduced.

Activity 3: Shifts in the demand curve

Looking back to figure’ 5.2 above:

Required

1 What specific actions could cause the curve to move to the right?

2 What specific actions could cause the curve to move to the left?

Solution

oe ie 5: Micro-economic factors 83
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 3 Supply
nl
————— SER SPIRES OPED IE AEE TEN

Qo a
Supply: The quantity of en that existing are or would-beSetenies would want to
KEY
TERM |ga a for the market at a given price.

3.1 The supply curve

The supply schedule for product Y is as follows.
Quantity that suppliers would supply at this
Price per unit price

a Units

100 10,000

150 20,000

300 30,000

500 40,000

The relationship between supply quantity and price is shown as a supply curve in Figure 5.3
Figure 5.3: The supply curve

0 10,000 20,000 30,000 40,000 Quantity supplied (units)

This graph shows us the amount of materials that firms are willing to supply at different prices.
Notice this curve slopes upwards as it goes to the right — again, this is pretty much what you
would expect; the higher the selling price is for something, the more firms are willing to make it,
since they will be able to make more money from doing so.

3.2 Factors affecting supply

What factors influence supply?
* Price obtainable for the good
* Prices of other goods
- Price of related goods in ‘joint supply’
* Costs of making the good
* Changes in technology

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{ Ra Essential reading

See Chapter 5 Section 2 of the Essential reading for more detail on supply.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

3.3 Shifts of the supply curve

The market supply curve is the aggregate of all the supply curves of individual firms in the market.
A shift of the market supply curve occurs when supply conditions (other than the price of the good
itself) change.
Figure 5.4: Shifts in the supply curve
Price
(£)

0) tp
0 Qo Q, Quantity supplied (units)

Figure 5.4 shows a shift in the supply curve from SO to S1. A rightward (or downward) shift of the
curve shows an expansion of supply and may be caused by the factors below.
(a) A fallin the cost of factors of production, for example a reduction in the cost of raw material
inputs
(b) A fallin the price of other goods; the production of other goods becomes relatively less
attractive as their price falls and firms are therefore likely to shift resources away from the
goods whose price is falling and into the production of higher priced goods that offer
increased profits. We therefore expect that (ceteris paribus) the supply of one good will rise
as the prices of other goods fall (and vice versa).
(c) Technological progress, which reduces unit costs and also increases production capabilities
(d) Improvements in productivity or more efficient use of existing factors of production, which
again will reduce unit cost
A shift of the supply curve is the result of changes in costs, either in absolute terms or relative to
the costs of other goods. If the price of the good is P1, suppliers would be willing to increase
supply from QO to O1 under the new supply conditions (Figure 5.3).
‘Conversely, we might see a leftward (or upward) shift in the supply curve if the cost of supply
increases. This would mean that at the existing price, a firm’s output will decrease and less will be
supplied.

ee 5: Micro-economic factors 85
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 An upward shift in supply could be caused by:
(a) An increase in the cost of factors of production
attractive to the
(b) Arise in the price of other goods which would make them relatively more
producer .
existing
(c) An increase in indirect taxes, or a reduction in a subsidy, which would make supply at
prices less profitable.

-_ The equilibrium price

7 ect SESE ENCES SEN ALSO SESH
RIESWISE EA LE NS ETO IH OST
Ye SHATNER DAE OTF UN
fi

Equilibrium price: The price of a good at which the volume demanded by consumers and the
i

TERM volume businesses are willing to supply are the same.

nce nA SDE RPA OSSDIEE EA AOR COTE APATITES

equilibrium price by plotting both the supply and demand curve on the graph,
and noting where they cross.
Figure 5.5: Equilibrium
Price
(£)

Supply

P,

Po

Demand

Price 0 Quantity supplied (units)

The point where the intersect gives us the point where the amounts produced equal the amounts
that people are prepared to buy, and so there is no shortage (pushing the price up) and no excess
production (pushing the price down). Of course, this equilibrium won't last forever — as we pointed
out before, the curves will move as any number of factors come into play, and as the curves move
to the right or left, the equilibrium price will move either up or down.

4.1 Changes in the equilibrium price

Equilibrium price, supply and demand must adjust following a shift of the demand or supply
curve. There are four possibilities therefore, which are illustrated by the following diagram:

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 Figure 5.6: Equilibrium and shifts in the demand curve
(1) Increase in consumer incomes (2) Product becomes unfashionable

= expansion = contraction
Po+o---- in supply RiGee in supply
P, +-—-—-—-——s Po +-------

0 Q, OQ, Quantity 0) Q, Q, Quantity

Increase in consur mes —s« Product becomes unfashionable

Prediction Prediction
* Rise in market price ¢ Fallin market price
_* Rise in quantity supplied _* Fallin quantity supplied
= ee et

Figure 5.7: Equilibrium and shifts in the supply curve

_ (3) Improvement in production technology (4) Rise in factor costs

= expansion = contraction
in demand in demand

0 OO, Quantity 0 Orme” Quantity

Improvement in production technology Rise in factor costs

Prediction > ee a a _ Prediction -

* Fall in market price « Rise in market price

* Rise in quantity supplied * Fallin quantity supplied

4.1.1 Price regulation

Government might introduce regulations either:
* To set a maximum price for a good, perhaps as part of an anti-inflationary economic policy
* To set a minimum price for a good below which a supplier is not allowed to fall

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 However, if we consider the setting of a maximum price:
effect at all on the
If this price is higher than the equilibrium price, its existence will have no
but |
operation of market forces;
* |f the maximum price is lower than what the equilibrium price would be, there will bean
supply
excess of demand over supply. The low price attracts customers but deters suppliers, so
is scope for the market to exist outside governme nt-sanct ioned channels —
will fall unless there
a so-called ‘black market’.

Essential reading
4s,

See Chapter 5 Section 3 of the Essential reading for more detail on the equilibrium price.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

Elasticity
ec ne ene:
-. SCY reset
SEH PENNS
ESI FSET EREIEEENIS TU ERE
CEATEP DODD EE ISDA IEP ECAR RE OEEYTB EIT COD ATH

|Elasticity: The extent of a change in demand and/or supply given a change in price.
RS YESSPECIAL NALA SS SCT DOSES IOI BLS IEE IL EEEICL scene eames eres

Elasticity, in general, refers to the relationship between two variables. Price elasticity of demand
explains the relationship between change in quantity demanded and changes in price.
If prices went up by 10%, would the quantity demanded fall by the same percentage?

5.1 Price elasticity of demand (PED)

Price elasticity of demand (PED) is a measure of the extent of change in the market demand for a
good in response to a change in its price.
* The demand for a good is said to be inelastic when changes in price have a relatively small
effect on the quantity of the good demanded.
* The demand for a good is said to be elastic when changes in price have a relatively large
effect on the quantity of a good demanded.
> ‘Relatively small’ and ‘relatively large’ here equate to ‘less than 1’ and ‘greater than 1’
respectively.

Formula to learn

PED = Change in quantity demanded, as a percentage of original demand

a Change in price, as a percentage of original price

Proportional change in quantity

PED = ee
Proportional change in price

_ ,Q2-Q1, | ,P2-P1
= eared Reh Famsrp|
| Where P,, Q, are the initial price and quantity; P2, Q, are the subsequent price and quantity.)

Since demand usually increases when the price falls, and decreases when the price rises,
elasticity has a negative value. However, it is usual to ignore the minus sign, and just describe
the
absolute value of the coefficient
« PED less than 1 = inelastic demand
¢ PED more than 1 = elastic demand
* PED =1= unit elasticity

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 Activity 4: Price elasticity of demand

The price of a good is £1.20 per unit and annual demand is 800,000 units. Market research
indicates that an increase in price of 10 pence per unit will result in a fall in annual demand of
70,000 units. Assume that the demand curve is a straight line.

Required

1 Calculate the elasticity of demand when the price is initially £1.20 and the price rises to £1.30

2 Calculate the elasticity of demand when the price is initially £1.30 and the price falls to £1.20.

Solution

Activity 5: Price elasticity of demand and revenue

A shop sells 100 shirts each month at a price of £20. When the price is increased to £24, the total
sales revenue rises by 14%.

Required
Within which range does the price elasticity of demand lie?
O Under 0.15
O Greater than 0.15 and less than 0.5
O Greater than 0.5 and less than 1.0
O Greater than 1.0

5.2 Special values of price elasticity of demand

There are three special values of price elasticity of demand: 0, 1 and infinity.
* Demand is perfectly inelastic: PED = O
This is the case where the demand curve is a vertical straight line.
¢ Demand is perfectly elastic: PED = (infinitely elastic)
This is the case where the demand curve is a horizontal straight line.
¢ Unit elasticity of demand: PED = 1
The demand changes proportionately to a price change.
-One point to remember is that we normally assume that goods have a negative PED, and so
ignore the negative sign — if something has a PED of °-2’ we would just refer to it as having a PED
of ‘2’. However, some goods do actually have a positive price elasticities of demand — if the price
goes up, so does demand.

5: Micro-economic factors 89
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 goods are
While this may seem counterintuitive, it does actually happen in real life, and such
referred to as:
a lack of
* Giffen goods (basic items for which demand goes up when prices rise because of
close substitutes)
quality)
* Veblen goods (status symbol items whose price is seen as a measure of exclusivity and
Of the two, Veblen goods are more commonly found.

Real life example

Giffen goods; bread, rice and wheat are common essentials with few near-dimensional
substitutes at the same price levels. An increase in price may lead to a fear of shortages in the
near future, leading to stockpiling by consumers.
Veblen goods; Rolex watches are seen as exclusive — if the price were to fall by say 20%, they
would be seen as less attractive by those consumers who are attracted by the idea of
conspicuous consumption, but would still be seen as overly expensive by those who struggle to
deal with normal day to day bills.

5.3 Factors affecting the price elasticity of demand

* Availability of substitutes
* The time horizon
* Competitors’ pricing
* Luxuries and necessities
* Percentage of income spent on a good
* Habit-forming goods

Income elasticity of demand

i oSEER NEES ODES EERE ENNIO STSCI PES OASETA EI IDSA JA RT RIES SDE EYOSSA YB CSE aR AS SE PASE ii

| Income elasticity of demand: An indication of the responsiveness of demand to changes in

' household incomes.
ESD RAN SEIN BETTER PINS CROSSHAIRS ESER IN LANE ELS CLD ME SENSED DEITIES LIE BILD A NE N N PLEEEO ED I OEE PCIE EEE EE NACE A RTI ON EE } ) |a

Formula to learn

oa _ % change in quantity demanded

Income elasticity of demand = % change in household incomes

* Demand for a good is income elastic if income elasticity is greater than 1. These are luxury
goods.
* Demand for a good is income inelastic if income elasticity is between O and 1. These are
normal goods or necessities.
* Demand for a good is negatively income elastic where, in response to an increase in income,
demand actually falls. These are inferior goods.
The change in quantity demanded takes the form of a shift in the position of the demand curve,
not a movement along it, since it is not stimulated by a change in price.
Goods whose income elasticity of demand is positive are said to be normal goods, meaning that
demand for them will rise when household income rises. If income elasticity is negative, the
commodity is called an inferior good since demand for it falls as income rises.
Inferiority in this sense is an observable fact about the consumer’s demand preferences, rather
than a statement about the quality of the good itself.

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 Real life example
Inter-city bus travel is an example of an inferior good. Bus travel is cheaper than air or rail travel,
but takes longer. When consumers have limited income, they are prepared to forgo the increased
time taken to travel in return for the cheaper cost. However, as their income increases, they will
choose the more rapid modes of transport over the slower, albeit cheaper, bus travel. Therefore
demand for bus travel will fall as income rises.

| iz Activity 6: Income elasticity of demand

What will be the effect on price, quantity demanded and quantity supplied of luxury sports cars,
given a significant reduction in income tax?

Solution

5.5 Cross elasticity of demand

ieee FASS ABCA TORTIE SESEYVAN VO PINTS LEUPEPTIN SII mv oe eres Pe A a NE RF AE EEE

Cu Eoe elasticity of demand: Cross elasticity of demand: A measure of the responsiveness of

=e Idemand for one good to changes in the price of another good.
neecemnrete AEE NA CALE TIRET SSSMCSHANE ICEEA EVA UNM PTET NE TENN PE ATESLIENS A ELAN EMA SINAC EIS PCP RR Ed AEE PTE AES HW ALR eNO OE Ee LD ENTOMOL TEND PL EH _
|

v7 Formula to learn
% change in quantity of good A demanded *
Cross elasticity of demand = %cMange IN the price GEOOoUE
*(given no change in the price of A)

Cross elasticity depends upon the degree to which goods are substitutes or complements.
- |f the two goods are substitutes cross elasticity will be positive.
* If the goods are complements cross elasticity will be negative.
* For unrelated goods, such as tea and oil, cross elasticity will be O.

Real life example

For example, assume bread and butter are complements. If the price of bread increases, demand
for bread and then, in turn, butter will decrease. So, as a fraction, we have a negative value
(quantity of butter demanded) over a positive value (increase in price) meaning the cross elasticity
of demand is negative.

5: Micro-economic factors 91
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M1
Essential reading

See chapter 5 Section 4 of the Essential reading for more detail on Elasticity.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

Long run and short run cost curves

eres yA DENIES I EE ESD SI POPEDEL PEE SAITO TELE OT ORESFCT OL I
PCE LS IESE IE ER ELIE EVESLEISPERT SIPS SITE IIIT Dae eae eee |

aeenal cost: The increase in total cost from selling one additional unit of a product or service
Marginal revenue: The increase in total revenue from selling one additional unit of a product or
service.
| Se RS EDGES
AEE LU SNE
ISTE ELECT EINES DESEO NET LELEEREN AMEELENNEL T PDB
EL CLE IIIA ELELE LAE

6.1 Short run supply curve

A firm’s short run average cost curve is U shaped. Initially, as output rises, the average cost falls,
due to economies of scale. However, at a certain point, represented by the bottom of the U, if
production increases further, the average cost starts to rise again, dues to diseconomies of scale.
The marginal cost curve initially lies below the average cost curve, but starts to rise steeply. It
passes through the average cost curve at the bottom of the U shape, then rises more steeply than
average costs.
If we assume there is a single, constant selling price for all firms, then a firm’s average revenue
(AR) and marginal revenue (MR) will be identical. We can show this as Price = Average Revenue =
Marginal Revenue.
The relationships are shown in the diagram below:
Figure 5.8: Marginal cost and revenue
Price/ 4 MC = supply AC
cost

3| D, = AR, = MR,

°,| : D, = AR, = MR,

P, | D, =AR, = MR,

0)
is 8 St Se es oO; (er OF oy Quantity

If a firm wishes to maximise profits, it will always produce the quantity such that marginal cost =
marginal revenue. Why is this? Consider the case where the price is P,:
- Ifa firm is producing less than Q; then the marginal cost is less than the marginal revenue.
Producing one more unit increases total revenue by more than it increases costs. It is worth
producing more to increase profits. This will be the case up until O, where marginal cost equals
marginal revenue.

mae
92 Business and technology (FBT/BT) BPP
 Once output exceeds Q, then the marginal cost becomes greater than marginal revenue. The
increase in total costs if one more unit is produced is more than the increase in total revenue.
Profits would fall if output is increased.
* Aprofit maximising firm will therefore produce the quantity such that the marginal cost = the
marginal revenue.
We can see in Figure 5.8 that at price P, the firm supplies Q, output, because MC = MR,. When
price rises to P,, the output increases to Q, and so on, provided that the firm has the capacity to
increase its sales output. In these conditions, the firm’s marginal cost curve becomes its supply
curve.

6.1.1 Cost plus pricing

The idea of the marginal cost curve representing the supply curve is the traditional theory of a
firm’s short run supply curve. However, more recent theories of the firm incorporate a cost-plus
pricing approach.
Under a cost-plus pricing approach, a firm adds a profit margin to its average cost at any level of
output in order to establish its selling price. This alternative theory produces a horizontal supply
curve.
Figure 5.9: Cost plus pricing
Price/ 1
cost

O Q oF Q, Quantity

™ Profit ---- Supply

A rational (profit maximising, or loss minimising) firm will only supply where AR > AC. So the
minimum and maximum levels of output occur at Q; and Q>, respectively, at price P,; that is, where
AR crosses the AC curve (AC = AR). Changes in the market price will lead to changes in output.
(Note, we are still assuming a single, constant selling price for all firms in the industry.) A higher
price (P,) will lead to a new supply curve, between Q, and Q,.

6.2 Long run supply curve

In traditional theory, the marginal cost curve remains the supply curve in the long run. However,
it may no longer be upward sloping. The supply curve was upward sloping in the short run
because of the impact of diminishing returns on the marginal cost curve. However, this is only a
short run phenomenon, because the constraint of one factor of production being fixed is only a
short run condition.
In the long run, the supply curve could still be upward sloping (if the firm suffers from
diseconomies of scale) but it could equally be downward sloping to the right if the firm benefits
from economies of scale. The curve could even be horizontal if the firm’s marginal cost remained
constant at all levels of output.

5: Micro-economic factors 93
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Chapter summary
EPCS HEN SATS LT AAP ATTAIN

:
5
CCST RASSa’

Market and competition Demand Supply —

I
Types of competition * The demand curve * The supply curve
« Factors influencing demand + Factors influencing supply
+ Perfect competition
i * Shifts of the supply curve
* Imperfect competition
* Monopolistic competition Shifts of the demand curve
* Oligopoly
* Movements along the demand
* The market mechanism
curve
* Shifts of the demand curve
_ Micro environment * Factors causing a shift
- « Individual organisations * Factors influencing demand

The equilibrium price — Elasticity Long-run and short-run curves

r
I I
Changes in the equilibrium price Price elasticity of demand Short run supply curve
* Increase in consumer incomes « Measure of change in demand * Produce to point where
* Product becomes given change in price marginal cost = marginal
unfashionable - « Elastic revenue
* Improvement in production ¢ Inelastic + If selling price constant
technology * Special values of price ¢ Short run curve — marginal
¢ Rise in factor costs elasticity of demand cost curve above AVC
— Perfectly inelastic i
— Perfectly elastic
— Unit elasticity Cost plus price
i * Horizontal supply curve
« Min and maximum quantities
Factors affecting price elasticity where AR crosses AC curve
of demand
* Availability of substitutes
+ The time horizon Long run supply curve
* Competitors’ pricing * Marginal cost curve remains
¢ Luxuries and necessities supply curve
* Percentage or income spent on * Capital not constrained in long
a good term
* Habit-forming goods * Slope of curve depends on
i economies of scale in long
term
Income elasticity of demand
* Responsiveness to change in
household incomes
I
Cross elasticity of demand
* Responsiveness to change in
price of another product
* Substitutes
* Complements
« Unrelated goods

94 Business and technology (FBT/BT) BPP

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 Knowledge diagnostic
AEE TEI ELE DEIU ETE NOS SILLS
SOT DN IS CELI LIT LFS ITER ELEC LSE IIE AEE MIN APA ESO SITET AS DOLLARS SIEII EI A OE TED ALES SE ASIIE RECALL SLE SALI LAID BO LON L DATA LEIS

. Market
A market can be defined as a situation in which potential buyers and potential suppliers of a good
or service come together for the purpose of exchange.

. Demand
Demand is concerned with the quantity of a good that potential purchasers would buy, or
attempt to buy, if the price of the good were at a certain level.

. Supply
Supply is concerned with the quantity of a good that existing suppliers or would be suppliers
would want to produce for the market at a given price.

. Equilibrium price
Equilibrium price is the price of a good at which the volume demanded by consumers and the
volume businesses are willing to supply are the same.

. Elasticity
Elasticity can be considered from a number of perspectives, the principle ones being
* Price elasticity of demand
* Income elasticity of demand
* Cross elasticity of demand

5: Micro-economic factors 95
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Further study guidance ,

Question practice
Now try the following from the Further question practice bank [available in the digital edition of
the workbook]:

Q17 | Exam Section A |a | 2mins

Q18 | Exam Section A eo 2 mins

——--—— 1 ———— a — we
Q19 Exam Section A 2 2 mins

Q20 Exam Section A Ee 2 mins |

Q22 Exam Section A Z |2 mins

: re ee Sy De ne ES Lg

Further reading
There is an article on the ACCA website entitled ‘Introduction to micro-economics’ that is relevant
to material in this section. You are strongly advised to read this article in full as part of your
preparation for the FBT exam.

96 Business and technology (FBT/BT) BPP

LEA R
MEDIAN”
Activity answers
tnscenseteencass: PUES IESZELE
OPBSEIEDR NESEY PILL NOLLETELESS
SSDECORI ITI LEOIED IA LI RETEST LT BE RS BRL EOWEIN.
BEI EEE IO CYP ES IOS LEI NE TI NR AM

Activity 1: Demand curves

Demand rises to (approximately) 8 kg at the reduced price of £2 per kilo. If the price rises to £4 per
kilo, demand falls to (approximately) 4.5 kg.
Notice that in this example we are considering what happens if we move along the demand curve.

Activity 2: Substitutes and complements

Effect of increase:

(1) Domestic deep freezers and perishable products are complements because people buy deep
freezers to store perishable products.
(2) Perishable products are supplied either as fresh produce (for example, fresh meat and fresh
vegetables) or as frozen produce, which can be kept for a short time in a refrigerator but for
longer in a freezer. The demand for frozen produce will rise, while the demand for fresh
produce will fall.
(3) Wider ownership of deep freezers is likely to increase bulk buying of perishable products.
Suppliers can save some packaging costs, and can therefore offer lower prices for bulk
purchases.

Activity 3: Shifts in the demand curve

1 Just look at the curve for a second. As it moves to the right the amount demanded at Price P
has increased from QO to Q1. Maybe this has been caused by people having more money to
spend, or maybe a famous film star has been seen with the product and more people are
interested in owning it as a result — there is no single ‘right’ answer to this; there could be
many factors causing the shift.

2 If the curve moves to the left, it means that there is less demand at any given price; so maybe
the product is less fashionable — maybe a new alternative has been developed, rendering the
product less attractive. Think of what happened to the sale of fountain pens when the
ballpoint pen came out — the demand for the fountain pens fell dramatically.

Activity 4: Price elasticity of demand

1 Ataprice of £1.20, annual demand is 800,000 units.
For a price rise:

% change in quantity Geooo X 100% = 8.75% (fall)

% change in price conn x 100% = 8.33% (rise)

Price elasticity of demand at price = G55 = —1.05

Ignoring the minus sign, the price elasticity at this point is 1.05. Demand is elastic at this point,
because the elasticity is greater than one.

2 Ataprice of £1.30, annual demand is 730,000 units.

For a price fall from £1.30 of £0.10:
% change in demand 70,000/730,000 x 100% = 9.59% (rise)
% change in price 10p/130p x 100% = 7.69% (fall)

BPP 5: Micro-economic factors 97

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 9.59
Price elasticity of demand = -7.69 =— 1.25
Or, 1.25 ignoring the minus sign
Demand is even more elastic at this point than it was at £1.20.

Activity 5: Price elasticity of demand and revenue

The correct answer is: Greater than 0.15 and less than 0.5
Total revenue at £20 = 100 x $20 = $2,000
Total revenue at £24 = $2,000 ~ 1.14 = $2,280 (A price increase of 20%)
Number sold at S24 = $2,280 + 24 = 95 (a fall in quantity demanded of 5%)
Therefore the PED = -.05/0.20 = -0.25 , so we would say the PED is 0.25.

Activity 6: Income elasticity of demand

The demand curve for sports cars will shift to the right. Price, quantity demanded and quantity
supplied will all go up.
The effect of a cut in income tax is to leave households with more to spend. Sports cars are a
luxury good, so their income elasticity of demand is likely to be quite high. The percentage
increase in demand for the cars is therefore likely to be greater than the percentage increase in
after-tax household income.
We can illustrate the change diagrammatically:
Figure 5.10: Cut in income tax
Price

The shift in the demand

curve (from Dy to D,) means
that the equilibrium
Py prrteseen-Neteenns quantity demanded and
P a,surots cy) soanhSoe supplied shifts from Qy to Q,
0 and the equilibrium price
increases from Py, to P,.

eeeRoeee Meee
Ono Quantity

98 Business and technology (FBT/BT)

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 Ce

_ Business organisation
{REID
SUe Nee TE EE REDE LAE TLE ISON KDE ETSI NED LIE

structure
tte: — 4

Learning outcomes
On completion of this chapter you should be able to:

Syllabus
reference no.

Ean te iaeel pon cetien an its Pictonena wen the formal Bt (a).
eel Seige

Describe the impact of ihe naaennael organisation on the ngs Bt (b).

Osean. Mintzberg’s components of the organisation and Seen the B2 (a)
different ways in which organisations may be structured:
(a) Entrepreneurial
(b) Functional
(c) Matrix
(d) Divisional: (geographical, by product, or by customer type)
) SSIIUS 2INIEESE (virtual, hollow or modular)

Ewlein basic proouicarenalsstructure concepts: B2 (b)

(a) Separation of ownership and management
(b) Separation of direction and management
(c) Span of control and scalar chain
(d) Tall and flat elo relalseUielas

Explain the phere eee of the Siege tactical and operational levels in —_B2 (c)
the organisation in the context of the Anthony hierarchy.

Explain centralisation and decentralisation and list their advantages and B2 (d)
disadvantages.

Exam context
This chapter lays the foundation for an understanding of what organisations are and how they
are controlled. It also introduces the concept of stakeholders, which is examinable in FBT but also
feeds into later ACCA exams.
100 Business and technology (FBT/BT)
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Chapter overview
PISS EA — WES en SAE IRN CT RAT SOT ITT,

EA
AIARES A EERE

Informal organisation _ Organisational structure Organisational structures

Benefits of the The difference between owners,

informal organisation managers and directors

Managerial problems of Mintzberg organigram

informal organisation

Divisional | |Flexibility in modern Anthony's Structural forms

structures | organisations ! _ hierarchy for organisations

Scalar chain and

span of control

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 1 Informal organisation
An informal organisation always exists alongside the formal one. This consists of social
uence
relationships, informal communication networks, behavioural norms and power/infl
structures, all of which may ‘bypass’ formal organisational arrangements. This may be
detrimental or beneficial to the organisation, depending how it is managed.
When people work together, they establish social relationships and customary ways of doing
things. Unlike the formal organisation, the informal organisation is loosely structured, flexible and
spontaneous. It embraces such mechanisms as:
(a) Social relationships and groupings (eg cliques) within — or across — formal structures
(b) The ‘grapevine’, ‘bush telegraph’, or informal communication which bypasses the formal
reporting channels and routes
(c) Behavioural norms and ways of doing things, both social and work-related, which may
circumvent formal procedures and systems (for good or ill). New members must ‘learn the
ropes’ and get used to ‘the way we do things here’
(d) Power/influence structures, irrespective of organisational authority: informal leaders are
those who are trusted and looked to for advice.

Real life example

Just think about the place where you work. No doubt there are individuals that you feel more at
ease with than others, and equally, some people you prefer not to work with. The workplace, like
any other place where people congregate is affected by the relationships that arise between
individuals — and in some cases, these relationships can benefit or be detrimental to the
organisation. Think about the restrictions that exist in your workplace; for instance, many
organisations insist that if two members of staff develop a serious attachment, one of them is
required to relocate to another department because of concerns that the judgement of either
party may be compromised by the relationship.

1.1 Benefits of the informal organisation

(a) Employee commitment. The meeting of employees’ social needs may contribute to morale
and job satisfaction, with benefits in reduced absenteeism and labour turnover.
(b) Knowledge sharing. The availability of information through informal networks can give
employees a wider perspective on their role in the task and the organisation, potentially
stimulating ‘big picture’ problem-solving, cross-boundary co-operation and innovation.
(c) Speed. Informal networks and methods may sometimes be more efficient in achieving
organisational goals, where the formal organisation has rigid procedures or lengthy
communication channels, enabling decisions to be taken and implemented more rapidly.
(d) Responsiveness. The directness, information-richness and flexibility of the informal
organisation may be particularly helpful in conditions of rapid environmental change,
facilitating both the mechanisms and culture of anti-bureaucratic responsiveness.
(e) Co-operation. The formation and strengthening of interpersonal networks can facilitate team
working and co-ordination across organisational boundaries. It may reduce organisational
politics — or utilise this positively by mobilising effective decision-making coalitions and
bypassing communication blocks.

1.2 Managerial problems of informal organisation

Each of the positive attributes of informal organisation could as easily be detrimental if the power
of the informal organisation is directed towards goals unrelated to, or at odds with, those of the
formal organisation.
(a) Social groupings may act collectively against organisational interests, strengthened by
collective power and information networks. Even if they are aligned with organisational goals,
group/network maintenance may take a lot of time and energy away from tasks.

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 (b) The grapevine is notoriously inaccurate and can carry morale-damaging rumours.
(c) The informal organisation can become too important in fulfilling employees’ needs:
individuals can suffer acutely when excluded from cliques and networks.
(d) Informal work practices may ‘cut corners’, violating safety or quality assurance measures.
Managers can minimise problems by:
* Meeting as many employee needs through the formal organisation as possible
* Using the informal, charismatic leaders to motivate workers
* Managers working as part of the informal organisation

2 Organisational structure
2.1 The difference between owners, managers and directors.
Before starting to look at the different organisational structures, it is worthwhile spending some
time considering what we mean when talk about management in an organisation.
The first point to note is that managers are usually distinct from the owners of a business. Owners
will delegate authority to managers to run the company in the best interests of the owners, but
managers will need to be motivated to do this — they will need to be incentivised to operate the
company in an efficient and effective way to reward the owners for risking their capital.
This topic is the main part of Section 5 of the syllabus ‘Governance and social responsibility in
business’.
Equally it is important to appreciate that the people at the top of the organisation — the directors
of a limited company — tend to have a much longer-term outlook than more junior managers.
They also tend to look at the whole company, rather than say a particular department or division.
Note that the higher up the organisation a manager climbs, the more likely he or she is to have an
external, longer term, group-wide perspective.

2.2 Mintzberg organigram

Henry Mintzberg believes that all organisations can be analysed into five components, according
to how they relate to the work of the organisation and how they prefer to co-ordinate.
Figure 6.1: Mintzberg’s organisational components

Strategic
| Apex

Techno-
structure

Middle
Line

Operating Core

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 components
The following table summarises the details you need to know about the five

| Ensures the organisation follows its mission | Direct supervision |

| Strategic apex
| Manages the organisation’s relationship with the (especially in small
|| businesses)
environment
+-

| The operating core is the people directly involved | Mutual adjustment; |

| Operating core
| in the production of the goods and services that standardisation of
| the organisation produces. _ skills

| Middle line |Converts the desires of the strategic apex into the | Standardisation of
_ work done by the operating core. _ outputs (results)

| Technostructure _Analysers determine the best way of doing a job. | Standardisation of |

_ Planners determine outputs (eg goods must _ work processes or
"achieve a specified level of quality). Personnel | outputs |
|analysts standardise skills (eg training
| programmes). |

| Support staff | Ancillary services such as public relations, legal = Mutual adjustment |
counsel, the cafeteria. Support staff do not plan
_or standardise production. They function
_ independently of the operating core.
}

Note that the strategic apex, middle line and operating core make up the basic triangle often used
to depict an organisation’s structure.

2.2.1 Strategic Apex

The board of directors of an organisation is nearly always its strategic apex, but remember that
every organisation has somebody that makes a decision about how it will be run; a window
cleaner is an example of a sole trader — and he would have to make decisions about what tools he
wants to buy or if he wants to continue carrying out his rounds. He would be both strategic apex
and operating core.

2.2.2 Operating core

The operating core is usually the people who carry out the work of the organisation, and very
often come into regular contact with the customers. Often the operating core is made up of low
skilled workers on low wages. In some organisations, however, the operating core may consist of
highly skilled, highly paid persons. A surgeon is part the operating core of a hospital for example.
A surgeon may get paid substantially more than the manager who oversees them. At BPP, the
operating core would include the writer of this workbook and would also include the staff who
teach in the classroom.

2.2.3 Middle line

Think in terms of any manager who exists below the strategic apex. They organise and encourage
the operating core, or the managers below them. At BPP the manager of the publishing teams
would be an example of the middle line.

2.2.4 Technostructure
Think in terms of the people who report on performance. At BPP it would include the finance team
that prepare monthly management accounts, carry out variance analysis and so on.

2.2.5 Support staff

At BPP, these would be the people whose work does not impact directly on teaching or writing,
such as the HR department or the legal team, but it also includes the people who come into the
head office to clean the windows.

10% Business and technology (FBT/BT)

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f=
Activity 1: Mintzberg

State which of Mintzberg’s five components correctly describes each of the following
staff/departments:

‘Staff/ ¢
departments
Manager of a retail Baie Ses
|
4O staff |
i === a - es a

A eleaten recponeible: fot 20 corporate

accounts
— — eens —__—_—___—_} . So ee -- sa SS

rh owner nee a ere-up internet company

empiogng two staff. |

‘inIT deserter: cre to peroce

internal CEOS

|The HR osarinient hich proves eccianee

to business De Mee Clic |

Essential etellatels

See err 6 Section 1 of the Essential reading for more detail on details of Business
organisation structure.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

Organisational structures
There are four structures: entrepreneurial, functional, matrix and divisional. As the divisional is
perhaps the most common, we'll look at the divisional structure in Section 4.
Exam questions in this area often focus on the advantages and disadvantages of the different
structures, so make sure you are comfortable with them.

3.1 Entrepreneurial
A fluid structure with little or no formality. Suitable for small start-up companies, the activities and
decisions are dominated by a key central figure (the owner/entrepreneur).
The strategic apex exerts a pull to centralise, leading to the simple structure.
The strategic apex wishes to retain control over decision-making, and so exercises a pull to
centralise (Mintzberg, 1979). Mintzberg believes that this leads to a simple structure. It is often
associated with small organisations, such as perhaps a firm that provides decorating services to
local customers. Notice that there are no managers other than the strategic apex, simply because
none are needed.
Figure 6.2 Entrepreneurial structure

Owner and manager

(eg a small decorators)

ae Tet ™
[Plasterer |Painter [Electicion
a

BPP , Ds stru
6: : Business organisation nstructure 105
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 The key characteristics of the entrepreneurial structure are as follows
The strategic apex is a
(a) The simple structure is characteristic of small, young organisations.
making up
small group, or possibly one person, which exercises direct control over the people
the operating core. There is little, if any, role for technical or support staff. .
power
(b) In small firms, a single entrepreneur or management team will dominate (as in the
culture). If it grows, the organisation might need more managerial skills than the apex can
provide. Strategies might be made on the basis of the managers hunches. |

(c) Centralisation is advantageous, as it reflects management’s full knowledge of the operating

core and its processes. However, senior managers might intervene too much.
(d) This structure can handle an environment that is relatively simple but fast moving, where
standardisation cannot be used to co-ordinate activities.
(e) Co-ordination is achieved by direct supervision, with few formal devices. It is thus flexible.
(f) This structure has its own particular characteristics: wide span of control; no middle line and
hence minimal hierarchy; and no technostructure, implying little formalisation or
standardisation of behaviour.

3.2 Functional
This structure is created via separate departments or ‘functions’. Employees are grouped by
specialism, and departmental targets will be set. Formal communication systems will be set up to
ensure information is shared. At its most simple, the organisation will look like this:
Figure 6.3 Functional Structure
/

|
{
Board of directors

Sales team | | Marketing function | | Finance department |

meueomannessomeereamanvemanansasst - — aii — a

Functional organisation involves grouping together people who do similar tasks. Primary
functions in a manufacturing company might be production, sales, finance and general
administration. Sub-departments of marketing might be market research, advertising, PR, and so
on.
Advantages include:
* Expertise is pooled thanks to the division of work into specialist areas.
* It avoids duplication (eg one management accounts department rather than several) and
enables economies of scale.
* It facilitates the recruitment, management and development of functional specialists.
* It suits centralised businesses.
Disadvantages include:
* It focuses on internal processes and inputs, rather than the customer and outputs, which are
what ultimately drive a business. Inward-looking businesses are less able to adapt to changing
demands.
* Communication problems may arise between different functions, which each have their own
jargon.
* Poor co-ordination, especially if rooted in a tall organisation structure. Decisions by one
function/department involving another might have to be referred upwards, and dealt
with at a
higher level, thereby increasing the burdens on senior management.
* Functional structures create vertical barriers to information and work flow.

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3.3 Matrix
A matrix organisation crosses a functional with a product/customer/project structure.
* The finance manager for their work in accounting and finance for their functional department;
and
* The project manager C for their work on the project team: budgeting, management reporting
and payroll relevant to the project, say.
Figure 6.4: Matrix Structure

| Production || Sales | | Finance | | Distribution | | | Marketing

Dept Dept || Dept Dept Dept || Dept

| Project/Product |
| ManagerA

| Project/Product

(
}|

Manager C

Advantages of matrix organisation include:

(a) Greater flexibility of:
(i) People. Employees develop an attitude geared to accepting change, and departmental
monopolies are broken down.
(ii) Workflow and decision-making. Direct contact between staff encourages problem
solving and big-picture thinking.
(iii) Tasks and structure. The matrix structure may be readily amended, once projects are
completed.
(b) Inter-disciplinary co-operation and a mixing of skills and expertise, along with improved
communication and co-ordination.
(c) Motivation and employee development: providing employees with greater participation in
planning and control decisions.
(d) Market awareness: the organisation tends to become more customer/quality focused
(e) Horizontal workflow: bureaucratic obstacles are removed, and department specialisms
become less powerful.
There are disadvantages, however.
(a) Dual authority threatens a conflict between functional managers and product/project/area
managers.
(b) An individual with two or more bosses may suffer stress from conflicting demands or
ambiguous roles.
(c) Cost: product management posts are added, meetings have to be held, and so on.
(d) Slower decision-making due to the added complexity.

Real life example

The matrix structure is most commonly associated with large organisations — it was originally
developed for the Boeing company in the 1970s. Boeing found it useful because they worked in a
project based environment — an order would come in for a large number of planes for a particular
“customer, and they would accommodate the specific needs of those high fee paying customers.
(It’s not like a car manufacturer that makes cars on a production line and holds any unsold cars in
stock until required.) Boeing is huge. As a large organisation, it has the resources to support an
extensive sophisticated co-ordinating mechanism (ie the technostructure) which allows it to

, an 6: Business organisation structure 107

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 e. Smaller firms lack this, and
overcome some of the problems associated with the matrix structur
so would find that the matrix structure would not work.
NN

Divisional structures
it into divisions or
When an organisation reaches a certain size, it may be appropriate to structure
r geograph ic area or a
‘semi-autonomous’ blocks. These divisions may focus on a particula
particular product or even customer type.
Figure 6.5: Divisional Structure
fe
| Board of directors or
holding company J
|

re )
ee —— ————E
wo
Pe )| ( ae ) ie
| China division or |
UK division | US division or
| sauces division J [ beans division |
obits { {
or soup division
Ce ee ee es cae ert Oe ro eet |

In a divisional structure some activities are decentralised to business units or regions (we shall
discuss centralisation and decentralisation in more detail later on in this chapter).

Divisionalisation
SERRANO Ha em AEE EEL OME PUNEATTEWIENEES EI APSE IED BES SEARIT OOD SESE NEANOE SELESEROE TERA ALS AEZESOEE SMELE DE DOS EDTA ETE ESTO PIE TORTIE IE EOE

| Divisionalisation: Divisionalisation is the division of a business into autonomous regions or

| product businesses, each with its own revenues, expenditures and capital asset purchase
| programmes, and therefore each with its own profit and loss responsibility.
NO SEE ATL CTA STENT ITB NOD A EISELE
LETAONB

Each division of the organisation might be:

* A subsidiary company under the holding company
* A profit centre or investment centre within a single company
* Astrategic business unit (SBU) within the larger company, with its own objectives.

4.2 Requirements of successful divisionalisation

Successful divisionalisation requires certain key conditions.
(a) Each division must have properly delegated authority, and must be held properly
accountable to head office (eg for profits earned).
(b) Each unit must be large enough to support the quantity and quality of management it needs.
(c) The unit must not rely on head office for excessive management support.
(d) Each unit must have a potential for growth in its own area of operations.
(e) There should be scope and challenge in the job for the management of each unit.
(f) If units deal with each other, it should be as an ‘arm’s length’ transaction.
The advantages and disadvantages of divisionalisation may be summarised as follows.

|Focuses the attention of management below __ In some businesses, it is impossible to identify |

| ‘top level’ on business performance _ completely independent products or markets
_ for which separate divisions can be set up.
Reduces the likelihood of unprofitable _ Divisionalisation is only possible at a fairly |
| products and activities being continued |senior management level, because thereisa
| limit to how much discretion can be used in |
_ the division of work. For example, every
‘ ah acacia ——

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 Advantages
Tee Ter a P aaheauinc ite and
|a pau Boas:
-———_-——
|
Eneoureaes a Grecian atendon to eRcncu, |
aera may be more resourceeSproblens: Many
| lower costs and higher profits _divisions get their resources from head office
te
inmeeln|scrlstele with other Bele Bein
raley : :
eunenmore eaehonte to junior managers, ine
so grooms them for more senior positions in |
the future (planes lees MEST
|

padneee the number of levels of OneGerent,

meaning that the top executives in each |
| division should be able to report directly to the
“chief executive of the holding CORSE
— EE _ - —— Os —

Activity! e:pITisrent structures

A family run restaurant with 10 staff

A asl) nearer company mit 250

|
| staff |
|

ouncon and feracon whe SS 197 Sues.

business units

“BPPProfessional Education

4.3 Centralisation and decentralisation — the role of head office in divisions

Divisions will normally report to head office on a range of performance-related matters. The level
of autonomy given to divisional heads is dependent on the level of centralisation required.
Centralised organisations retain much of the power and decision making at head office.
Decentralised organisations delegate more business decisions to divisional heads.
A centralised organisation is one in which authority is concentrated in one place.
We can look at centralisation in two ways.
(a) Geography. Some functions may be centralised rather than ‘scattered’ in different offices,
departments or locations.
So, for example, secretarial support, IT support and information storage (filing) may be
centralised in specialist departments (whose services are shared by other functions) rather
than carried out by staff/equipment duplicated in each departmental office.
(b) Authority. Centralisation also refers to the extent to which people have to refer decisions
upwards to their superiors. Decentralisation therefore implies increased delegation,
empowerment and autonomy at lower levels of the organisation.

4.3.1 Advantages and disadvantages of centralisation

Centralisation offers greater control and co-ordination; decentralisation offers greater flexibility.

6: Business organisation structure 109

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 centralisation and
The table below summarises some of the arguments in favour of 6

decentralisation.

| aS are made at one aGint he so are |oe Apuienine top managers, in terms
easier to co-sordingte: | of workload and stress |

enol managers can hes aPacer view oe haere ethene & more junior managers ne
pices and eelglsce etnies? | who are anes ieee Ruts |

|
|
j
}

| Senior management can balance das interests | Greater awareness of local ene hp
| decision makers (geographically dispersed |
_ of different functions — eg by deciding on the |
|

resources to allocate to each. | organisations are often decentralised on a

| regional/area basis for this reason)

Quality of decisions is (theoretically) higher Greater speed of necsan: elatutey ental |

_ due to senior managers’ skills and experience. |response to changing events, since no need to |
| _ refer decisions upwards. This is particularly
| |Mor in rapidly changing markets.

| It is possibly cheaper, by reducing number of Helps oars the skills of junior managers:
|managers needed and so lower costs of | supports managerial succession
_||| overheads.
[a = — aa: —S EE — a ——— — —

Crisis ener: are men more rai atine eaocrate pence ef eapeneieiturecanwee
centre, without need to refer back. _ identified: controls, performance
|
_ measurement and Sececin celeune are better.

Policies, procedures and documentation can n@emmunccuen technology allows Beeson |

be standardised organisation-wide. to be made locally, with information and input|
|from head office if required.

Activity 3: Centralisation and decentralisation

Suggest two benefits and two drawbacks of both centralisation and decentralisation.

Flexibility in modern organisations

Modern management writers such as Charles Handy and Tom Peters rate flexibility as a key
critical success factor for competitive organisations today.
Some recent trends have emerged from the focus on flexibility:
(a) Flat structures. The flattening of hierarchies does away with levels of organisation which
lengthened lines of communication and decision-making. Flat structures are more responsive
because there is a more direct relationship between the organisation’s strategic centre and
the operational units serving the customer. We look at the details of flat and tall structures in
Section 7 of this chapter.
(b) In modular organisations different elements or components of the product or service the
organisation produces are outsourced to different suppliers. The retained people within the
organisation assemble or combine these elements to produce the final product or service.
This structure enables the organisation to be more flexible and to respond to market needs
more quickly, but also depends on reliable suppliers. For example, a motor vehicle dealership
may recognise that its sales, repair and customer service modules are performing well, but
that its finance and accounting services are inefficient. The dealership may, as a result,
outsource that module.
(c) Boundaryless organisations remove both the internal barriers that separate the hierarchy
levels, different functions and different departments, and also remove > the barriers between

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 the organisation and its suppliers, customers and competitors. To help eliminate boundaries,
managers may use virtual, hollow or modular structures. This helps to eliminate bureaucracy
and helps to reduce costs.
(d) Virtual organisations. The organisation may consist of individuals, teams, companies or
stakeholders. Members are geographically dispersed and the organisation usually only exists
electronically on the internet, without any physical premises. This creates cost savings from
not having the costs associated with physical locations, such as rent. For example, Amazon
operates as a virtual retailer without incurring the cost of retail premises. These organisations
are entirely reliant on their technology and any problems could affect the operation of the
organisation.
(e) Ina hollow organisation people and activities are split between core and non-core
competencies. All non-core processes and activities are outsourced.

Real life example

The sports shoe and clothing manufacturer Nike outsources production to sub-contractors — but
the activity seen as core and key, product design, is retained in-house. Such organisations can
then focus on their core activities, but this structure depends on being able to find reliable
subcontractors.

Anthony’s hierarchy
Robert Anthony classified management activities into three categories.
Figure 6.6: Anthony’s model

Strategic

. Tactical -

Operational =

Managerial activity can be described in the following hierarchy (Anthony, 1965).

(a) Strategic management (carried out by senior management) is concerned with direction
setting, policy making and crisis handling. The time frame of decisions made at strategic
management level would typically have implications for three to five years.
(b) Tactical management (carried out by middle management) is concerned with establishing
means to the corporate ends, mobilising resources and innovating (finding new ways to
achieve business goals). Decisions made at this level would have medium-term implications.
(c) Operational management (carried out by supervisors and operatives) is concerned with
routine activities to carry out tactical plans. Decisions at this level would deal with short-term
matters.

Real life example

Consider the position of a manufacturing company that is trying to grow. It may decide to grow
by entering new geographic markets, so it has to decide which markets it wants to enter or remain
in — it may for instance decide to enter the retail market in Peru. This would be a strategic level
_ decision. How it competes in the Peruvian market (by perhaps making its products cheaper than
its competitors) is an example of a tactical management decision. How it actually makes the
products and runs its factories is an example of an operational management decision.
cence nen - ee
pence ree

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 7 Structural forms for organisations
7.1 Scalar chain and span of control
As organisations grow in size and scope, different organisational structures may be suitable.
The scalar chain and span of control determine the basic shape. The scalar chain relates to levels
in the organisation, and the span of control the number of employees managed.
Tall organisations have a:
(a) Long scalar chain (via layers of management)
(b) Hierarchy
(c) Narrow span of control
Flat organisations have a:
(a) Short scalar chain (less layers)
(b) Wide span of control
pe SR RNA SESE REUSE RIES NAAN ARS EDU ASS OSES SS TEI TC RLSM ne CES RR SBESE OE BENS TAY

|Span of control: Span of control or ‘span of management’ refers to the number of

subordinates responsible to a superior.
i NI PHONE AO DOD IEDE RELL OE ELI P ETO IETEAMED MLM T LOPEBecmeceenn

In other words, if a manager has five subordinates, the span of control is five.
A number of factors influence the span of control.
(a) A manager’s capabilities limit the span of control: there are physical and mental limitations to
any single manager’s ability to control people and activities.
(b) The nature of the manager’s workload
Figure 6.7: Nature of manager’s workload
Manager's
work
f Sees eS,
Solitary work Entrepreneurial Interaction Supervision
(some planning activities with superiors
and scheduling) (‘external and colleagues
dealings)
“Sa
Non-supervisory work

The more non-supervisory work in a manager’s workload:

¢ The narrower the span of control
« The greater the delegation of authority to subordinates
* The geographical dispersion of subordinates: dispersed teams require more effort to supervise.

7.2 Tall and flat organisations

Recent trends have been towards delayering organisations of levels of management. In other
words, tall organisations (with many management levels, and narrow spans of control) are turning
into flat organisations (with fewer management levels, and wider spans of control) as a result of
technological changes and the granting of more decision-making power to frontline employees.
The span of control concept has implications for the length of the scalar chain.
SEE RR SRA SAE SS ON NOE SPREE PSST ET ERENT NUTTER mere eras Se ECD ETAL SENN DADS
= SNeorcmmnean
A — EIST = USP EAN
OCS 2 I SIR FORE is NE NAMES ENO

| Scalar chain: The chain of command from the most senior to the most junior. |
Tall organisation: An organisation which, in relation to its size, has a large number of levels of
management hierarchy. This implies a narrow span of control.
Flat organisation: An organisation which, in relation to its size, has a small number of
| hierarchical levels. This implies a wide span of control.

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Figure 6.8: Tall and flat organisations

Chief
executive

Divisional Senior |
directors management

Department
managers

Section Middle
managers management

Assistant
managers

Supervisory
Supervisors pabagement | Department
managers

Charge hands/
Team leaders fe
a
wee
eal
-Workers

Tall Flat

The advantages and disadvantages of these organisational forms can be summarised as follows.
Tall organisation

Narrow See. Sys vin hibitsdelegation.

t-——— Pine
|Small groups enable team meniber to jetta supervision can ae imoosecs peceng |
| coals: in decisions iinitiative

A large number a senseonfine Pemetonal | the same work passes “enrouan te

too many
ladders — assists management training and |hands Increases administration and overhead
career planning |costs Slow decision making and responses,
| as9 the Sue els ores is furtheree
eS |

Flat organisation

| More opportunity for delegation Requires that jobs can be delegated.

| Managers may only get a superficial idea of
_ what goes on. If they are overworked they are
more likely to be involved in crisis
|antetele ulciay
= ae

Relatively cheap Seuss control

In theory, rene uparcanimunicaton Reavean Middle managers are often necessary to

strategic apex and operating core convert the grand vision of the strategic apex
into operational terms

BPP 6: Business organisation structure 113

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iz Activity 4: Span of control 2

The span of control refers to the chain of command from the most senior to the most junior.
True or false?

M1,
Essential reading

See Chapter 6 Section 2 of the Essential reading for more detail on details on flexibility in modern
organisations.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

114% ~~ Business and technology (FBT/BT)

ae
BPP
Chapter summary
SLIT ELIS: PST OAT RS YELLE TEN DELON BLE EGL LED POE TIONS
4
e

L| Business organisation structure 5

>"US atE SDETESE SPIIR DOEES ENE LI SEETRSTREE LELIEIEG SETTAB! ERIE ATE LES
;

_ Informal organisation _ Organisational structure Organisational structures

Social relationships The difference between owners, « Entrepreneurial structure

Grapevine managers and directors ¢ Functional structure
Behavioural norms * Owners delegate authority to ¢ Matrix structure
Power/influence structures managers
¢ Must be motivated

Benefits of the informal

organisation Mintzberg organigram
+ Employee commitment « Strategic apex
Knowledge sharing * Operating core
Speed ¢ Middle line
Responsiveness ‘ * Technostructure
Co-operation + Support staff

Managerial problems of informal

organisation
May act against organisational
interests
Inaccuracy of rumours
Individuals suffer if excluded
from cliques
Informal practices may violate
safety or quality assurance

Divisional _ Flexibility in modern Anthony's Structural forms

structures organisations hierarchy for organisations

| | |
e Requirements of Flat structures « Strategic management Scalar chain and span
successful Modular organisations * Tactical management of control
divisionalisation Boundaryless ¢ Operational + Span of control
° Advantages and organisations management meScalanchatn
disadvantages of Virtual organisations * Tall organisations
divisional structure Hollow organisations * Flat organisations
Centralisation and
decentralisation

Y BPP
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6: Business organisation structure 115
 Knowledge diagnostic
EAN PATROL SISO ASTOMS USE ARNE
ANSPEADSI SERIE TENSEI OO IEE
ANS DL ETE
NET ATTRITIONLIE ILE
ITO ILI
ELIE TOTELE OEE LE ELE IL SDDS EAI

. Informal organisation
An informal organisation always exists alongside the formal one. This consists of social
relationships, informal communication networks, behavioural norms and power/influence
structures, all of which may ‘bypass’ formal organisational arrangements.

. Mintzberg
Henry Mintzberg described organisational forms that show the elements of the organisation
including strategic apex, middle line, operating core, technostructure and support staff.

. Organisational structures and divisional structures

Henry Mintzberg described organisational forms that show the elements of the organisation
including strategic apex, middle line, operating core, technostructure and support staff

. Flexibility in modern organisations

Recent trends have emerged from the focus on flexibility in modern organisations. This has given
rise to a number of new organisational structures.

. Anthony’s levels
Robert Anthony defined the organisation into three levels which are strategy, tactics and
operations.

116 = Business and technology (FBT/BT)

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BPP
Further study guidance

Question practice
Now try the following from the Further question practice bank [available in the digital edition of
the Workbook]:

Exam eosin A a |

eon tae Section A 2 |2 a |

O26 —— Bona Becton hes _ [2 ot |2 mins : i” |

427 | Exam SectionB 4 ae te |

Further reading
There is an article on the ACCA website entitled “Mintzberg’s theory on organisations’ which is
relevant to material in this section. You are strongly advised to read this article in full as part of
your preparation for the FBT exam.

ee 2 6: Business organisation structure 117

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Activity answers

Activity 1: Mintzberg
Mintzberg’s five components:

Staff/departments : 7 _ Mintzberg _
Mec of a retail dutlet supervising 4O staff The middle fine
Fe aeatt = fr = Ue Se ee = — = =

A aallsinert ecoorene for 20 eayeaen | The spares core |

accounts

The owner of a start-up internet company The strategic apex

mipleding two staff. =

The IT Recarncnt postingsavienna ane fechnectec are

internal systems |
The HR Separtnnent en seer assistance Support staff |
to business managers |

* Since the manager is not part of the board of directors, he would be part of the middle line
* The salesman is dealing with the customers daily , so would be part of the operating core.
* The owner of the internet company, being the person who makes the decisions about the
overall direction of the business, would be considered the strategic apex
* The IT department seeking to harmonise internal systems would be part of the technostructure.
* The HR department does not get involved directly in what the organisation does, so would be
thought of as part of the support staff.

Activity 2: Different structures

For BPP, the matrix would be by syllabus, and for each syllabus area there are marketing,
production and subject managers etc.

: AF propriate structure
¢

lA foray run ont with 10 staf "Entrepreneurial

DA small Pence tine: company wih 250 |pierre

| staff 4
a, ee 2Seee ean ee aE Se ne ae s a
Wohrcon and Uonnson whe Rave 197 Bede: ON Goncl
business units

| BPP | Professional Education |Matrix ante

aie et SEGA os ae ee aeoe es WO SR Sp SE eee e eee Eo. = I

Activity 3: Centralisation and decentralisation

Advantages/Disadvantages:

| Advantages Quick decisions _ Motivational

euaiede view Local fost
ae a ‘ — par es =— 2 =. = |
bicadvantages Loss of local fects Costly
| oe ofney Lack of direction |

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Activity 4: Span of control
False. This refers to the scalar chain. The span of control refers to the number of subordinates
responsible to a superior.

BPP , at
. ae 6: Business organisation structure 119
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120 Business and technology (FBT/BT)
{
ae
BFF
 SR LEA
Organisational culture
REE STEARNS
BRE RSEIDY OED ILE
ED LEAS ETE

and committees

Learning outcomes
On completion of this chapter you should be able to:

‘Syllabus roferenes no.

Describe the activities of an organisation that affect its “29 (d)

competitiveness:
(a) Purchasing
(b) Production
(c) Marketing
(¢) Service

pacenbe ihe roles Gnd functions oF the mainPdeeorinentc! ina B2 (e)

business organisation:
(a) Research and development
(6) Purchasing
(c) Production
(d) Direct service provision
(e) Marketing
(f) Administration
(g) Finance

Explain the role of marketing in an organisation: Be (f)

(a) The definition of marketing
(6) The marketing mix
() The Heisei of the Hale eel to the eee: eh

Befing organisational culture. B3 (a)

Daserihe the factors that shape ihe ealene ok the organisation, B3 (b)

Eepcin the centibution made pate

writers on Piirare: B3 (c)
(a) Schein — determinants of organisational culture
(b) Handy — four cultural stereotypes
(c) Hofstede — akicuiate elute Beco oeon culture

Explainthe olietetes of committees. BY (a)

Describe tl
the
RSs of codiminee used by business eels uel BY (b)
 Syllabus reference no.

List the advantages and disadvantages of committees. B4 (c)

Explain the roles of the chair and secretary of a committee. BY (d)

Expiain the relationship between accounting and other key C1 ()

functions within the business, such as procurement, production
and marketing.

Explain financial considerations in production and production C1 (b)

planning.

Identify the financial issues associated with marketing. C1 @

Identify the financial costs and benefits of effective production ee)

planning.

Explain the contribution of the accounting function to the C2 (a)

formulation, implementation and control of the organisation’s
policies, procedures and performance.

Identify and describe the main financial accounting functions in C2 (b)

business:
(a) Recording financial information
(6b) Codifying and processing financial information
(c) Preparing financial statements

Identify and describe the main management accounting and

performance management functions in business: C2 (c)
(a) Recording and analysing costs and revenues
(b) Providing management accounting information for decision-
making
(c) Planning and preparing budgets and exercising budgetary
control

Identify and describe the main finance and treasury functions: C2 (d)
(a) Calculating and mitigating business tax liabilities
(b) Evaluating and obtaining finance
(c) Managing working capital
(d) Treasury and risk management

Exam context
The role of the various departments in an organisation is something that could be easily examined
in a Section A question. Cultural influences provide a good source of potential exam questions for
both Sections. The specimen exam contained a number of questions on topics covered in this
chapter.

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 BPP Bick
Y LEARNING 7: Organisational culture and committees 123
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Chapter overview
SRERSAVNE RS ARE AION NLT SAIL LES EI AILSA ELON TESLA VTS TON LOS
a

FRETS Organisational culture and committees

¢ELLE
Pres SLET IIL EELS LITDAMCS DE

_ Organisational departments and functions © — Culture ©

Research and development Service operations What is culture

Purchasing department Marketing Elements of culture

Production Administration Organisational culture

Finance Culture and structure

National cultures

Committees

Purposes of committees Advantages of committees

The committee Chair Disadvantages of committees

The committee secretary Using committees successfully

Types of committee

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 1 Organisational departments and functions
1.1 Research and development
Organisations undertake research and development in order to improve their products and
processes; thus enabling them to remain competitive in the marketplace.
Research types:
Pure — No immediate commercial advantage (eg looking for a cure for the common cold)
* Applied — Specific application (eg have a cure but need to make it safe!)
An ‘R&D’ department will be involved in the development of brand new products as well as
enhancements to existing ones. It will also be involved with improving the manufacturing
processes.

1.2 Purchasing
The purchasing department is responsible for the acquisition of material resources and business
services used by the organisation.
Purchasing managers have to obtain the best purchasing mix from suppliers bearing in mind four
factors in order to obtain the best value for money:
* Price - should consider best value over time
* Quality - the level of quality will depend on the needs of user departments
* Quantity - obtaining a balance between avoiding delays in production by running out of
inventory, and the costs of holding too much inventory
* Delivery - the lead time between placing and delivery of an order should be considered when
selecting suppliers
Effective purchasing achieves the following:
* Obtains best value for money
* Quality targets
* Optimal inventory levels

1.3 Production
The production function plans, organises, directs and controls the necessary activities to provide
products and services, creating outputs which have added value over the value of inputs.

| Obtain inputs to the production ‘system’, such | Inputs: timber, screws, nails, adhesives,
as plant facilities, materials and labour |varnish, stain, templates, cutting tools,
| | carpenters

| Adding of value. The activities below occupy | Operations: sawing, sanding, assembly,
|

most of the production manager’s attention. __finishing

* Scheduling jobs on machines |
| « Assigning labour to jobs
* Controlling the quality of production
and/or service delivery
|.
!
Improving methods of work
* Managing materials and equipment, to
| avoid waste

| Create outputs, ie finished products and | Outputs: tables, chairs, cabinets, and so on
[ services |

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1.3.1 Production management decisions
Longer term decisions
These are related to setting up the production organisation:
* Selection of equipment and processes
* Job design and methods
* Factory location and layout
* Ensuring the right number and skills of employees
Short-term decisions
These are concerned with the running and control of the organisation.
* Production and control
* Labour control and supervision
* Quality management
* Inventory control
« Maintenance

1.3.2 Relationship with other functions

Longer-term decisions, particularly relating to design and the innovation of improved products,
cannot be taken by the production department alone; its activities must be integrated with other
functions in the firm.
* Product design is co-ordinated with R&D. Production should advise R&D as to the
consequences of particular designs for the manufacturing process.
* Job design will involve consultation with human resources specialists.
* The quantities needed to be produced will be notified by the sales department.
* The human resources department will be involved in managing the workforce.
* The finance department might indicate the resources available for new equipment.

1.4 Service operations

Many products have a service element (eg after sales warranty and service), whilst some
businesses are purely service orientated (eg healthcare, education).
Service issues that make them different from providing goods to customers:
Simultaneous — production and consumption of the service takes place at the same time (eg a
hairstyle)
Heterogenous — the quality of service varies each time it is performed. It can depend on who
delivers it and when.
Intangible — unlike goods, there are no substantial material or physical aspects to a service. A
service cannot be packaged in a bag and carried home, such as a live musical performance.
Perishable — services cannot be stored, which means they have to be performed when needed.

1.5 Marketing
°
| Marketing: ‘The management process which identifies, anticipates, and satisfies customer |
KEY
TERM | needs profitably’ (Chartered Institute of Marketing).
PA NNSA TRIE ST TAISEN ISAS

1.5.1 Marketing activities

A popular misconception is that marketing means advertising or selling. As the definition above
shows, marketing is far broader, as it is about identifying what customers want and making sure
that the products or services that the business provide meet those needs. The main activities in
marketing include:
(a) Sales support. The emphasis in this role is essentially reactive: marketing supports the direct
sales force. It may include such activities as telesales or telemarketing, responding to

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 inquiries, co-ordinating diaries, customer database management, organising exhibitions or
other sales promotions, and administering agents. These activities usually come under a sales
and marketing director or manager.
(b) Marketing communications. The emphasis in this role is more proactive: marketing promotes
the organisation and its product or service at a tactical level. It typically includes activities
such as providing brochures and catalogues to support the sales force.
(c) Operational marketing. The emphasis in this role is for marketing to support the organisation
with a co-ordinated range of marketing activities including marketing research; brand
management; product development and management; corporate and marketing
communications; and customer relationship management. Given this breadth of activities,
planning is also a function usually performed in this role but at an operational or functional
level.
(d) Strategic marketing. The emphasis in this role is for marketing to contribute to the creation of
competitive strategy. As such, it is practised in customer-focused and larger organisations. In
a large or diversified organisation, it may also be responsible for the co-ordination of
marketing departments or activities in separate business units.

The marketing mix

gy sen AI SRA RETR EIS SEAS IOC ESOT EUSA ERATE MS A SESUEEA CA GR A AS RS SE SS AS SOE NAMES BUY
rc |
Vente mix: The set of controllable erie and their levels that the eset uses to |
influence the target market. These variables are product, price, place and promotion
| (McCathy 1964).
Rn RRA SCN APSA SOREEESES
SPOSFSPREN SEESO INNES
OPE CERES EEA SA RAEI A pS EFS EER EAS EOE ARTS PTE ETE RNR TA AE ERR EERE SCN ENR EROSAORN ER

The mt pating: mix’ comprises yuna Py’

(a) Product
The actual physical products or services that are being sold. The marketing function
endeavours to ensure that the products are what the customers require and/or communicates
the benefits of the products to the consumers.
(b) Place
Marketing helps to decide where the consumer can obtain the product (eg website or store)
and how the product is distributed (eg delivered or collect).
(c) Promotion
This includes all marketing communications which inform potential customers about the
products on offer. Promotion should create:
(i) Awareness of the product
(ii) Interest in the product
(iii) Desire to purchase the product
(iv) Action in purchasing the product
(d) Price
The price of a product has to deliver a profit to the organisation, but at the same time must
be set at the right level for the consumer.
Sometimes prices are pitched at a low level to persuade purchasers to buy. This is known as *
penetrating pricing’ and often occurs in the early stages of the product life cycle (eg
household products).
‘Price skimming‘ is where prices are set very high to maximise profits, even though this will
restrict demand (eg new high technology products).
Price is often used as a competitive weapon.

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2 Activity 1: The marketing mix

Consider how you would market Product Princess, a new cosmetic, to the teenage market.

Required
How would you use the 4Ps of the marketing mix to go after that market and successfully sell this
new product?

1.5.3 Marketing strategy and corporate strategy

So, what is the relationship between marketing and strategic management? The two are closely
linked since there can be no corporate plan which does not involve products/services and
customers.
Corporate strategic plans aim to guide the overall development of an organisation. Marketing
planning is subordinate to corporate planning but makes a significant contribution to it and is
concerned with many of the same issues. The marketing department is probably the most
important source of information for the development of corporate strategy. The corporate audit of
product/market strengths and weaknesses, and much of its external environmental analysis is
directly informed by the marketing audit.
Specific marketing strategies will be determined within the overall corporate strategy. To be
effective, these plans will be interdependent with those for other functions of the organisation.
(a) The strategic component of marketing planning focuses on the direction which an
organisation will take in relation to a specific market, or set of markets, in order to achieve a
specified set of objectives.
(b) Marketing planning also requires an operational component that defines tasks and activities
to be undertaken in order to achieve the desired strategy. The marketing plan is concerned
uniquely with products and markets.
Marketing management aims to ensure the company is pursuing effective policies to promote its
products, markets and distribution channels. This involves exercising strategic control of
marketing, and the means to apply strategic control is known as the marketing audit. Not only is
the marketing audit an important aspect of marketing control, but it can also be used to provide
much information and analysis for the corporate planning process.

CL)
Essential reading

See Chapter 7 Section 1 of the Essential reading for more detail on the marketing function.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

1.6 Administration
In many organisations administrative functions are carried out at head office as much as
possible. When this is the case, the administration function is said to be centralised. A centralised
administration department involves as many administrative tasks as possible being carried out at
a single central location.

1.6.1 Advantages of a centralised administrative office

(a) It provides consistency, for example the same account codes are likely to be used no matter
which part of the organisation submits an invoice. Everyone uses the same data and
information.
(b) It gives better security/control over operations and it is easier to enforce standards.
(c) Head office is in a better position to know what is going on.

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 (d) There may be economies of scale available, for example in purchasing computer equipment
and supplies.
(e) Administration staff are ina single location and more expert staff are likely to be employed.
Career paths may be more clearly defined.

1.6.2 Disadvantages of a centralised administration office

(a) Local offices might have to wait for tasks to be carried out.
(b) There is a reliance on head office as local offices are less self-sufficient.
(c) Asystem fault or hold-up at head office will impact across the organisation.

1.7 Finance
The finance function has four primary roles:
* Raising money
* Recording and controlling what happens to the money
* Providing information to managers
* Reporting to shareholders and others
Money is raised from a variety of equity and debt sources as required by the organisation's
strategic plan.
The finance function produces financial accounts for its shareholders and ensures that all
transactions are properly recorded in accordance with the law.
A key feature of the finance function is treasury management. Treasury management plans and
controls the sources and uses of funds by the organisation. This is achieved by a range of
techniques.
(a) Cash budgeting, daily, weekly, monthly, quarterly and annually
(6b) Arranging a bank overdraft facility; borrowing funds in the money markets and capital
markets
(c) Repaying sums borrowed when the loans mature
(d) Comparing actual cash flows against budget
(e) Possibly, the cashier’s duties of making payments to suppliers, paying wages and banking
receipts
Managing foreign currency dealings, to limit the firm’s exposure to the risk of losses arising from
changes in exchange rates
The finance function produces management accounts, which are used by the organisationto
control its activities and to help make general management decisions.
(a) Planning
(i) The finance function draws up budgets which direct and allocate resources.
(ii) The finance function also produces forecasts of anticipated future results.
(b) Decision-making. The finance function is often involved in assessing and modelling the
expenditure and cash flow implications of proposed decisions.
(c) Control
(i) Budgets are also used to monitor performance. The finance function regularly provides
information comparing budgeted revenues and costs for a period, with actual results
and comparisons from previous months.
(ij) Management accountants are involved in assessing the contribution which products,
services, processes and other operations make to overall profitability.
(iii) Costing based on predetermined standards provides the information which enables
managers to identify weaknesses and look for remedies all in a timely manner.
The success of management accountants in meeting their job objectives will depend on:
+ The quality of the information they provide
« Whether the information they provide to other managers is used properly

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 Essential reading
LS
Section 2 of Chapter 9 of the essential reading discusses the role of the finance function in more
detail.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

Culture
2.1 What is culture?
Culture can be described as ‘the way we do things around here’.
Schein (1985) defines organisational culture as ‘the set of shared, taken for granted implied
assumptions that a group holds and that determines how it perceives, thinks about and reacts to
its environment’.

2.2 Elements of culture

According to Schein there are three elements of culture which build on each other:
Figure 7.1: Schein

| Schein's
Assumptions or | Observable
i Gomme Geterminants ———<>
unspoken’ rules elements
| of culture

Values and
beliefs

(a) The first level. The observable, expressed or ‘explicit’ elements of culture.
(i) Behaviour: norms of personal and interpersonal behaviour; customs and rules about
behaviour that is acceptable or unacceptable.
(ii) Artefacts: concrete expressions such as architecture and interior design (eg of office
premises), dress codes and symbols.
(iii) Attitudes: patterns of collective behaviour such as greeting styles, business formalities,
social courtesies and ceremonies.
(b) The second level. Beneath these observable phenomena lie values and beliefs and the
professed culture, which give the behaviour and attitudes their special meaning and
significance. For example, the design of office space may imply status and honour, or reflect
the importance of privacy within a culture: it ‘means’ more than the observable features.
Values and beliefs may be overtly expressed in slogans or the mission statement.
(c) The third level. Beneath these observable phenomena lie values and beliefs and the professed
culture, which give the behaviour and attitudes their special meaning and significance. For
example, the design of office space may imply status and honour, or reflect the importance
of privacy within a culture: it ‘means’ more than the observable features. Values and beliefs
may be overtly expressed in slogans or the mission statement.

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Figure 7.2: Iceberg

Behaviour
and Attitudes

Professed culture

Assumptions
(inbuilt and shared
beliefs and values)

Behaviour and attitudes are observable to outsiders, but professed culture and assumptions are
not, despite often being the more important aspect of culture. This is similar to an iceberg, in that
what can be seen above the significant part of the structure.

Organisational culture
Organisations have differing cultures. These are sets of values, norms (standards of behaviour)
and beliefs, which are reflected in different organisation structures and systems.
There are five observable aspects of culture that can be identified (and memorised as CRABS).
Customs
Rituals
Artefacts
Beliefs and values
Symbols
Examples of these aspects include the following:

Beliefs and values, — | ‘The customer is always right’. |

which are often |
| unquestioned |
= ———— — ——---— — =e — —- Se ee

|Customs |ffAge on of weer Somes eee erece iseal Seis ee

| for id IESeven ‘dress down SWSENS) have their rules.

Artefacts Microsoft encourages Sorina between employees bu ie |

|aside paces for the sielasiel

| Rituals _ In some firms, edlecpecnic compe with each wrk and there is a
|reward, given at a ceremony, for the salesperson who does best in
ay Pero
= — —EE _ Sig —_—

Symbols _ Corporate metenl:are an dona di Stine but hee are directed

|outwards. Within the organisation, symbols can represent power:
| dress, make and model of car, office size and equipment and access
_to facilities can all be important symbols.

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 Activity 2: Organisational culture o

Give an example of each of the observable aspects, of culture using your organisation.

2.4 Culture and structure

Different types of organisational structure are associated with different types of culture. Charles
Handy (2007) named four types of organisational culture after the names of Greek Gods:

| Zeus Power culture | Apollo Role culture

|The organisation is controlled by a key central | Classical, rational organisation: bureaucracy. |
| figure, owner or founder. Power is direct, | Stable, slow-changing, formalised, |
|personal, informal. Suits small organisations impersonal. Authority based on positionand |
| where people get on well. | function. |

| Athena Task culture | Dionysus Person culture

| Management is directed at outputs: problems | The purpose of the organisation is to serve the |
_ solved, projects completed. Team based, interests of the individuals who make it up:
|horizontally structured, flexible, valuing | management is directed at facilitating,
_ expertise — to get the job done. | administering.

2.4.1 Power culture (ZEUS) - Key features

(a) Central power source, eg owner manager
(b) Control through trust
(c) Flexible and reactive

2.4.2 Role culture (Apollo)

Features based around functional ‘pillars’:
(a) The pillars are co-ordinated at the top by a narrow band of senior management.
(b) Likely to be regulated and hierarchical.

2.4.3 Task culture (Athena)

(a) Job or project orientated
(b) Team based
(c) Very adaptable
(d) Horizontally structured

2.4.4 Person culture (Dionysus)

(a) Aculture based on self-interest
(b) Management through facilitation and administration
It is possible for different cultures to occur in different parts of the same organisation, especially
large ones with many departments and sites. This is an example of the ‘contingency approach‘
where ‘it all depends’.

2.5 National culture

National Cultural dimensions influence the way in which people work and the way in which they
expect to be managed.
Global organisations in particular need to be sensitive to these particular issues.
Hofstede (2011) carried out cross-cultural research at 66 national offices of IBM and formulated
one of the most influential models of work-related cultural differences.
The Hofstede model describes four main dimensions of difference between national cultures,
which impact on all aspects of management and organisational behaviour: motivation, team
working, leadership style, conflict management and HR policies.

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 (a) Power distance: the extent to which unequal distribution of power is accepted
(i) High PD cultures (as in Latin, near Eastern and less developed Asian countries) accept
greater centralisation, a top-down chain of command and closer supervision.
Subordinates have little expectation of influencing decisions.
(ii) Low PD cultures (as in Germanic, Anglo and Nordic countries) expect less centralisation
and flatter organisational structures. Subordinates expect involvement and participation
in decision-making. (Japan is a medium PD culture.)
(b) Uncertainty avoidance: the extent to which security, order and control are preferred to
ambiguity, uncertainty and change
(i) Low UA cultures (as in Anglo and Nordic countries) respect flexibility and creativity. They
have less task structure and written rules, more generalists and greater variability. There
is more tolerance of risk, dissent, conflict and deviation from norms.
(ii) High UA cultures (as in Latin, near Eastern and Germanic countries and Japan) respect
control, certainty and ritual. They value task structure, written rules and regulations,
specialists and experts, and standardisation. There is a strong need for consensus:
deviance and dissent are not tolerated. The work ethic is strong.
(c) Individualism: the extent to which people prefer to live and work in individualist (focusing on
the * l identity) or collectivist (focusing on the ‘we’ identity) ways
(i) High individualism cultures (as in Anglo, more developed Latin and Nordic countries)
emphasise autonomy and individual choice and responsibility. They prize individual
initiative. The organisation is impersonal and tends to defend business interests: task
achievement is more important than relationships. Management is seen in an individual
context.

(ii) Low individualism (or collectivist) cultures (as in less developed Latin, near Eastern and
less developed Asian countries) emphasise interdependence, reciprocal obligation and
social acceptability. The organisation is seen as a ‘family’ and tends to defend
employees’ interests: relationships are more important than task achievement.
Management is seen in a team context. (Japan and Germany are ‘medium’ cultures on
this dimension.)
(d) Mas culinity: the extent to which social gender roles are distinct (Note that this is different
from the usual sense in which the terms ‘masculine’ and ‘feminine’ are used.)
(i) High masculinity cultures (as in Japan and Germanic and Anglo countries) clearly
differentiate gender roles. Masculine values of assertiveness, competition, decisiveness
and material success are dominant. Feminine values of modesty, tenderness, consensus,
focus on relationships and quality of working life are less highly regarded, and confined
to women.

(ii) Low masculinity (or Feminine) cultures (as in Nordic countries) minimise gender roles.
Feminine values are dominant — and both men and women are allowed to behave
accordingly.

: iZ Activity 3: National culture and management style

Here are three cases:

(1) The newly appointed Spanish (more developed Latin) RED manager of a UK (Anglo) firm asks
to see the Rules and Procedures Manual for the department.
(2) AUS-trained (Anglo) manager attempts to implement a system of Management by Objectives
(MbO) in Thailand (less developed Asian).
(3) A Dutch (Nordic) HR manager of a US (Anglo) subsidiary in the Netherlands is instructed to
impl ement downsizing measures.

Required
’ Accordin g to the Hofstede model, what issues might arise in each of the cases above?

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 3 Committees
ai] Purposes of committees
Committees exist within organisations for many purposes. At the board level there may be
committees such as the risk committee which monitor the risks that the organisation faces. There
may other less formal committees such as social committees. The purposes of such committees
typically include:
Creating new ideas. Group creativity may be achieved by a brainstorming committee or think
tank.
(a) Communication. They can be an excellent means of communication. For example, they can
be used to exchange ideas and get feedback before a decision is taken or to inform
managers about policies, plans, actual results, and so on.
(b) Democratic. They are democratic, because they allow for greater participation in the
decision-making process. Problem solving can be facilitated by consultations between
interested parties.
(c) Combining abilities. Committees enable the differing skills of its various members to be
brought together to deal with a problem. In theory, the quality of committee decisions should
be of a high standard.
(d) Co-ordination. Committees should enable the maximum co-ordination of all parties involved
in a decision to be achieved, for example in co-ordinating the budgets of each department
and compiling a master budget.
(e) Representation. Committees enable all relevant interests to be involved in the
decision-making process and they bring together the specialised knowledge of working
people into a working combination.
(f) Recommendations. Making recommendations for others to follow is a key output from
committee processes.

3.2 The committee chair

There are a number of recognised qualities of a good chair (though common sense may dictate
many others, varying with circumstances).
(a) The chair will have to give immediate rulings on points of dispute or doubt, so they should
have:
(i) Asound knowledge of the relevant issues
(ii) An ability to make up his/her mind
(iii) Skill in communicating clearly, but tactfully and in a courteous manner
(b) The chair should be and be seen to be impartial. There will be times when criticism is
expressed which they personally may find unfair, or when there is a strong clash of opinion
between other committee members. In either situation, whatever their personal views, the
Chair should treat opponents with equal fairness.
(c) The chair should have the discretion to know when to insist on strict observance of correct
procedure, and when a certain amount of relaxation will ease the tension.
(d) The chair should be punctual and regular in attendance at meetings. If they cannot give the
duties the appropriate amount of time and attention, they should consider resigning.

3.3 The committee secretary

(a) Duties before committee meeting:
(i) Fixing the date and time of the meeting
(ii) Choosing and preparing the location of the meeting
(iii) Preparing and issuing various documents
(b) Duties at the meeting: assisting the chair, making notes
(c) Duties after the meeting: preparing minutes, acting on and communicating decisions

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3.4 Types of committee
Committees can be classified according to the power they exercise.
(a) Executive committees have the power to govern or administer. The board of directors of a
limited company is itself a ‘committee’ appointed by the shareholders, to the extent that it
governs or administers.
(b) Standing committees are formed for a particular purpose on a permanent basis. Their role is
to deal with routine business delegated to them at weekly or monthly meetings.
(c) Ad hoc committees are formed to complete a particular task (eg fact-finding and reporting
on a particular problem before being wound up).
(d) Sub-committees may be appointed by committees to relieve the parent committee of some of
its routine work,
(e) Joint committees may be formed to co-ordinate the activities of two or more committees; for
example, representatives from employers and employees may meet in a joint consultative
committee. This kind of committee can either be permanent or appointed for a special
purpose.
(f) Management committees in many businesses contain executives at a number of levels; not
all the decisions in a firm need to be taken by the board.

3.5 Advantages of committees

(a) Consolidation of power and authority. The pooled authority of a committee may enable a
decision to be made for which an individual’s authority would not be sufficient. Examples of a
plural executive include a board of directors or the cabinet of the government.
(b) Delegation. A committee can further delegate responsibility, for example to a subcommittee.
(c) Blurring responsibility. When a committee makes a decision, no individual will be held
responsible for the consequences of the decision.
(d) Delay. A committee is used to gain time (eg a manager may set up a committee to
investigate a problem when they want to delay their decision, or a company may refer a
labour relations problem to a committee to defer a crisis with a trade union).

3.6 Disadvantages of committees

(a) They are apt to be too large for constructive action, since the time taken by a committee to
resolve a problem tends to be in direct proportion to its size.
(b) Committees are time consuming and expensive. In addition to the cost of highly paid
executives’ time, secretarial costs will be incurred.
(c) Delays may occur if matters of a routine nature are entrusted to committees; committees
must not be given responsibilities which they would carry out inefficiently.
(d) Operations may be jeopardised by the frequent attendance of executives at meetings, and
by distracting them from their real duties.
(e) Incorrect or ineffective decisions may be made, if members are unfamiliar with the issues.
Occasionally, there may be a total failure to reach any decision at all.
(f) The fact that there is no individual responsibility for decisions might invite compromise
instead of clear-cut decisions. Moreover, members may avoid responsibility for poor results
arising from decisions taken by the committee. Weak management can hide behind
committee decisions.

3.7 Using committees successfully

(a) Well-defined areas of authority, timescales of operations and purpose should be specified in
writing.
(b) The chair should have the qualities of leadership to co-ordinate and motivate the other
committee members.
‘(c) The committee should not be so large as to be unmanageable.

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 (d) The members of the committee should have the necessary skills and experience to do the
committee’s work; where the committee is expected to liaise with functional departments, the
members must also have sufficient status and influence with those departments.
(e) Minutes of the meetings should be taken and circulated by the secretary, with any action
points arising out of the meetings notified to the members responsible for doing the work.
(f) In order to conduct business and make decisions there is usually a minimum number of
members required to be in attendance at the meeting. This minimum number of members is
known as a quorum and it is usually over 50% of members.
(g) Above all, an efficient committee must provide benefits that justify its cost.
(h) Finally, if at all possible, the committee should be allowed plenty of time to reach decisions,
enabling members to form subgroups.

eee ner NT LEHRER PRCT AEA SS SOSA SIE POR SEI I ASI PAE OST OSES
EE RAS
IEEED AESETAL EDT ee

PER performance objective PO3 requires you to demonstrate contribution to strategy and |
innovation. Knowledge of organisational culture and working effectively with internal |

136
ae
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Chapter summary
3 rere
7
4

_ Organisational culture and committees |

"“Qiasn ancien pasreameeeenAcr RNASE DSSS OS ISNT OTIS

: Organisational departments and functions Culture

Research and development Service operations What is culture

* Involved in development of new * Simultaneous ¢ How we do things round here
products and processes and * Heterogeneous
enhancing existing ones * Intangible
' ¢ Perishable Elements of culture
* Observable elements
Purchasing department * Values and beliefs
- * Aims to obtain best purchasing Marketing « Assumptions or unspoken rules
mix: * Marketing activities
— Price * Marketing mix (the 4Ps)
— Quality * Marketing strategy and Organisational culture
— Quantity corporate strategy * Observable elements of
— Delivery organisational culture
* Effective purchasing — Customs
department achieves Administration — Rituals
— Best value for money + Advantages of centralised — Artefacts
— Quality targets * Advantages of decentralised — Beliefs and values
— Optimal inventory levels — Symbols

| Finance
Production * Raising money Culture and structure
: ¢ All activities to create outputs ¢ Recording and controlling + Zeus — power culture
from inputs * Providing information to « Athena — task culture
— Obtains inputs (machinery, managers * Apollo — role culture
materials, labour) ¢ Reporting to shareholders and * Dionysus — person culture
— Performs value adding others
activities
— Creates outputs National cultures
* Production management * Hofstede model describes four
decisions dimensions of difference:
— Longer term decisions related — Power distance
to setting up the production — Uncertainty avoidance
organisation — Individualism
— Short-term decisions — Masculinity
concerned with running and
control of the organisation
+ Relationships with other
functions
— Product design alongside
R&D
— Job design alongside HR
— Production planning
alongside sales department
— Investment decisions with
finance department

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merenes er Sa
Committees

eS
Purposes of committees Advantages of committees
* Creating new ideas * Sharing authority
* Communication * Delegation
¢ Democratic * Blurring of responsibility
* Combining abilities
* Coordination
. « Representation Disadvantages of committees
* Recommendations * Slow to make decisions
* Time consuming and expensive
* May remove executives from
3 The committee Chair other tasks
* Has to make immediate rulings
¢ Should be impartial |
¢ Should have discretion over Using committees successfully
procedures * Chair with good leadership
qualities
* Committee should not be too
The committee secretary large
+ Preparing for committee * Members of the committee
meetings should have the relevant skills
* Making notes * Should allow plenty of time to
* Preparing minutes, acting on reach decisions
decisions

Types of committee
+ Executive committees
¢ Standing committees
+ Management committees

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 Knowledge diagnostic
sc ouDmeNE: NOE ELON oo LIED SPELL 7 CAE ELSID
ETON DI IESE ITILETES IMPS SMSEASES
ALESANN ESBSORENSTEIN OT EREECE NI URIS St ET CSOSA EIR TW EDERAL NOE SO
OL RI SE OE I NT A I SI I

. Organisational departments and functions

May include a research and development function, purchasing function, production, marketing,
admin, and finance

. Purchase function
The purchase function is responsible for the right purchase mix — Price, Quality, Quantity, and
Delivery. It aims to achieve value for money and source the right quality of inputs. It also aims to
optimise inventory levels.

. Marketing
Marketing aims to anticipate and satisfy customer needs, profitably. Marketing activities include
supporting sales, promoting the organisations, market research and strategic marketing. The
company may use the marketing mix — the four Ps of Product, Place, Promotion and Price.

. Finance function
The finance function’s primary roles are raising money, recording and controlling the company’s
resources, providing information to management, and reporting to shareholders and other
external stakeholders. The finance function may also include a treasury department.

. Culture
The culture of an organisation includes observable elements such as customs, rituals, artefacts,
overt beliefs and values and symbols. Unobservable elements include assumptions and unstated
values and beliefs. Culture may also be associated with structure, and Handy proposed four
types of culture: Power (Zeus), Role culture (Apollo), Task culture (Athena) and Person culture
(Dionysus). National culture is influenced by four dimensions: Power distance, Uncertainty
avoidance, Individualism and Masculinity.

. Committees
Committees may be set up at various levels within an organisation, such as sharing ideas,
enabling more democratic decision making and combining differing skills. The chair of a
committee must be able to ensure the committee is effective.

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Further study guidance

Question practice
Now try the following from the Further question practice bank [available in the digital edition of
the Workbook]:

Q28 / <li orn ain | , 3 = 7 Z mine

929 “ExamSectionA tt min

Q30 —.t Exam ian b 7 |4 i . | Omics

Further reading
There is an article on the ACCA website entitled ‘The role of marketing’ that is relevant to material
in this section. You are strongly advised to read this article in full as part of your preparation for
the FBT exam.

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Activity answers
SARACEN R ENTE NRE TENSES CAA AI eS GASSE ATTERPS BOSAL SYN ANS AAT A PR SE CEE
IECSOAS SPRL IS ee

Activity 1: The marketing mix

The following is one possible approach to using the 4Ps. It is not the only approach, so if your
answer is different from this, it does not mean that your answer is ‘wrong’.
Product:
* Natural ingredients
* Colourful packaging
* Brand clearly displayed (teenagers tend to be brand sensitive)
Price:

* Dependent on brand although premium brand may not mean premium price as teenagers
cannot afford
* Would not be cheap product as again teenagers tend not to want cheap products
Place:
* High Street stores to attract the teenagers to buy
* Supermarkets for parents to have access to purchase for the kids
* Internet would depend on a variety of factors, one key issue is would it be environmentally and
economically viable
Promotion
* Instagram groups, interactive website attached to the parent company’s site
¢ Promoted by famous celebrities known to the teenage population
* BOGOF/vouchers for discounts

Activity 2: Organisational culture

Examples of the things you may have considered under each heading are given below, but this is
not an exhaustive list:
Customs — appraisal cycles, start and finish times
Rituals — break times, cakes on birthdays, social activities
Artefacts — language, smart phones
Beliefs and values — mission statements
Symbols — logo, uniform
(Also: workings methods, communication methods, dress code, rules, working methods, hours.)

Activity 3: National culture and management style

Possible issues:
(1) A high-UA manager, expecting to find detailed and generally adhered-to rules for everything,
may be horrified by the adhocracy of a low-UA organisation: if they attempt to impose a
high-UA culture, there may be resistance from employees and management.
(2) A high-individuality manager may implement MbO on the basis of individual performance
targets, results and rewards: this may fail to motivate collectivist workers, for whom group
processes and performance is more important.
(3) A low-masculinity manager may try to shelter the workforce from the effects of downsizing,
taking time for consultation, retraining, voluntary measures, and so on: this may seem
unacceptably ‘soft’ to a high-masculinity parent firm.

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144% Business and technology (FBT/BT) as ee
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 Skills checkpoint 2
Learning the models

Chapter overview

Answer Planning

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Introduction
Within the syllabus for BT/FBT are many models and theories that you need to learn. The
examiner reports that exam questions on simpler theories such as Porter’s five forces, Maslow,
Blake and Mouton enjoy higher pass rates, while questions on more complex theories, such as
Belbin and Shein have lower pass rates in Section A of the exam. In Section B the examiner
mentions Schein, Hofsted, Herzberg, McGregor Vroom, Belbin and as models that candidates
have difficulties with. The examiner does acknowledge that there are many topics covered in the
BT/FBT syllabus, and advises candidates to aim for breadth, rather than spending too much time
focusing on some topics at the expense of others.
This section aims to help you develop techniques to learn the various models.

Approach to studying
As you work through the chapters in the Workbook, a good approach to studying the models is to
do. the following:
Look at the chapter overview — this gives you the ‘big picture’ and puts into context how the
models fit in. ln Chapter 2, for example, the overview shows you that you are looking at the
external factors that impact on a business. You can see that there are boxes for Political
 Factors, Technology and so on. So already you are becoming aware of the factors that you will
study in more detail. You will notice one model, which is Porter's Five Forces.
» As you begin to study the model, read through the section dealing with the model fairly quickly
initially, again to get the overall picture of what is involved in the model.
* Once you have done this, go through and read it again — reflectively. As you look at each part
of the model, try to think of real life examples, or reflect on whether you can understand the
logic of what you are reading. When studying Porter’s five forces model for example, the first
‘force’ is the threat of new entrants. Think about why that is important to an industry. Think
about the industry you work in — would it be easy for new competitors to set up in that
business, or not? If not, what is stopping them? By doing this, you are gaining a deeper
understanding of the models which will help you answer the application style questions
* Close your book, take a piece of paper, and try to summarise the model from memory. Write
as much as you can remember before opening your book again to fill in any gaps.
* Make some notes. Active learning is a good way to help you absorb the knowledge, Just
highlighting the main points is not a particularly active way to learn a theory, so try to put
more effort in. Perhaps try some of the memory techniques mentioned in the next section.
* Having ‘mastered’ the model in this way, have a break before moving onto the next mode
* Once you have completed a chapter, attempt the further question practice recommended, to
test your knowledge.

Techniques for memorising models

A mnemonic is a system that is used to help memorise something. Mnemonics are a good way of
remembering the main parts of a model. This section provides examples of some types of
mnemonics that you might find useful in learning the models and theories in the BT/FBT syllabus:

Acronyms
An acronym is a good way of learning a list. You arrange the list in such a way that the first letter
of each item in the list spells a word that you can remember. An example of an acronym is
SPAMSOAP, which can be used to remember the different types of internal control (see Chapter
10):
Segregation of duties
Physical
Authorisation
Management
Supervision
Organisation
Arithmetic and accounting
Personnel

Stories and associations

Other types of mnemonic include stories and associations. In Belin’s team roles, which is covered
in Chapter 14, there are nine different roles that members can play in a team. A good way to
remember each of these roles is to take a team that you know and try to match each role in
Belbin’s model with somebody in that team, then learn the name given by Belbin to that person -
for example, John = Shaper, Janet = Chair etc. The team could be any type of team — a work
team, a sports team, even a group of friends.

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Test yourself
Test yourself continuously. Perhaps make a list of all the models as you come across them, on a
notepad document on your phone. When you have a spare five minutes, take a model from the
list, and write down on a piece of paper the key points of that model, if you can remember them.
The more often you review a model, the more likely you are to remember it. As you get closer to
the exam, you should hopefully find that you can remember all of the models.

Workbook features
The chapter summaries are another useful tool that may help you revise models. The chapter
summaries are like a skeleton — they contain the bones of the theory. Look at the summaries and
see how much you can remember to flesh out the bones. If you can’t remember that much, you
should go back and read through that section of the chapter. These are supplemented by the
learning diagnostics at the end of the chapter.

Application of knowledge
While some of the questions in the BT/FBT exam are pure tests of knowledge, there are also
questions that aim to test your understanding, by giving you a short scenario and requiring you
to apply your knowledge in some way. This is particularly the case in Section B of the exam. It is
therefore important when studying that you do not just learn the ‘what’ of each model, but also
the ‘why’. You need to understand the model in other words. Taking Porter’s five forces, for
example, it would not be enough to simply be able to list the five forces. You would need to
understand how each force affects the competitive nature of the environment. This skill is
acquired while studying. Always ask yourself ‘what is the point of this model, how does it help?’.
Application is also helped by practising questions too. It is essential that you do plenty of question
practice. In the workbook, there are plenty of questions within the chapters and the further
question practice at the end. You also have the questions in the revision question bank. Aim to
work through all of these questions at least twice, and note down those that you get wrong, so
you can come back to them again later. Practising questions will reinforce your learning process —
it is often said that you learn by your mistakes, so when you get a question wrong, think of that
as an opportunity to fill in a gap in your knowledge.

Skills practice
As you work through the chapters in the workbook, try the techniques above to help you learn
more effectively.
« Read through the model once quickly
* Read the model again, reflectively
* Close your book and see how much of the model you can remember
* Write some notes — try to think of interesting mnemonics — ways to help you remember the
model
« Attempt the questions in the chapter and the further question practice
* Keep alist of models and continuously test yourself

8: Learning the models 147

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148 Business and technology (FBT/BT)
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 Corporate governance
ee FLED NEY

and social responsibility

Learning outcomes
On completion of this chapter you should be able to:

Sullabue
reference no.

ExplainoeBOeneGy concept i
in eigen to corporate OTT sich: B5 (a)

Doane Sareea governance one eacie| geen ian and econ Hatt Bd (b)
Eisenia! in ROU easels Sy Slelacen ieee

Ean the eerie of organisations to maintain swans btoncerd: BS (c)

of po uolote goomonce and corporate social Ree CrSPiE:

Briefly explain the main ee ommencorcn: of best practice in Svesiye Bd (d)

corporate governance:
(a) Executive and non-executive directors
(b) Remuneration committees
(c) Audit committees
(d) Public Sverre

Explain roe ee oncatons fae account of their ayo foeoeme trite

objectives through analysis of the needs of internal, connected and external _B5 (e)
stakeholders.

Identify the social and environmental responsibilities of business B5 (f)

organisations to internal, connected and external stakeholders.

Exam context
Corporate governance and social responsibility is an issue for all corporate bodies, both
commercial and not for profit. There were two questions in the specimen exam relating to
corporate governance.
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Chapter overview
—— EIEN TRA SONS IR LONE
OR OLE ASN LIS GI LGNTT PETES REL SISTERS AT SOE EDIEMASE TET
a
\
_ Corporate Voi etaand social responsibility |
"sansa
‘en. sie BPS ALS SBE UN BOND SES ROSEN RAEI PEREES ETN a saeco

Introduction to Best practice Corporate social

corporate governance recommendations responsibility

The agency problem The board of directors Approaches to

social responsibility

Developments in Board members

corporate governance | Ethical stance

Non-executive directors |
Analysis of stakeholders

Remuneration and
audit committees

Reporting on
corporate governance

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 Introduction to corporate governance :

Corporate governance: The system by which organisations are directed and controlled by
their senior officers

The agency problem

Corporate governance issues generally arise from the separation between ownership and control
in organisations
* Small organisations where the owner and the manager are the same person do not cause
corporate governance issues
* With larger organisations, the owners (shareholders) and the controllers (directors and
managers) are not the same parties. Their interests may diverge, eg shareholders will want
dividends and an increase in the value of their share, whereas managers may want higher
remuneration and bigger status.
The agency concept is a situation where one party, the principal, hires another party, the agent,
to act on their behalf. When applied to corporate governance, the shareholders are the ‘principal’
and the directors are the ‘agent’.
The agency concept is more relevant for larger organisations where there is a greater degree of
separation between ownership and management.
Management may follow their own interests rather than the owners’. This is known as the agency
problem.

Activity 1: Agency

Give some examples of actions that directors of a large company might take, if there are no
controls, that are not in the interests of its shareholders.

Solution

Mh,
Essential reading

See Chapter 8 Section t of the Essential reading for more detail on the role of corporate
governance.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

1.2 Developments in corporate governance

Corporate governance has become increasingly high profile over the last thirty years due toa
number of factors including:
(a) High-profile corporate scandals (eg BHS, Wirecard, Parmalat)
(6) Increasingly active and international shareholders

ass
152 Business and technology (FBT/BT)
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 (c) Increasing media scrutiny
(d) Globalisation highlighting businessculture differences around the world
(e) Developments in financial reporting

1.2.1 Sarbanes-Oxley Act 2002

In the US, the Sarbanes-Oxley Act was introduced in 2002. Companies listed on US stock markets
must comply with the act. The main provisions of the act are:
* The majority of the board of directors must be independent.
* The CEO and CFO must certify that the financial statements are accurate.
* Companies must form an audit committee made up entirely of independent directors.
* The auditors must review and report on the effectiveness of the internal control procedures.
- The Public Company Accounting Oversight Board (PCAOB) was set up (see Chapter 9).

1.2.2 OECD Principles

In 1999 the Organisation for Economic Co-operation and Development (OECD) published the first
edition of its Principles of corporate governance. These are intended to provide guidance for
countries that wish to improve their corporate governance regulations, and for companies that
wish to adopt best practice. The most recent edition of the OECD principles was issued in 2016.

. 1.2.3 UK Corporate Governance Code

The UK Corporate Governance Code was developed over many years:
* In1992 the Cadbury Committee on best practice made recommendations relating primarily to
the structure of the board of directors
*- The Greenbury Committee of 1995 looked at remuneration of directors.
¢ The Higgs report of 2003 dealt with the role of non-executive directors.
¢ The Smith report of 2003 looked at audit committees.
In 2003 these reports and committee recommendations were combined into the ‘Combined Code
on corporate governance.’ Since 2018 it is now referred to as ‘UK Corporate Governance Code’.
The UK code is principles-based, which means it sets out principles of good governance, leaving it
up to organisations to decide how to adhere to these principles. This is in contrast to the Sarbanes
Oxley act in the US, which adopts a rules-based approach.

4
Essential reading

See Chapter 8 Section 2 of the Essential reading for more detail on corporate governance.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

Activity 2: Poor corporate governance

ooo

What might the features of poor corporate governance be?

Solution

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 Best practice
2.1 The board of directors
Figure 8.1: The board of directors

The Board

| Executive Directors |Chief Executive |} | Chairman

{ } ‘
Non-executive Directors
}
|
j \ ‘ an = _ —_ —

\
}
Audit | Remuneration |
| Committee | | Committee
}

2.1.1 Role of board

A director is someone who works for a company and is charged with the conduct and
management of its affairs. The directors collectively are referred to as the board of directors, who
are elected by the shareholders.
Stewardship theory links to Corporate Governance as it views the directors as stewards of the
company assets on behalf of the owners.
The role that should be taken by the board has been much debated. For example, they may
include major decisions such as:
(a) Mergers and acquisitions
(b) Acquisitions and disposals of major assets
(c) Investments
(d) Capital projects
(e) Bank and other borrowings

2.1.2 Role of the chair

The chair is the leader of the board of directors. It is the chair’s responsibility to ensure that the
board operates efficiently and effectively, promoting regular attendance at meetings, and full
involvement by all members. The chair decides the scope of each meeting and is responsible for
ensuring that all matters are discussed fully.

2.1.3 Role of the chief executive officer

The chief executive officer (CEO) is the leader of the executive team and is responsible for the
day-to-day management of the organisation. As well as attending board meetings, the CEO will
usually chair the management committee or executive committee. While most companies have
monthly board meetings, it is common for management/executive committee meetings to be held
more often.

2.1.4 Role of company secretary

The company secretary is effectively the chief administrative officer and is appointed by the
company’s directors. They are legally responsible for acting on the company’s behalf to
undertake specific requirements.
Duties which fall under the remit of the company secretary typically include:
* Filing the company’s financial statements and annual return with the companies supervisory
authorities
* Maintaining statutory books and records, ie a register of directors and shareholders and any
charges held on the company assets
* Safeguarding legal documents including share certificates, certificates of incorporation and
other official documentation

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 * Organising board meetings of shareholders and taking formal minutes
In addition to these duties, the company secretary is required to establish and maintain a
registered office for official communications.

res Board members

Corporate governance codes in a number of countries have made several recommendations in
relation to the board, including the following:
(a) Individual directors should have relevant expertise for the role, which complement each
other.
(b) The board should receive appropriate information in a timely manner which is sufficiently
clear, including non-financial information.
(c) The performance of the board and its members should be assessed annually (eg by
shareholders).
(d) The roles of chair and chief executive should be separated to prevent domination of the
board by one person.

2.3 Non-executive directors

Non-executive directors have no management responsibilities. It is intended that they act as a
balance to executive management and advise the board on issues such as strategy,
performance, risk and remuneration of the executive directors.
Non-executive directors can broaden the experience and perspective available to the board, and
can offer reassurance to shareholders and other outside parties.
Non-executive directors must be independent of the company, for example, they are not expected
to have business or financial connections with the company, and have time-limited appointments.
In certain countries, the concept of non-executive directors is taken further. For example, in
Germany all public companies must have a two-tier board. The management board comprises
executive directors and the supervisory board comprises non-executive directors, partly elected
by shareholders and partly by employees.

Activity 3: Selecting non-executive directors

What do you think are some of the problems around the selection and recruitment and role of
non-executive directors?

Solution

Real life example

Philip Green, a British retailer, acquired the BHS retail chain for £200 million in 2000. He sold it for
£1 in 2016, and the company subsequently became bankrupt. At the date when Mr Green sold
BHS, the company’s pension fund was running a deficit of £571 million. The bankruptcy of BHS
and the pension deficit were due in large part to the fact that during his period of ownership,
there was little investment in the stores or the pension fund, while Mr Green’s family received
dividends of £400 million.

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 A report by the UK Parliamentary Committee into the affair reached the following conclusions:
“We saw meagre evidence of the type of constructive challenge that good board’ should provide.
These weak governance arrangements allowed the overarching interest of the Green family to
prevail and facilitate the flow of money offshore to the ultimate owner of the parent company,
Lady Green”.

2.4 Remuneration and audit committees

Non-executive directors can exercise oversight of executive directors by operating through
committees of the main board. These may include key areas of board activity including audit,
senior manager’s remuneration, risk management and senior appointments. You only need to
know about the role of the audit and remuneration committees for your exam.
The following table summarises the key information about these two committees:

| Membership Eg 2-3 non-executive directors _ Eg 2-3 non-executive directors, |

|
| at least one of whom must have
| recent, relevant financial
|
|
experience
|— Pt FO = ee — ee — — aaa

Remuneration policy and specific Internal controls with the

ete ; |
packages for executive directors _ organisation, liaison with external |
and senior management auditors, oversight of internal
auditors

_ Key objectives: Key objectives:

|
|
(a) Procedures for determining (a) An independent channel is
remuneration are formal and available to report any
transparent control issues
(b) Bonuses should arise from -(b) Resolving any auditor
achievement of measurable recommendations and
performance auditor/management
(c) All board remuneration and disputes
benefits are transparent in © Financial and control
the statutory accounts systems in place are
Remuneration packages adequate, including an
align the interests of effective internal audit
function ||
management and |
shareholders (d) Adequate risk monitoring is |
in place |

4,
Essential reading

See Chapter 8 Section 3 of the Essential reading for more detail on the roles of the remuneration
and audit committees.
The Essential reading is available as an Appendix of the digital edition of the Workbook.
SAN nS

2.5 Reporting on corporate governance

Companies listed on a Stock Exchange may be required to provide information on corporate
governance (eg the following are a requirement for the London Stock Exchange, and derive from
the UK Corporate Governance Code):
(a) Anarrative statement of how the principles of the corporate governance code have been
applied

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(b) A statement of compliance with the Code throughout the accounting period, or reasons for
non-compliance
(c) Information about the board of directors
(d) Committee reports (eg of the Remuneration and Audit Committees)
(e) A statement of effectiveness of internal controls

Activity 4: Governance issues

orca ee eee eee . . a - ——

Techpoint ple is a medium-sized public company that produces a range of components used in
the manufacture of computers.
The board of directors consists of chair Max Mallory, chief executive Richard Mallory and finance
director Linda Mallory, all of whom are siblings. There are five other unrelated executive directors.
All directors receive bonuses based on sales. The company’s sales are made by individual
salesmen and women, each of whom have the authority to enter the company into contracts
unlimited in value without the need to refer to a superior or consult with other departments.
It is this flexibility that has enabled the company to be very profitable in past years. However, a
number of bad contracts in the current year have meant that the finance director has reclassed
them as ‘costs’ to maintain healthy sales and to protect the directors’ bonuses.
Required
What are the corporate governance issues at Techpoint plc?

Corporate social responsibility

RAG AS SEASIDE NC POIEN ONES AES SS EES o

Corporate Social Responsibility: The idea that organisations, especially (but not only)
_ companies, have an obligation to consider the interests of customers, employees,
_ shareholders, communities, and ecological considerations in all aspects of their operations.
es I APMP BOOSIE ELAR OSI AEMEELT NEECEINESE IY NLS BOE ORO EE AE NT EI EE EV OE EO ae Neerem EeA ST OAC ET

Approaches to social responsibility

Proactive strategy — Taking full responsibility for its actions
Reactive strategy — Waiting until there is a public reaction before amending the company’s ways
Defence strategy — Attempting to avoid additional obligations caused by a particular problem
Accommodation strategy — Accommodating concerns of the public and governments to prevent
stricter legislation being introduced

Pros and cons of CSR

Some arguments for/against companies embracing corporate social responsibility are:

Power — Large companies can be very _ Key objective - Companies can benefit
powerful and, as they are not democratically | societies most by operating efficiently and
accountable, may infringe on others’ rights if | maximising wealth for shareholders
they do not exercise self-restraint

Infrastructure - Companies depend on - Taxation — Companies already fund society's

| society's infrastructure to function |infrastructure via taxes
}— — ——_ s - 7

| Externalities — A company’s operations may _ Sovereignty — It should be up to shareholders

| have social and environmental consequences __ to donate to charities if they wish to, not for
which need to be addressed, eg pollution, | companies to undertake charitable activities
environmental damage

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 Public Relations — Adopting corporate social | Payback — Companies should already be
responsibility can result in a better image and | focused on anything that will enhance
greater customer and employee loyalty _ shareholder value without labelling it
| corporate social responsibility
L as ee a

3.3 Ethical stance

Ethical stance means the position that a person or organisation takes when faced with ethical
questions.
The range of ethical stances, as described by Johnson and Scholes (2005) includes:
(a) Short-term shareholder interest
The organisation is responsible for its ethical stance in the short-term interests of
shareholders, but the government has a wider longer-term remit.
(b) Long-term shareholder interest
The organisation takes a wider view of its ethical responsibilities by:
(i) Corporate image enhancement
(ii) Presentation of pressure for legal regulation
(c) Multiple stakeholder obligations
The organisation accepts the legitimacy of the expectations of stakeholders other than
shareholders.
(d) Shaper of society
This is a more demanding role that ‘multiple stakeholder obligations’ and is largely the
preserve of public sector organisations.

3.4 Analysis of stakeholders

CSR can also be viewed within the context of the stakeholders of the organisation, and the extent
to which it meets the needs of the different stakeholders.
Refer back to Chapter 1 for information on stakeholders.

pacer ceca nn ESS REAR ATT CONES ASS CNS AR DO TESTS

SIN ISTE ATESRE

PER alert
PER performance objective PO4 requires you to contribute to the effective governance, risk
management and control of an organisation. The material covered in this chapter will help in
| this context.
saben eeecae ent

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Chapter summary
Peg EP OTE,
PiFERED ELE LEADER RESIN DLE EEATA NEVI ER ESN LACTDLA PED SEG SEVEN ILE

_ Corporate governance and social responsibility

INTHE FSSA DEG ERIE Nuwwezrane™

Introduction to Best practice Corporate social

corporate governance recommendations responsibility

The agency problem The board of directors Approaches to social

* Principal (owner) * Role of board responsibility
* Agent (director) Role of chair * Proactive
Role of chief executive * Reactive strategy
* Role of company secretary + Defence strategy
Developments in corporate + Accommodation strategy
governance
* Sarbanes-Oxley Act Board members
* OECD Principles + Relevant expertise Ethical stance
* UK Corporate Governance * Receive appropriate * Short term shareholder interest
Code information * Long term shareholder interest
« Assessment * Multiple stakeholder
¢ Separation of role of Chair and obligations
Chief Executive + Shapeholder of society

Non-executive directors Analysis of stakeholders

« No management * Refer to chapter1
responsibilities
* Broaden experience of board
¢ Must be independent

Remuneration and audit

committees
* 2-3 non executive directors
« Remuneration responsible for
remuneration of executive
directors
— Remuneration of executive
directors
+ Audit committee responsible
for:
— Internal controls
— Liaison and oversight of
external auditors

Reporting on corporate
governance
* How principles have been
applied
« Statement of compliance
+ Information about board
* Committee reports
+ Effectiveness of internal
controls

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 Knowledge diagnostic
eit ROSES CMEDSA EEESOT NS TASS TASES 8 AL BTS EY SGD RLS I ITS ANIA SELENE SSDS LIEDa.
DIP SEE SLE —IIE LYEences
LEE SRI
SNELLA REETM
ee ENCED
LEN ONES EETIS,

. Corporate governance
Corporate governance is the system by which organisations are directed and controlled by their
senior officers.

. Board of directors
A director is someone who works for a company and is charged with the conduct and
management of its affairs. The directors collectively are referred to as the board of directors, who
are elected by the shareholders.

. Executive and non-executive directors

Executive directors take the decisions about how the business will be run; however, non-executive
directors provide specialist advice and independent oversight of those decisions.

. Committees
Committees including non-executive directors cover areas such as remuneration and audit.
Companies are often required to publish information relating to corporate governance as a
requirement of stock exchange listing.

. Best practice
Best practice corporate governance regulations aim to ensure that:
¢ Appropriate people with the right skills are appointed to the board
+ There are sufficient non-executive directors to provide scrutiny over the CEO and other
executive directors
¢ Remuneration is fair and not excessive
* The company’s system of internal controls is monitored to ensure it is effective

. Corporate Social Responsibility (CSR)

Organisations often recognise obligations over and above those to the internal and connected
stakeholders. They see an obligation to the wider community and environment. CSR policies can
cover things such as working conditions, charitable donations and ecological policies such as
waste and energy use.

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Further study guidance

Question practice
Now try the following from the Further question practice bank [available in the digital edition of
the Workbook]:

Number —

Exam Section A

Exam Section A

Exam Section A 1 min

We —
A34 |Exam Section A 2 mins
a eat 5
O35 |Exam Section B / 5 mins

Further reading
There is an article on the ACCA website entitled ‘Corporate governance: the board of directors
and standing committees’ that is relevant to material in this section. You are strongly advised to
read this article in full as part of your preparation for the FBT exam.

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Activity answers
paRASLE
NAR DYSPEPSIA NR TE TRUNCATE CT ANSE PESO 0AM STP IAPETLSEE EREOL ASR DS TLDEE SERED EA PELE
2 LIP TES COVEN
- erssoass! re

Activity 1: Agency
The following are some obvious examples, but the list is not exhaustive:
(1) Managers may award themselves large pay rises or benefits in kind (eg expensive company
cars).
(2) Managers may make acquisitions to increase their own status (empire building). If they pay
too much for these acquisitions, shareholders will not benefit.
(3) Managers may not work to their full potential, taking their salary for the minimum effort.
(4) Managers may award contracts to their friends in other companies rather than obtaining the
best value for money from other suppliers.

Activity 2: Poor corporate governance

Features of poor corporate governance:
* Dominance of the Board and company by one individual or a small group
* Excessive remuneration and perks
« Lack of transparency
* In extreme cases, corruption or illegality
Poor corporate governance can lead to reputational damage and sometimes bankruptcy.

Activity 3: Selecting non-executive directors

Problems in selecting and recruiting non-executive directors include the following:
* Are they genuinely independent? They are ultimately appointed by the executive directors.
* Can be hard to recruit, especially if there are strict requirements on experience, eg must have
been a director of a listed company.
* They usually have significant other responsibilities so may have limited time available
* Executives may ignore their views.

Activity 4: Governance issues

The main corporate governance issues are:
(1) Domination by a small group
All the key directors are related which gives them power over the other executives.
(2) Short-term view
Directors’ bonuses are based on short-term sales and have resulted in the manipulation of
accounts to achieve them.
(3) Lack of supervision
The sales force can tie the company into large loss-making contracts without any checks.
There is no authorisation or communication with other departments which means the
company may take on contracts that it cannot fulfil. The company has been hit hard with
bad contracts in the current year.

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=

\ The role of accounting

: APSE
UA ER SESE IED BLAISDELLSBS AUS ONS RAPTOR NEIL EE TAILED IEEE ELD ELD EE ORE DOLE OTN EEEVLE CEPOL LE POLI NE PELE

Learning outcomes
On completion of this chapter you should be able to:

Syllabus
reference no.

Explain the contribution of the accounting function to the formulation, C2 (a)

implementation, and control of the organisation’s policies, procedures, and
peloigranee.

Identify ae oscibe a main Haererel cimemiuina Penecren in Syetiasea: C2 (b)

(a) Recording financial information
(b) Codifying and processing financial information
() Ereparing ATA statements

Ean basic bee! erie ments in einen to Riatine and submitting C3 (a)
eure records and repels and cellars, financial reports.

Explain the Brood consequences of failing to comply with the legal C3 (b)
eae ue for sees eae and JR gee oung records.

Explain how ts Aremmationc| accountancy profession regulates itself C3 (c)

through aie elena of Tp’ standards and their monitoring.

Explain the various ere purposes for which the following financial C4 (a)
information is required.
(a) The statement of profit or loss
(b) The statement of financial position
(c) The statement of cash flows
(d) eke intel and integrated reports

Describe the main purposes of the following types a Ponducient C4 (b)

accounting reports.
(a) Cost schedules
(b) Budgets
(c) Variance reports

Identify an organisation’s system requirements in relation to the objectives C5 (a)

and policies of the organisation.

Describe the main financial systems used within an organisation. C5 (b)

 Syllabus
reference no.

(a) Purchases and sales invoicing

(b) Payroll
(c) Credit control
(d) Cash and working capital management

Explain why it is important to adhere to policies and procedures for C5 (c)

handling clients’ money.

Understand business uses of computers and IT software applications. C5 (9g)

(a) Spreadsheet applications
(b) Database systems
(c) Accounting packages

Describe and compare the relative benefits and limitations of manual and Cs (hi)
automated financial systems that may be used in an organisation.

Exam context
This chapter looks at the role of the accounting function and at the regulatory environment for
financial accounting. The topics covered in this chapter are highly examinable - there were several
questions in the Specimen paper that relate to material covered here.

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Chapter overview
|
ms

HM The role of accounting

4
al
SS

% SEAS ARS NEDORGY EET SEL A

Sassi
TELNET ES

The accounting function Financial systems Accounting systems

Role in the organisation System requirements

External reports Main systems

Internal reports

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 1 The accounting function
1.1 Role in the organisation
1.1.1 Main function
The accounting function is part of the broader business system, and does not operate in isolation.
It handles the financial operations of the organisation, but also provides information and advice
to other departments.
Typically large organisations structure their accounting functions on the lines of:
Figure 9.1: Typical structure of accounting function

Finance director
| (reports to CEO/Board of directors) |

Treasurer | Financial controller | | Management accountant |

(responsible for | | (responsible for | | (responsible for budgets/ |
| cash flow control) |
\
| routine accounting)
\
| cost accounting)

Accounts are produced to aid management in planning, control and decision-making and to
comply with statutory regulations. The accounting department must be adequate to fulfil these
functions. An organisation’s accounting department is affected by the nature of its business
transactions and the sort of business it is. An appropriate accounting department will depend
upon:
* Size of the organisation
* Type of organisation
* Structure of organisation
* Legal jurisdiction of the organisation
The accounting department will provide the basis for financial information used internally and
externally.

1.1.2 Policies and procedures

In any organisation there is a need for order, co-ordination and control to ensure efficiency. To
achieve this, management often implements rules and procedures. For example, there will be
authorisation policies for the purchase of non-current assets, procedures for choosing new
suppliers, procedures for accepting new customers, etc.
Policies and procedures may be grouped in the form of a policy manual, perhaps stored on the
organisation’s computer network for easy reference. Although a policy manual is to be
recommended as a form of control over the activities of employees, care must be taken that strict
adherence to the rules does not create inflexibility.
Many organisations have an internal audit department, which is designed to alleviate the risks of
error and fraud. Internal auditors are employees of the company, but most internal audit
departments aim to retain independence from the other departments. One of the roles of an
internal audit department will be to ensure that staff are complying with the company’s policies
and procedures.

Handling clients’ money

In some industries, the nature of the business means that money is held on behalf of clients.
Examples include:
* Banks
* Fund managers and financial services

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 * Lawyers
* Accountants
There must be strict policies over how client money is held. In particular, the money held by clients
should be held in separate accounts from those of the rest of the business, so that they do not get
confused and should the company itself go bankrupt, then the clients’ money will be safe.
Regulations relating to handling clients’ money are issued by industry regulators - in the UK for
example, the financial services industry is regulated by the Financial Conduct Authority.
Businesses must also comply with regulations relating to money laundering, and are required to
ensure clients are not using the client accounts for money laundering purposes. Money laundering
is described in Chapter 11.
The accounting department will be responsible for monitoring clients’ money.

1.1.4 Performance
An important area of responsibility for the finance department is performance management and
measurement. This involves setting targets for other departments and monitoring their
performance against those targets. An example of this is the budget.

1.2 Financial accounting

Financial accounting is primarily concerned with providing information to external stakeholders,
particularly shareholders. Financial accounting involves:
* Recording transactions in ‘books of prime entry’.
* Analysing and categorising transactions and posting them to the ledgers.
¢ Finally, the transactions are summarised in the financial statements.

ais Essential reading

See Chapter 1 Section 1 of the Essential reading for more detail on what financial accounting
involves.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

1.3 The regulatory system

1.3.1 Requirements
Most countries have laws that require companies to:
* Keep proper accounting records.
* File financial statements with the government’s company registration body (Companies House
in the UK). These financial statements are then available for inspection by members of the
public.
There may be a requirement to have the financial statements audited by an independent
accountant. The role of auditors is discussed in Chapter 10. In the UK, an audit is required for all
companies above a given size, according to criteria related to revenue, value of assets and
number of employees.

if 7 Activity 1: Government’s company registration body

Why is there a requirement for financial statements to be available for inspection by members of
the public? Who might be interested in inspecting the financial statements?

1.3.2 Regulation of unincorporated entities

While most of the regulations above apply only to companies, other forms of business entity are
required to comply with some regulations relating to accounting, eg:

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 of their sales and
* Businesses registered for sales tax (VAT) are required to keep records
expenses to support the numbers in their sales tax returns.
tax returns, and
* Taxpayers are required to maintain records of their income to support their
such returns might include profits of unincorporated businesses.
* Charities may be required to report to charity regulators.

Activity 2: Proper accounting records

What do you think is meant by proper accounting records?

1.3.3 Consequences of failing to comply with regulations

* Companies can be fined for failing to keep proper accounting records or for failing to file the
financial statements with the government’s company registration body on time. If companies
persistently fail to file accounts on time they can be ‘stuck off’ by the company registration
body.
* Inaccurate or late tax returns can lead to audits and investigations by tax authorities, which
can lead to fines and tax penalties.
* The auditors may issue a ‘qualified’ audit opinion, if in their opinion there are any serious
misstatements in the financial statements, or if the company has not kept proper accounting
records.
* Public oversight boards (eg FRC in the UK) review financial statements on a sample basis to
ensure that the accounts comply with relevant regulations. If they do not, the companies may
be required to re issue the accounts.
* Where the company has issued financial statements that are designed to intentionally mislead
the users, the directors are guilty of fraud, which is a criminal activity. They may therefore
face jail or other sanctions.
¢ Directors or officers of companies may be subject to criminal procedures for failing to adhere
to the accounting regulations.
* Ifa listed company fails to publish financial statements within the required deadline (eg four
months after the financial year end in the UK) the company’s listing on the stock market can
be suspended. This means that it will no longer be possible to buy or sell the company’s shares.

1.3.4 Regulation by the accounting profession

While company law sets out the basic accounting requirements that govern companies, detailed
guidance is often provided by the accountancy profession. The accountancy profession is made
up of accountancy bodies such as the ACCA which oversee the activities of their members. The
profession is often independent of the government, although governments do oversee the
activities of the professions to ensure that they are acting in the public interest.
The following regulatory bodies regulate the accountancy profession:
* The International Accounting Standards Board (IASB) is responsible for issuing International
Financial Reporting Standards (IFRS). The IASB is a non-profit organisation whose members
include representatives of accountancy bodies and representatives of users of the financial
statements. IFRS provide detailed guidance on treatment of specific items in the financial
statements - for example IFRS 15 deals with recognition of revenue. IFRS standards have been
adopted in many countries around the world. Within the EU, listed companies must prepare
financial statements in accordance with IFRS.
* The International Federation of Accountants (IFAC) is a global accountancy body. It’s
membership is made up of 170 accounting bodies throughout the world, including ACCA. IFAC
aims to ensure that accountants throughout the world operate to a consistently high standard.
IFAC issues a code of ethics (see Chapter 19) and also issues international auditing standards.
* National accounting standards bodies set accounting standards for use within particular
countries. In the UK, for example, the Financial Reporting Council (FRC) issues accounting

asa
168 Business and technology (FBT/BT) , BPP
 standards for UK companies. It should be noted that these do not apply to listed companies in
the UK, as they must adopt IFRS.
* Stock exchanges set requirements relating to the provision of financial and other information
by companies whose securities are listed on their exchanges. In the US, the Stock Exchange
Commission (SEC) oversees the reporting requirements of all companies listed on US stock
markets.
* Public oversight boards monitor and review the activities of the accounting profession. In some
countries they are government bodies, while in others they are private sector. Examples
include:
- Financial Reporting Review Panel in the UK which reviews published financial statements on
a sample basis, to ensure that they are compliant with relevant accounting standards and
guidance.
- Public Company Accounting oversight board (PCAOB) in the US which oversees the audit of
public (listed) companies. It was set up under the Sarbanes-Oxley Act in the wake of the
Enron scandal.

Financial information

2.1 External reports

External reports are produced primarily for shareholders, but other stakeholders might also be
interested in the information provided. The main reports included in the financial statements are:
* Statement of profit and loss (income statement or profit and loss account)
* Statement of financial position (balance sheet)
* Statement of cash flows
Companies might also prepare other non-financial reports such as sustainability reports or
integrated reports.

2.1.1 Statement of profit and loss

The statement of profit and loss shows the revenue and costs of the business for a particular
period, and the resulting profit.
It aims to show the financial performance of the business for the period. In particular, users will be
interested in how much profit has been generated.

2.1.2 Statement of financial position

The statement of financial position lists the assets and liabilities of the business at a particular
point in time. It also shows the owners’ equity - that is share capital plus retained profits.
The statement of financial position shows two important categories of information:
* How much the company owns - net assets means total assets minus total liabilities. This is
referred to as the financial position of the company.
« Whether or not the business has sufficient cash and other liquid assets to meet its liabilities
when they become due. This is referred to as the liquidity.
Users may also be interested in the return that the business generates on these assets, and may
calculate ratios such as return on capital employed. Such ratios are covered in the financial
accounting exam.

2.1.3 Statement of cash flows

The income and expenses in the statement of profit and loss are recognised in the period to which
they relate (accruals concept) which may not be the same as the date when cash is received and
paid, eg depreciation is recognised as an expense in the profit and loss account each year of the
life of an asset, while the cash is usually paid at the start of the asset's life.

The statement of cash flows provides information about cash received and paid out during a
period.

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iz Activity 3: Shareholders
?
How will shareholders use the information provided in each of the three financial statements

2.1.4 Sustainability and integrated reports

Financial statements have limitations:
* They provide only financial information, so ignore the other impacts that an organisation has
on society.
* They provide only historic information. Users of the accounts are interested in the future
prospects of a business.
Many businesses now provide sustainability reports, which detail how sustainable the business
model is. Refer back to Chapter 2 for information about sustainability.
Integrated reporting is a new approach to corporate reporting, which aims to provide a holistic
view of the performance of an organisation by looking not only at financial performance, but on
the impact the business has on nature and society as a whole. An integrated report aims to be
concise, as there has been much criticism recently about the amount of detail required in
Financial Statements. Integrated Reporting standards are issued by the International Integrated
Reporting Council. Adoption of integrated reporting is mandatory in some countries (eg South
Africa) but voluntary in others.

2.1.5 Management accounting

Management accounting refers to provision of internal financial information to help managers
with the following:
« Planning
* Controlling
* Decision making
Unlike external information, there are no regulations governing the management accounting
information. Typically management accounts may include:
Cost schedules - showing costs incurred categorised into appropriate categories
Budgets - a budget is a financial plan for a period, showing expected revenues and costs.
Variance reports - are produced regularly, showing differences between actual and budgeted
costs and revenues. These aim to identify problems which managers need to focus on solving.
The role of management accounting was discussed in Chapter 7.

3 Financial systems
(SNARE FES ARE ENS SSIES ASANO seibieenmenesaamninememienameene er en
°
aN _lcFinancial
; systems: The people, procedures H
and computing equipment that record all of the i
TERM | sales and expenses of the organisation and provide relevant financial information to
| management and external stakeholders. |
i

3.1 System requirements

The system requirements of a business will depend on several factors:
* Size of the business
* Volume of transactions
* Nature of the business
* Location/ dispersion of the business

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 Effective systems and procedures should ensure that:
* Relationships with customers are effectively managed
* Relationships with suppliers are effectively managed
* Office functions interrelate properly and are not duplicated

Activity 4: Sales systems

tt

Contrast the sales system requirements of a large supermarket group, operating over 100 stores,
with a small food retailer with only one small store.

3.2 Main systems

Businesses come in all shapes and forms. However, there will be a number of types of transaction
which will be common to most businesses.
* Making sales
* Paying employees
* Making purchases
« Purchasing non-current assets
* Paying expenses
This diagram shows, in a simplified form, the flow of funds, documentation and information.
Figure 9.2: Business transactions processing systems

y, \ yf \ Purchase
Wa \“ he \ order
<N Sales f
> < AS Purchasing f >
Ne J $ iN / ‘
Se y,f \ e y hi

\7Z VA ae S

‘(nae a i Sales Purchase ‘ >)

Customers | order order | Suppliers |

| Invoice > i ee Ne invoice | |

/ Receivables », Z Payables ~
Payment \. a"
ledger
beta / ledger / Payment
~

Transaction Vous Transaction

data os \— acata
/ General \—
\. ledger /
‘\ of
fo
Z

|Accounting data
fi

/ Management\
\\. information /
NE system /

\WA

The following sections describe how these systems operate in a typical company.

3.2.1 Sales invoicing

In a retail organisation sales are made on the shop floor. The customer is given an invoice at the
checkout.

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 In manufacturing organisations the system is more complex:
(a) Sales orders are taken by the sales department.
(b) Orders are authorised by credit control department.
(c) Confirmed orders are sent to stores for despatch.
(d) Copies of the order are sent to the accounts department.
(e) When the goods are despatched a despatch note is sent to the accounts department.
(f) The sales ledger team in the accounts department send the invoice to the customer based on
the information in the order and despatch note.
(g) The credit control team monitor the outstanding amounts receivable from customers, and
record cash payments when they are received.

3.2.2 Purchase invoicing

(a) Stores manager/user departments complete a purchase requisition.
(b) Requisitions are authorised by an appropriate manager (eg department manager).
(c) Purchase department selects a supplier and places an order for each approved requisition.
(d) Goods are received - receiving department checks that all goods accepted are matched to
an order.
(e) Copies of satisfied orders are sent to accounts department.
(f) Purchase invoice is received. Purchase ledger department check invoice against appropriate
purchase. order, and record the invoice for payment.
(g) Payment is made on the appropriate date.

3.2.3 Payroll
Large organisations may have a payroll department. Smaller companies may outsource payroll to
an agency. The principles of operating the payroll are:
(a) Human resources department sends details of new employees to payroll department along
with pay methods (monthly, weekly, fixed salary, hourly rate).
(b) For employees on variable remuneration, line managers send details of hours worked weekly
or monthly to the payroll.
(c) For each employee, payroll clerk calculates total gross pay, tax and other deductions, and
net pay.
(d) Payroll is authorised by a senior manager and employees are paid.

3.2.4 Credit control

When sales are made on credit, there is a risk that customers will not pay. This has to be balanced
against the sales that would be lost if credit is refused. This is the job of the credit control
department.
(a) New customers - credit checks are run and a credit limit established for a customer.
(b) When customers place orders, credit control checks that the order would not take the
customer’s balance above their credit limit. If it would then the credit controller will either:
(i) Increase the credit limit (after appropriate checks)
(ii) Block the order until customer has paid outstanding invoices to take the balance back
below the credit limit.
(c) Credit controller monitor the outstanding receivables balances to identify overdue balances.
Collection procedures are put in place to encourage the customer to pay.
(d) Ultimately if a customer refuses to pay an outstanding debt, the company may take legal
action.

Ut}
Essential reading

See Chapter 9 Section 3 of the Essential reading for more detail on financial systems and controls.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

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Accounting systems
Computerised accounting systems
The principles behind computerised accounting are the same as those of manual accounting.
Computerised accounting tends to rely on accounting packages which comprise several modules
(eg sales ledger, purchase ledger).
Manual systems are usually inferior to computerised systems.

Activity 5: Manual accounting systems

What are the disadvantages of a manual accounting system?

Solution

Integrated accounting software

Integrated accounting software has automatic links between separate accounting modules thus
meaning data needs only to be processed once and all files are updated.
Figure 9.3: Integrated accounting systems

Nae)
| Decision |
|support |
system | Va earoet sate ae
| | 2
Rete eet Spreadsheet ae Nominal
(orem | facilities | | ledger
j : } \ } H |
| Executive | oe | module |
information | Na
| system |
\ a ae SS }

ic as ian MT reas po ah « = a ee
|Receivables | | Payables | | Payroll | | Inventory | | Non-current
module | | module | module | module assets
ae } X =|: . y ee P Eke r. Riel Ba es PS RIG LS oe RSs

| Job costing |}|

| module |
Noe — ——

oe cs 9: The role of accounting 173

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 Integrated accounting systems have the following advantages and disadvantages:

One entryupdates others Creer computer rmeme RS

tec sjogele plans Fewer facilities than specialist modules

Users workload is simplified

o) Databases and spreadsheets

5.1 Databases
A database is a ‘pool’ of data that can be used by a variety of people for a variety of
applications:
Figure 9.4; Databases

cnem data |

User queries ad , Be eG =e (Database

base |
management system | i

|
| Application programs
XX

| ee pa = g

Sales applications ree and personnel Staff payroll Other

statistics etc statistics etc analysis etc applications*

The range of applications which make use of a database will vary widely, depending on what
data is held in the database files.
A database allows all of the information within an organisation to be held centrally and accessed
by the different applications that use it. Controls will be in place within the database
management system to ensure that people can only update or amend data that is relevant to
their role, and security controls will mean that the data is only accessible to authorised persons.

No duplication ofeffort/data oe Breakdown especially if complex

rfSortsto Tene updates oe Access- iissues

Soa ee ee ee es —e : = ——— ee “2 = “. j|

Spreadsheets

Spreadsheets: A spreadsheet is essentially an electronic piece of paper divided into rows and
columns with a built-in pencil, eraser and calculator. It provides an easy way of performing
_ numerical calculations.

The intersection of each column and row of a spreadsheet is referred to as a cell. A cell can
contain text, numbers or formulae. Use of a formula means that the cell which contains the
formula will display the results of a calculation based on data in other cells. If the numbers in

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those other cells change, the result displayed in the formula cell will also change accordingly.
With this facility, a spreadsheet is used to create financial models.
Below is a spreadsheet processing budgeted sales figures for three geographical areas for the first
quarter of the year.
Figure 9.5: An example of a spreadsheet

ees
BUDGETED SALES FIGURES
Jan Feb Mar Total
5 £’000 £’000 £000 £000
4 |North xc ae Pe 7,621
south | 6,532 5,826 6,124 18,482
6 |West | 895 432 596 1,923
"| Total e258. 9,259 8,909 28,026
Spreadsheets have many uses, both for accounting and for other purposes. It is perfectly
possible, for example, to create proforma statements of financial position and statements of
comprehensive income on a spreadsheet, or set up the notes for financial accounts, like the non-
current assets note.

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Chapter summary ,

| The role of accounting ©

‘Srunamppasameaes ATES TTY GEL 2 NTT ELEN TI BE LEAT COE Re

ts

The accounting function © _ Financial systems _ Accounting systems :

er | | |
Role in the organisation System requirements * Computerised accounting
* Main function * Size of business systems ;
* Policies and procedures * Volume of transactions * Integrated accounting
* Handling clients’ money + Nature of the business software
+ Performance + Location/dispersion of the - Databases and spreadsheets
* Prepare financial statements business
— File financial statements with l
the registrar of companies
- Sources of regulations Main systems
* Regulation of other entities * Sales invoicing
| ¢ Purchase invoicing
* Payroll
External reports * Credit control
* Statement of profit and loss
* Statement of financial position
* Statement of cash flows
* Sustainability and integrated
reports

Internal reports
* Cost schedules
' + Budgets
¢ Variance reports

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 Knowledge diagnostic

. Role of finance
The finance department handles the financial operations of an organisation. It also provides
information and advice to other departments, ensures adherence to financial policies and
procedures, monitors financial performance and prepares financial statements.

. Regulations
Most countries have regulations that require companies to keep proper accounting records and to
file financial statements with the government company registration body.

. Sources of regulations
Accounting regulations come from several sources, including laws (eg Companies Act),
accounting standards issued by professional bodies, and international financial reporting
standards that may be applicable to listed companies.

. External information
External information comprises a statement of profit and loss, a statement of financial position
and a statement of cashflows. This information might be supplemented by sustainability reports
or integrated reports which aim to provide information about the non-financial impact that an
organisation has.

. Internal information
Internal information is provided to help businesses plan , control and make decisions. Examples
include costs schedules, budgets and variance reports.

. Financial systems
Financial systems aim to record and classify transactions and prepare financial statements. Key
financial systems include sale invoicing, purchase invoicing, payroll and credit control

BPP 9: The role of accounting 177

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Further study guidance !

Question practice
Now try the following from the Further question practice bank [available in the digital edition of
the Workbook]:

pon eon 1a

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pono en whe Dice ce soot ie pan | Smins |

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Activity answers
poeta.
RR - — ae aI aT SEN ES SES I SY na

Activity 1: Government’s company registration body

The requirement to file financial statements is the price that companies pay for their limited
liability status. People who lend money to the company cannot hold the owners of the company
liable for the company’s debts, therefore they need to have information about the company’s
finances before doing business with it. The following members of the public may be interested in
inspecting the financial statements:
* Lenders (eg banks) analyse the financial statements to ensure that the company can afford to
repay their loans
* Suppliers who sell on credit want to know that the company can afford to pay their debts
* Employees want to see how well the company is performing so that they can evaluate their job
security and possibly negotiate higher salaries if the company is performing well.
* Tax authorities want to ensure that the companies are declaring their profits in their tax returns
* Residents living next to the company’s premises might be interested in how well the company is
performing as they want to understand potential social contributions that the company could
make.
Note. Shareholders are not included in the list, as shareholders should be sent copies of a
company’s accounts automatically, so would not have to go to the company registration body to
inspect them.

Activity 2: Proper accounting records

Proper accounting records:
* All transactions should be recorded
* There should be a clear system for coding and classifying the transactions so that the
financial statements and tax returns can be prepared accurately.
« |t should be possible for auditors to verify the balances in the financial statements by
identifying supporting documents such as invoices from suppliers.
* The records should be kept in a safe and secure manner. Many tax authorities are happy for
documents to be stored digitally.
¢ The records should be kept for the number of years specified by tax authorities or other
regulators.

Activity 3: Shareholders
Statement of financial position - shareholders will use this information to look at the value of the
assets that the company holds. They will also be interested in the ability of the company to meet
its liabilities as they become due (the liquidity of the company).
Statement of profit and loss - this will be used to assess the performance of the company.
Shareholders will be interested in how revenues have increased over prior years, and about how
well costs are being controlled. The statement may also be used to make forecasts about future
profits, so that shareholders can decide whether to keep their investment.
purposes as the statement of profit and loss.
Statement of cash flows - this will be used for similar
than the profits made, and some investors
The difference is it shows the cash generated, rather
a business rather than the accounting profits.
are more interested in the cash generating ability of
profitable businesses have gone out of
Cash flow is also an important indicator of liquidity -
business because they used up more cash that they could generate.

Activity 4: Sales systems

The volume of transactions in the large supermarket group means that the supermarket would
need a system that can quickly record sales at the checkouts, using electronic point of sales

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systems, that automatically record each sale by scanning bar codes on the items at the
checkouts. In the small retailer, a manual cash register may be sufficient to record sales (although
most stores these days do use EPOS systems).
In the supermarket, the system will have to deal with a huge number of transactions. It will
therefore have to have the capacity to do this. It will require a network, linking all the checkouts to
a central system that will summarise the daily sales.
In the retailer, no network will be required. Daily sales totals (from the cash register daily reports)
could be entered into an accounting system manually.
The supermarket will need to maintain perpetual inventory records, whereby inventory is updated
each time a sale is made. This will enable the supermarket to ensure inventory is replenished when
needed, and provide useful information to management about trends in sales.
A small retailer will be able to perform manual inventory counts and will notice if any particular
lines of inventory are running low as they will see the empty shelves.

Activity 5: Manual accounting systems

Disadvantages of a manual accounting system:
(1) Lower productivity
(2) Slower processing speeds
(3) Greater risk of errors
(4) Information less accessible
(5) More difficult to make alterations/corrections
(6) Not suitable for large amounts of data
(7) Inconsistent quality of output

180 Business and technology (FBT/BT) - BPP

penn
LE
 ANSE
AEDT OO NS SCREETOCS
Control, security and
BOE
SEEDATS NST EASES PAGES PTY

audit

Learning outcomes
On completion of this chapter you should be able to:

Syllabus Biiieace
re no.

Identify and describe the main audit and assurance roles in C2 ©

business.
(a) Internal audit
(ol Excel peloucit

alan ane main fences Si the iaeernal auctor Saal ie C2 @)

external puciton and how ney differ.

Recommend imoReL TEINS to sioeeunnline WeLES to prevent C5 (e)

error and fraud and to ee overall sae cE

een at Gpiseoiee pene are necessary in relation to C5 (f)

business and IT eulcins and Bice

Explain Peicrncl control apa internal aa Cé (a)

Explain ihe imecrcnes i ene financial sonnel inn Cé (b)

organisation.

Describe the responsibilities of management for internal Cé (c)

financial control.

Describe the features of effective internal financial control Cé (d)

piccec ulesinan organisation: fareutcline authorisation.

Identify and fees the types of miormaton pean enh ane Cé (e)
information systems used by the business organisation for
internal control.

peeerine general and application systems see in ee Cé (f)

bees cloud eennlaig as a capability in accountancy eta C8 (a)

how it creates benefits for the ie elaicetoi

Ein hon Eueuien and artificial Pico (Al) in C8 (b)

accounting systems can affect the role and effectiveness of
accountants.

Describe how the application of big data and data analytics can C8 (c)
improve the effectiveness of accountancy and audit.
 Outline the key features and applications of Blockchain C8 (d)
technology and distributed ledgers in accountancy.

Define cyber security and identify the key risks to data that C8 (e)
cyber-attacks bring.

Identify and describe features for protecting the security of IT C8 (f)

Exam context
In this chapter we move to the main elements of internal control systems that organisations
operate. Controls must be linked to organisational objectives and the main risks that
organisations face. In addition, internal control systems do not just consist of the controls
themselves but also the control environment within which controls operate.
Internal audit is a key part of the control system of larger companies and the external audit
function exists to review controls and report on the financial statements.
Organisations are becoming increasingly reliant on computerised information systems. It is vital
therefore to ensure these systems are secure — to protect the information held on them, to ensure
operations run smoothly, to prevent theft and to ensure compliance with legislation.
Security and legal issues are likely to crop up regularly in the examination. There were three
Section A questions in the specimen exam relating to this chapter. Part of one of the Section B
questions also related to the content covered in this chapter.

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Chapter overview
[cSSS ERR TRB AAO CAB SI LUST LEE AUN TLE RIE 5 SES ESN

Control, security and audit

"Pe AR TRSRILA VERSE SEO OASIS CEERI SS iss SEAS

Internal control Control environment Internal audit and

systems and procedures internal control

Definitions Control environment Objectives of internal audit

Inherent limitations of internal Control procedures Types of audit

control systems

Accountability of internal audit

External | _ Cyber risk, cyber-attack IT systems

audit and cyber security security

What is the difference between Cyber risk

internal and external audit? |

| Cyber-attack
Evaluation of the internal
audit function |

Cyber-security

Building controls — _ Impact of Financial

into an information Technology (Fintech) on
system - accounting systems

Security controls Cloud computing

| and accounting

Integrity controls |
| Other forms of Fintech

Contingency controls

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 1 Internal control systems
1.1 Definitions
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management regarding internal controls and their importance in the entity. The control .

environment encompasses the management style, and corporate culture and values shared by
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Internal control eae include allthe aateee and octeies are by the directors Hae
management of an entity to assist in achieving their objectives. Internal controls may be
incorporated within computerised accounting systems. However, the internal control system
extends beyond those matters which relate directly to the accounting system.
In order for internal controls to function properly, they have to be well directed across the entire
organisation. Managers and staff will be more able (and willing) to implement controls
successfully if it can be demonstrated to them what the objectives of the control systems are,
while objectives provide a yardstick for the board when they come to monitor and assess how
controls have been operating. Staff also need to understand them and what they are trying to
achieve.

Activity 1: Purposes of internal control

What are the purposes of controls in an organisation?

A suitable framework for controls (such as the FRC Guidance on Risk management, Internal
Control and related Financial and Business Reporting) would consist of information and
communication processes, as well as monitoring their continuing effectiveness via measures
such as internal audit which we shall discuss later in this chapter.

1.2 Inherent limitations of internal control systems

There are inherent limitations of an internal control system. A sound system of internal control
can only provide the directors with reasonable assurance that their objectives are reached and
may simply reduce, but not eliminate, the possibilities of:
* poorly judged decisions
* fraud
* human error
* deliberate circumvention of controls
* management override of controls
* unforeseeable circumstances.
Systems will provide reasonable (not absolute) assurance that the company will not be hindered
in achieving its business objectives and in the orderly and legitimate conduct of its business but
will not provide certain protection against all possible problems. The costs associated with certain
controls may outweigh the benefits they deliver, which can also make controls less effective.

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 2 Control environment and procedures
We explained earlier that internal control systems can be split into
* The control environment
* Control procedures

eet Control environment

The following are elements of a strong control environment.
* Clear strategies for dealing with the significant risks that have been identified
The company’s culture, code of conduct, human resource policies and performance reward
systems supporting the business objectives and risk management and internal control systems
* Senior management demonstrating values through its actions and policies commitment to
competence, integrity and fostering a climate of trust within the company
* Clear definition of authority, responsibility and accountability so that decisions are made and
actions are taken by the appropriate people
* Communication to employees of what is expected of them and scope of their freedom to act
* People in the company having the knowledge, skills and tools to support the achievements of
the organisation’s objectives and to manage effectively its risks
However, a strong control environment does not, by itself, ensure the effectiveness of the overall
internal control system although it will have a major influence on it.
The control environment will have a major impact on the establishment of business objectives, the
structuring of business activities and dealing with risks.

2.2 Control procedures

You may find control procedures classified in different ways; these are considered below.
Classification of controls can be important because different classifications of control are tested
in different ways.

| Administration | These are concerned with achieving the objectives of the organisation and
| with implementing policies. These controls relate to channels of
| communication and per (OS ee Side cs
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include bank reconciliations and physical checks of inventory against
| PDMS records.

Comect These are désioned to minimise or Poca ate atfect aherrors.ae example
would be a back-up of computer input at the end of the day.

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4,
Essential reading

There are other classifications in Chapter 10 Section 1 of the Essential reading.

The Essential reading is available as an Appendix of the digital edition of the Workbook.

A useful framework for effective financial control procedures is (SPAMSOAP):

Segregation of duties - for example, the chair/chief executive roles should be split
Physical - these are measures to secure the safe custody of assets
Authorisation and approval - all transactions should require authorisation or approval by an
appropriate responsible person; limits for the authorisations should be specified
Management - provide control through analysis/review of accounts, such as variance analysis
Supervision - ensures everyone is aware of work checks, reducing the risk of falsification or errors
Organisation - by identifying reporting lines, levels of authority and responsibility, this ensures
everyone is aware of their control (and other) responsibilities
Arithmetical and accounting - such as reconciliations and the use of trial balances
Personnel - attention should be given to selection, training and qualifications of personnel, as well
as personal qualities; the quality of any system is dependent on the competence and integrity of
those who carry out control operations
Internal controls should not be confused with internal checks, which have a more restricted
definition.
PCE LETS SSR ESM BEATE SE IFS PSE RESEND ENDED A RI BRT ETE OEE SET METER RECT PAR MA SO SY SEE SER

Internal checks: Scrutiny of day-to-day transactions whereby the work of one person is proved |
|— independently or is complementary to the work of another, the object being the prevention or
pve!
early detection of errors and fraud. It includes matters such as the delegation and allocation
of authority and the division of work, the method of recording transactions and the use of
independently-ascertained totals, against which a large number of individual items can be
proved.
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Essential reading

You can read more about internal checks in Chapter 10 Section 2 of Essential reading.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

Activity 2: Characteristics of internal control

What are the characteristics of a good internal control system?

Solution

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 3 Internal audit and internal control
Internal audit is one part of an organisation’s internal control system but it plays a unique role.
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41
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i of an entity’s operations and management.
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3.1 Objectives of internal audit

The internal audit department should seek to add value and monitor all aspects (not just
accounting) of the business. Their work may cover the following broad areas:
(a) Review systems of accounting and internal control for both financial and non-financial
controls (this includes reviewing the design of the systems, monitoring the operation of the
systems by risk assessment and detailed testing and recommending cost-effective
improvements)
(b) Examination of information — both financial and operating, including detailed testing of
transactions, balances and procedures
(c) Review of the economy, efficiency and effectiveness of operations
(d) Review of compliance with laws, regulations and other external requirements and with
internal policies and directives
(e) Review of safeguarding of assets
(f) Review of implementation and communication of corporate objectives
(g) Identification of significant business risks, monitoring overall risk management policy and
monitoring risk management strategies for effectiveness
(h) Special investigations into particular areas, for example suspected fraud or how well the
business complies with social and/or environmental matters.
Internal auditors’ work on risk management is crucial to the way the organisation counters risk
and forms part of the overall risk management procedures in place. The areas that auditors will
concentrate on will depend on the scope and priority of the assignment and the risks identified.
Where the risk management framework is insufficient, auditors will have to rely on their own risk
assessment and will focus on recommending an appropriate framework. Where a framework for
risk management and control is embedded in operations, auditors will aim to use management
assessment of risks and concentrate on auditing the risk management processes.
There are two key features of any internal audit function that are central to them achieving their
objectives:
* Independence — Although an internal audit department is part of an organisation, it should
still be independent of the line management whose sphere of authority it may audit.
« Appraisal — Internal audit is concerned with the appraisal of work done by other people in the
organisation, and internal auditors should not carry out any of that work themselves.

3.2 Types of audit

Internal auditors can get involved in virtually anything that the organisation requires them to do.
This could involve a review of social or environmental activity of both employers and employees,
as well as performing certain investigations.
However, there are three specific types of audit that you do need to be aware of.

3.2.1 Operational audits

This type of audit monitors management's performance and is sometimes known as
‘management’, ‘efficiency’ or ‘value for money’ audit.

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3.2.2 Systems audits
Systems audits test and evaluate internal controls. Typically, there are two types of test:
* Compliance testing: evidence that the internal controls are being applied as prescribed
* Substantive testing: are there any errors or omissions from specific transactions?
lf compliance tests reveal that internal controls are working satisfactorily then the amount of
substantive testing can be reduced, and the internal auditor can concentrate the audit effort on
those areas where controls do not exist or are not working satisfactorily.

Real life example

Suppose a department within a company processes travel claims which are eventually paid and
recorded on the general ledger.
When conducting compliance tests, the internal auditor is looking at the controls in the travel
claim section to see if they are working properly. This is not the same as looking at the travel
claims themselves. For example, one of the internal controls might be that a clerk checks the
addition on the travel claim and initials a box to say that they have done so. If they fail to perform
this arithmetic check, then there has been a control failure — regardless of whether the travel
claim had, in fact, been added up correctly or incorrectly.
When conducting substantive tests, the internal auditor is examining figures which they have
extracted directly from the company’s financial records. For this sort of test, the auditor is
concerned only with establishing whether or not the figure in the ledger is correct. They are not
concerned as to how it got there.

3.2.3 Transactions audits

A transactions audit aims to detect fraud within an accounting system’s records and uses only
substantive tests. Sometimes the term ‘probity’ is used to describe the need for honesty in this
context, meaning that internal auditors are looking for instances of records that are not a fair
reflection of what has actually happened.

3.3 Accountability of internal audit

Ideally the internal audit department should report to the audit committee of the board of
directors as it is then free to access all parts of the organisation and report on all levels of
management which ensures that its recommendations are implemented. (The role of the audit
committee was discussed in Chapter 8)
The UK Corporate Governance Code (FRC, 2018) states that companies without an internal audit
function should provide an explanation for the absence, describe how internal assurance is
achieved, and how this affects the work of external audit.
The need for internal audit will depend on:
* The scale, diversity and complexity of the company’s activities
* The number of employees
* Cost-benefit considerations
* Changes in the organisational structures, reporting processes or underlying information
systems
* Changes in key risks
* Problems with internal control systems
* An increased number of unexplained or unacceptable events
Given an acceptable line of responsibility and clear terms of authority, it is vital that the internal
auditor is and is seen to be independent. Internal audit requires a highly professional approach
which is objective, detached and honest. Independence is a fundamental concept of auditing and
this applies just as much to the internal auditor as to the external auditor, The internal auditor

188 Business and technology (FBT/BT)

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 should not install new procedures or systems; neither should they engage in any activity which
they would normally appraise, as this might compromise their independence.

Essential reading

In Chapter 10 Section 3 of Essential reading, you will find an activity which tests how well you
have understood the role that internal audit plays in an internal control system.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

External audit
Orr nr eR TAT SO ET NNN TSP PAE SSS ON OE I A IES

External ones Meee

A examination of the books Bee account and records of an entity
carried out by an independent third party (the auditor) to ensure that they have been properly
maintained, are accurate and comply with established concepts, principles, accounting
standards and legal requirements and give a true and fair view of the financial state of the
enh.
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The primary purpose of an external oudit iis to review the Bseitheand rebar in order to give a
professional opinion on whether the financial statements represent a true and fair view of the
organisation. It is usually a legal requirement and for listed companies, an essential part of
complying with the stock market’s regulations.

1 What is the difference between internal and external audit?

The key differences between internal and external audit are:
| | ame ]

| Internal | External

| Reason |Add value and improve | Express an opinion on the financial

|estes Ss operations statements

|Reporting to |"Board of directors (or similar, | Shareholders or members of the

L || such as an audit committee) | company

Work relating t
to | Operations of the See uion _ Financial statements
—— | eto :

Peclatauenia ine | Employees of the company | Independent of the company and its
|company (an be outsourcedseca) / management

The table above shows that whilst some of the work may be similar, the whole basis and reasoning
for their work is fundamentally different. This is emphasised by the difference in objectives with
internal audit having a much wider scope than the narrow ‘true and fair view’ that external
auditors are responsible for providing an opinion on
There should be co-ordination between the external and internal auditors to ensure that
duplication of work is minimised and controls enhanced. This can be achieved via meetings and
shared access to testing techniques and working papers.

4.2 Evaluation of the internal audit function

lf external auditors can rely to an extent on the work of the internal audit department they will
have to do less testing themselves. To make this judgement they will consider:
* Organisational status - Internal audit’s specific status in the organisation and the effect this
has on its ability to be objective
* Scope of internal audit functions - The nature and extent of the assignments which internal
audit performs and whether management and the directors act on internal audit
recommendations

10: Control, security and audit 189

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 * Technical competence - Whether internal audit work is performed by persons having
adequate technical training and proficiency
- Due professional care - Whether internal audit work is properly planned, supervised, reviewed
and documented
for
In relation to audited financial statements, the Financial Reporting Review Panel is responsible
monitoring the use of accounting standards in published financial statements and for examining
and questioning the departure from accounting standards by large companies.

Cyber risk, cyber-attacks and cyber security

— 22 oN IOS BST ANSEL LOST SEDI BENT LIE LEE DOSS

| Cyber risk: This is a term that covers a number of organisational risks which are possible
consequences of a cyber-attack. i

_ Cyber-attacks: Deliberate attempts to damage an organisation by using the Internet to take

| advantage of poor security controls and system integrity. i
{ Cyber security: The protection of computer systems from the risk of cyber-attack through the
| use of hardware and software security procedures and controls.
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5.1 Cuber risk

Cyber risk factors could include the following:
* Financial losses (including fines from non-compliance with relevant laws and regulations)
* Reputational damage (including loss of custom)
* Operational disruption (such as simply being unable to trade online)

5.2 Cyber-attacks
These can include the following:
* Phishing — The cyber-attacker sends emails to the victim which appear to be from a trusted
source, for example a bank, leading the victim to divulge sensitive information under false
pretences.
* Pharming — The cyber-attacker targets an organisation’s website by automatically redirecting
visitors from the organisation’s website to a bogus website and collecting their data without
their knowledge or approval.
* Hacking — The cyber-attacker uses specialist software and other tools to gain unauthorised
access to an organisation’s computer system, either to obtain data or to stop the system
working altogether.
* Distributed Denial of Service (DDoS) attack — The cyber-attacker attempts to disrupt an
organisation's online activities by preventing people from accessing the organisation’s website.
Botnets (large numbers of individual computers which have been taken over without the user
knowing) are instructed to overwhelm the organisation’s website with a wave of internet traffic
so that the system is unable to handle it and may cause it to crash.
* Webcam manager — The cyber-attacker uses software to take control of the user’s webcam.
* File hijacker/ransomware — The cyber-attacker gains access to the user’s system to hijack
their files and hold them to ransom.
* Keylogging — The cyber-attacker plants software onto the user’s computer to record what the
user types onto their keyboard. The objective is to learn passwords and user details to gain
access to confidential information.
* Screenshot manager — The cyber-attacker obtains information from the victim by installing
software onto the user’s computer to enable screenshots of the user’s computer screen to be
taken. Like other cyber-attacks, the purpose can be to steal information, funds, or may even
be to perform corporate espionage.
* Ad clicker — The cyber-attacker directs the victim’s computer to a bogus website by
encouraging them to click on a specific link contained in online advertising.

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5.3 Cyber security
This is the protection of computer systems from the risk of cyber-attack through the use of
hardware and software security procedures and controls. Common cyber security measures
include:

|Cyber security method Description

_ Access control _ These are physical and network procedures to

restrict access to a system.

| Boundary firewalls and internet gateways Firewalls and internet gateways are software
| _ protection that intercept data being
_ transmitted in and out of a system.

| Malware and virus protection Malware protection software prevents

|
_ installation and removes suspicious programs
|
(such as Trojans) and viruses from a system.

, Patch management This is a system procedure rather than a

| _ hardware or software solution (sometimes
known as a ‘bug-fix’). The organisation should
_ ensure that the latest software updates are
}
| installed on the system when available.

| Secure configuration | The organisation should have a policy which

| states that systems should be set up with
cyber security as a priority.

[
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| PER performance objective PO4 requires you to contribute to the effective governance of an
i_ organisation and raise awareness of risk. The material covered in this chapter will help you oe
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| achieve this.
|
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These cyber controls also highlight the need for a broader selection of IT system controls.

IT systems security

Activity 3: Threats to systems and data

Suggest some physical environmental threats to IT systems and data.

Solution

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It is important that IT systems are secure and protect the data and information that they process
and store. Security refers to technical issues related to the computer system, psychological and
behavioural factors in the organisation and its employees, and protection against the
unpredictable occurrences of the natural world. Security can be categorised as follows:
* Prevention. It is in practice impossible to prevent all threats cost effectively.
* Detection. Detection techniques are often combined with prevention techniques: a log can be
maintained of unauthorised attempts to gain access to a computer system.
* Deterrence. As an example, computer misuse by personnel can be made grounds for
disciplinary action.
* Recovery procedures. If the threat occurs, its consequences can be contained (for example
checkpoint programs).
* Correction procedures. These ensure the vulnerability is dealt with (for example, by instituting
stricter controls).
* Threat avoidance. This might mean changing the design of the system.
Physical access controls seek to prevent intruders accessing the IT system and include:
* Security and other staff who can act as ‘gatekeepers’
* Door locks
* Keypad or card entry systems (being able to detect someone's identity from their biometrics is
ideal, but that can be very expensive)
e Intruder alarms

Computer theft is an increasing problem as equipment becomes smaller and more portable.
Whilst the loss of the physical asset is a concern, the loss of the data stored on the computer may
cause a bigger problem.

Activity 4: Security measures (1)

You are the chief accountant at your company. Your department, located in an open-plan office,
has five networked desktop PCs and three laser printers.
You have just read an article suggesting that the best form of security is to lock hardware away in
fireproof cabinets, but you feel that this is impracticable.

Required
Recommend alternative security measures which you could adopt to protect the hardware in your
department.
NT A a EE ECE

Building controls into an information system

Controls can be built into an IT system and they can be classified as follows:
Figure 10.1: IT Controls

ef
| Security |
|
_ Integrity
2
| Contingency

| existto | | exist to ensure conformity | | exist to recover the

|} prevent risk
.
|| !
|
.
of systems operation
i
|
|
| system in the event |
|

—- _ | to the design specification | | of asystems failure |

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 7.1 Security controls

( Activity 5: Security measures (2)

Give an example for each of the security risks given below and suggest a suitable control.

_ Risk Example | Control!

Human error

| Malfunctioning hardware or
_ software

|Natural disasters

|Deliberate actions

"Commercial Bepionage

uleheene dene }

"Industrial action

7.2 Integrity Controls

7.2.1 Input controls
These ensure the accuracy, completeness and validity of input data by:
* Data verification — ensure the data is correct eg checking a password is correct, or a date is
the correct date by asking a manager
* Data validation — ensures the data is reasonable by means of a variety of techniques: the
number of characters in a password, an agreed batch total or a limit on the acceptable range
of values that can be entered

7.2.2 Data processing controls

These also exist to ensure accuracy and completeness but focus on the processing of data once
it has been input.
Outputs are verified by the following:
¢ Investigation and follow-up of error reports and exception reports
* Batch controls to ensure all items processed and returned
* Controls over distribution/copying of output

7.2.3 Back-up controls

These aim to maintain system and data integrity by ensuring that the most recent copy of the
data can be recorded and restored in the event of loss or corruption to the primary storage media.
A well planned back up and archive strategy should include:
- Off-site storage and back up (including in the cloud)
* Regular back up of critical data
* Archiving plans (the process of moving data from primary storage, such as a hard disk, to tape
or other portable media for long-term storage)
+ Disaster recovery plans (we will discuss this next in relation to contingency controls)
* Regular testing to verify back up data can be successfully restored

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7.2.4 Administrative controls
These should include the following:
* Careful personnel selection for senior IT roles
* Segregation of duties for other IT roles
* Passwords: Virtually all computer installations use passwords. Failed access attempts may be
logged. Passwords are not fool proof.
* Standard system passwords (such as 1234 or 0000) when a device or user is first active must
be changed to something that cannot be guessed.
* Passwords must never be divulged to others and must never be written down.
* Passwords must be changed regularly — and changed immediately if it is suspected that the
password is known by others.
* Obvious passwords must not be used.
Other higher-level passwords are used by administrators to control access rights for the reading,
modifying and deleting functions.
To keep track of how controls evolve over time, an audit trail may be used.
a aeeeeneeeeeenenmeenene |

Audit trail: A record showing who has accessed a computer system and what operations they
have performed.
Audit trails are useful both for maintaining security and for recovering lost transactions.
| Accounting systems include an audit trail component that is able to be output as a report.
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4,
Essential reading

Chapter 10 Section 4 of the Essential reading covers various systems integrity issues for PCs and
networks that you should be familiar with.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

7.3 Contingency Controls

Contingency controls include the creation of a disaster recovery plan to ensure that the system
recovers as fully and as soon as possible in the event of a disaster.
Disaster recoveryplans provide for:
(a) Standby procedures so that some operations can be performed while normal services are
disrupted
(b) Recovery procedures once the cause of the breakdown has been discovered or corrected
(c) Personnel management policies to ensure that (a) and (b) above are implemented properly
A disaster recovery plan must cover all activities, from the initial response to a ‘disaster’ through
to damage limitation and full recovery.
Responsibilities must be clearly spelt out for all tasks.

Impact of Financial Technology (Fintech) on accounting

systems
Cloud computing and accounting, automation, artificial intelligence, big data, data analytics,
Blockchain and distributed ledger technology have all impacted on accounting systems and the
work of accountants and auditors.
They are often referred to using the term financial technology or Fintech.

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 8.1 Cloud computing and accounting
P SS nes nee
Qo | Cloud computing: This involves the provision of computing as a consumable service instead of |
TERM a purchased product. It enables system information and software to be accessed by
computers remotely as a utility through the Internet.
Cloud accounting: The provision of accountancy software through the cloud. Users loginto |
the accountancy software to process financial transactions and produce management reports |
in the same way as if the software was installed on their own machine.
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A cloud service can be private or public. A public cloud sells services to anyone on the Internet.
(such as Amazon Web Services and Dropbox). A private cloud is a proprietary network or a data
centre that supplies hosted services to a limited number of people. When a service provider uses
public cloud resources to create their private cloud, the result is called a virtual private cloud.
Private or public, the goal of cloud computing is to provide easy, scalable access to computing
resources and IT services. In the UK, Sage, Quickbooks and Xero (as well as others) provide cloud
accounting services.
The benefits of cloud accounting include:
* System data is automatically refreshed and kept up-to-date.
* Data is made is available to multiple users simultaneously and globally.
* System errors and inconsistencies are eliminated as only one set of data is held
+ Data is stored in one offsite location and users simply access the information when required
(plus there is no need to transmit the data between users over the internet or by USB stick,
increasing data security).
* Multiple users mean key people can access financial and customer details easily.
* Reduces the cost and complexity of keeping backups of the data as this is done by the cloud
service provider.
* Reduces the cost and time involved in upgrading the software.
* |Improves support as the service provider can access the user’s information to help resolve
issues.
Despite these benefits, cloud accounting does increase the risk of cyber-attacks and therefore the
loss of, or damage to data. Users are reliant on cyber security and back-ups being taken by the
service provider. There is also a need for organisations to ensure subscriptions and corporate
accounts for cloud services are kept up-to-date because there have been instances of data loss
where organisations have failed to pay for the service or update payment details which have
changed and this has led to services to be withdrawn and data deleted.
Developments in cloud accounting technology have increased the need for staff training in
accountancy firms to use the new systems. It has also created a need for new guidance and
procedures on using cloud-based infrastructures to be created and for new infrastructures to be
developed to make best use of cloud-based systems.

8.2 Other forms of Fintech

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Automation: The ability of systems to perform routine activities and processing of data
aa i without the input of a human.
| Artificial intelligence: Also known as Al, this is the ability of a computer system to assist a
| human operator to make business decisions or help solve problems.
| Big data: Sets of data of such size that traditional databases are unable to store, manage or
analyse them.
Data analytics: The collection, management and analysis of large data sets (such as big
data) with the objective of discovering useful information, such as customer buying patterns,
that an organisation can use for decision making.
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» Distributed ledger technology (Blockchain): Technology that allows organisations and
naividuals whe are unconnected to share an agreed record of events, such as ownership of an
2 .

asset,

Distributed ledger technology (also Known as Blockchain) is a technology that eliminates the
need for date and information to be stored and managed centrally.
Furthermore, this technology allows an accurate, up-to-date, single, trusted and transparent
record to be shared between numerous organisations. The concept of Blockchain is best explained
through its practical uses,

Real life example

The diamond industry uses a Bloekchain system named Everledger to help prevent fraud and the
transfer of stolem goods. All diamonds have unique characteristics (similar to how humans have
eividua! fingerprints). The Everledger system creates an identity for every diamond by recording
these unique characteristics. Every time a diamond is bought or sold, the sale is recorded by the
system on the Blockehain so that the diamond’s ownership can be traced.
Another example is in relation to the eryptocurrency Bitcoin. Bitcoins are created by individuals or
organisations processing data and solving problems (known as mining).
Onee mined, Biteoins become the property of the miner and can be traded or transferred. Every
transaction is recorded en a Blockchain. The Blockchain stores the transaction history of all
Bteoins, enabling the assurance that only legitimate owners of Bitcoins can spend or transfer
them,

tt also prevents Bitcoins being copied or being illegally generated.

For accountants and auditors, distributed ledgers and Blockchains allow for increased clarity
and transparency in the recording of business transactions.
This is because transactions can alse be posted to a public ledger on a Blockchain. This extra
Information means that there are more resources available for business planning and valuation,
especially in relation te measuring the value of assets (since transactions concerning assets will
have an indelible record).
Distributed ledgers also reduce the need for auditors to audit transactions and verify the
ownership of assets because they have a source of information about the assets that they can
Brust

Essential reading

or further information on all these types of Fintech, you should read Chapter 10 Section 5 of
Essential reading.
The Essential reading Is available as an Appendix of the digital edition of the Workbook.

Activity 6: Fintech
ee

=xoiain (Gn provide examples) of how the various types of Fintech listed below might improve the
effectiveness of the work undertaken by accountants and auditors.

Explanation
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7 and technology (FBT/BT)
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Type of Fintech Explanation
Artificial intelligence

Big data and data analytics

+ a
Distributed ledger technology

10: Control, security and audit 197

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Chapter summary
A ROLRO
SLED PALA HME LAL NALS A TL SO ER

Control, security and audit aS

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BALTES TATE
ELE EI I Saal

Internal control . Control environment Internal audit and

systems and procedures internal control

I
Definitions Control environment Objectives of internal audit
Consists of control * Clear demonstration of + Independent appraisal activity
environment and control leadership through strategies for evaluating adequacy and
procedures adopted effectiveness of controls
° Policies and procedures ' « Demonstrated by culture « Reviewing systems, including
adopted by the directors and ¢ Values including authority, their economy, efficiency and
management responsibility and effectiveness
Purpose is to achieve objectives accountability * Reviews for compliance,
and comply with laws and * Communication of key safeguarding assets, risks and
regulations expectations from other investigations
Purpose is also to safeguard management * Work includes independence
assets and allow quality and appraisal
internal and external reporting |
Assists with risk management Control procedures |
* Administration Types of audit
* Accounting * Operational audits (sometimes
Inherent limitations of internal * Prevent known as 'management',
control systems + Detect ‘efficiency’ or 'value for money’
Poorly judged decisions * Correct audits)
Fraud and error « Internal checks * Systems audits testing controls
Management override * For financial control via compliance and
Unforeseen events procedures, use SPAMSOAP: substantive testing
Cannot provide absolute levels — Segregation of duties * Transactions audits of items in
of assurance, only reasonable — Physical the accounts (not controls)
assurance — Authorisation and approval
— Management
— Supervision Accountability of internal audit
— Organisation * Internal audit accountable to
— Arithmetic and accounting management and/or audit
— Personnel committee
* Need for internal audit
depends on organisational
factors such as size,
complexity, change and risk
* Independence is fundamental

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 External Cyber risk, cyber-attack IT systems
audit and cyber security security

What is the difference between Cyber risk Threats can include fire, flood,
internal and external audit? adverse weather conditions,
Financial losses (including fines
* External audit only responsible from non-compliance with terrorism and even just
for true and fair opinion relevant laws and regulations) accidents
(internal audit could be asked Reputational damage Security procedures can
to do anything) (including loss of custom) include prevent/detect/correct
¢ External audit reports to Operational disruption (such controls, as well as deterrence,
shareholders (internal audit as simply being unable to recovery and threat avoidance
report to either board or audit trade online) Physical access controls can
committee) also be used (security staff,
+ External audit focuses on the locked doors and intruder
- financial statements (internal Cyber-attack alarms)
audit focus is anywhere) Phishing (gaining access to
¢ External audit must be data via false pretences)
independent of the company Pharming (collecting data by
(internal audit is usually redirecting users to a bogus
employed by the company) website)
Hacking (illegally accessing
data)
Evaluation of the internal audit Distributed denial of service
function (DDoS) attack (deliberately
* Organisational status flooding a website with more
* Scope and authority of the traffic than it can handle to
internal audit function put it out of business)
* Technical competence Webcam manager (taking
+ Due professional care control of a webcam to access
(planning, supervision, review) images)
File hijacker/ransomware
(withholding access to files
unless a ransom is paid)
Keylogging (tracking keyboard
entries to attempt to identify
passwords)
Screenshot manager (used as
a form of espionage to steal
data and other information)
Ad clicker (directing users to a
bogus website)

Cyber-security
e Access controls to block
network access
Firewalls and gateways to act
as protective boundaries
Malware and virus protection
Patch management (‘bug
fixes')
Secure configuration policy

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 Building controls Impact of Financial
into an information Technology (Fintech) on
system accounting systems —

Security controls Cloud computing and

* Monitoring and anti-virus accounting
software, control systems, Cloud computing allows IT
segregation of duties and services to be accessed via the
back-ups internet rather than onsite
Cloud accounting uses
, | cloud-based financial systems
Integrity controls to record and process
Input controls to verify and transactions and other activity
validate data as it is being
e Significant cost savings from
input using the cloud BUT there is a
Processing controls to ensure risk of using a third party for
data is accurate and complete sensitive data
Output controls (such as error
and exception reporting)
Back-up controls to protect Other forms of Fintech
from data getting lost ° Automation refers to the ability
Administrative controls such as of systems to perform routine
passwords, segregation of activities and processing of
duties and the appointment of data without the input of a
appropriate management human
Artificial intelligence refers to
the ability of a computer
Contingency controls system to make business
* Standby procedures in the decisions or help solve
event of disruption problems
¢ Recovery procedures to restore
e Big data describes sets of data
data and systems of such size that traditional
* Personnel management to databases are unable to store,
enable these controls to work manage or analyse them
effectively Data analytics is the
* Disaster recovery plans collection, management and
analysis of large data sets
(such as big data) with the
objective of discovering useful
information
Distributed ledger technology
(Blockchain) allows
unconnected individuals and
organisations to share an
agreed record of events

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 Knowledge diagnostic
REDE TIS ENETEI SSMS IAL
OTR SND ORE A St SRE NIH IG BASE RE RE LIME PERIL DE
SEEN
DS REID SE ELE IDOE IE APES

. Internal controls
Internal controls should help organisations counter risks, maintain the quality of reporting and
comply with laws and regulations. They provide reasonable assurance that the organisations will
fulfil their objectives and consist of the control environment and control procedures.

. Control environment

The control environment is influenced by management’s attitude towards control, the

organisational structure and the values and abilities of employees.

. Control procedures
Control procedures can be classified in various ways including administrative and accounting;
prevent, detect and correct; discretionary and non-discretionary; voluntary and mandated;
manual and automated. The mnemonic SPAMSOAP can be used to remember the main types of
control.

. Internal audit
The role of internal audit will vary according to the organisation’s objectives but is likely to include
review of internal control systems, risk management, legal compliance and value for money.
Internal auditors are employees of the organisation whose work is designed to add value and
who report to the audit committee.

. External audit
External auditors are from accountancy firms and their role is to report on the financial
statements to shareholders.

. IT security
Security, in information management terms, means the protection of data from accidental or
deliberate threats which might cause unauthorised modification, disclosure or destruction of
data, and the protection of the information system from the degradation or non-availability of
services.

. Fintech
Cloud computing and accounting, automation, artificial intelligence, big data, data analytics,
Blockchain and distributed ledger technology have ali impacted on accounting systems and the
work of accountants and auditors. They are examples of financial technology.

BPP
Y LEARNING 10: Control, security and audit 201
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Further study guidance :
DReACOTSNSOAETINSTE
AOS

Question practice
Now try the following from the Further question practice bank [available in the digital edition of
the Workbook]: EN

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Cer Co eal: Se Cel
Ce co e Ec
Further reading
There is an article on the ACCA website entitled ‘Internal controls’ that is relevant to material in
this chapter.

Own research
Try and get hold of a set of audited financial statements (they are usually available on a
company’s website under headings such as ‘Investors’ or ‘“Governance’) and find the independent
auditor’s report to understand what the external auditor is responsible for creating.
If your organisation has an internal audit department, try and obtain some of its reports to see
exactly what they have been involved in.
Cyber security is aften in the news so stay alert to stories which focus on this evolving topic.
For a deeper insight into one aspect of Fintech, try listening to the podcast The Missing
Cryptoqueen which follows the real-life story of a new cryptocurrency and its enigmatic founder.

202 Business and technology (FBT/BT) > tae

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Activity answers
SOOT EOC: score a3 LTT SA STAT SS TIO EET SEES — - . 2 —_ =

Activity 1: Purposes of internal control

Purposes of controls:
* Facilitate the business's effective and efficient operation and achieve its objectives
* Respond appropriately to significant business, operational, financial, compliance and other
risks
* Safeguarding of assets from inappropriate use or from loss and fraud
* Help ensure the quality of internal and external reporting, requiring the maintenance of
proper records and processes that generate a flow of timely, relevant and reliable
information from within the organisation and from external sources
* Help ensure compliance with applicable lawsand regulations
* Guide behaviour
* Highlight inconsistencies

Activity 2: Characteristics of internal contro!

A clearly defined organisation structure:
(1) Different operations must be separated into appropriate divisions and subdivisions.
(2) Officers must be appointed to assume responsibility for each division.
(3) Clear lines of responsibility must exist between each division and subdivision and the board.
(4) There must be overall co-ordination of the company’s activities (through corporate
planning).
Adequate internal checks:
(1) Separation of duties for authorising a transaction, custody of the assets obtained by means
of the transaction and recording the transaction.
(2) ‘Proof measures’ such as contro! totals, pre-lists and bank reconciliations should be used.
Acknowledgement of work done: persons who carry out a particular job should acknowledge their
work by means of signatures, initials, rubber stamps, and so on
Protective devices for physical security:
Formal documents should acknowledge the transfer of responsibility for goods. When goods are
received, a goods-received note should be used to acknowledge receipt by the storekeeper.
Pre-review: the authorisation of a transaction (for example a cash payment, or the purchase of an
asset) should not be given by the person responsible without first checking that all the proper
procedures have been carried out
A clearly defined system for authorising transactions within specified spending limits:
Post-review: completed transactions should be reviewed after they have happened; for example,
monthly statements of account from suppliers should be checked against the purchase ledger
accounts of those suppliers.
There should be authorisation, custody and re-ordering procedures.
(1) Funds and property of the company should be kept under proper custody. Access to assets
(either direct or by documentation) should be limited to authorised personnel.
(2) Expenditure should only be incurred after authorisation and all expenditures are properly
accounted for.
(3) All revenue must be properly accounted for and received in due course.
Personnel should have the capabilities and qualifications necessary to carry out their
responsibilities properly.

ts 10: Control, security and audit 203

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 and to
An internal audit department should be able to verify that the control system is working
review the system to ensure that it is still appropria te for current circumsta nces.

Activity 3: Threats to systems and data

Fire
Fire is the most serious hazard to computer systems. Destruction of data can be even more costly
than the destruction of hardware.
A fire safety plan is an essential feature of security procedures in order to prevent fire, detect fire
and put out the fire.
Water
Water is a serious hazard. Flooding and water damage are often encountered following
firefighting activities elsewhere in a building.
This problem can be countered by the use of waterproof ceilings and floors together with the
provision of adequate drainage.
Weather
Wind, rain and storms can all cause substantial damage to buildings. In certain areas the risks
are greater, for example the risk of typhoons in parts of the Far East. Many organisations make
heavy use of prefabricated and portable offices, which are particularly vulnerable.
Lightning
Lightning and electrical storms can play havoc with power supplies, causing power failures
coupled with power surges as services are restored.
Power failure can be protected against by the use of a separate generator or rechargeable
battery. It may be sufficient to maintain power only long enough to close down the computer
system in an orderly manner.
Terrorist activity
Political terrorism is the main risk, but there are also threats from individuals with grudges.
In some cases, there is very little that an organisation can do: its buildings may just happen to be
in the wrong place and bear the brunt of an attack aimed at another organisation or intended to
cause general disruption. Physical access to buildings should be controlled.
Accidental damage
People are a physical threat to computer installations: there can be few of us who have not at
some time spilt a cup of coffee over a desk covered with papers or tripped and fallen doing some
damage to ourselves or to an item of office equipment.
Combating accidental damage is a matter of having a good office layout and eliminating
hazards, such as trailing cables.

Activity 4: Security measures (1)

‘Postcode’ all pieces of hardware. Invisible ink postcoding is popular, but visible marking is a better
deterrent. Heated soldering irons are ideal for imprinting postcodes onto objects with a plastic
casing.
Mark the equipment in other ways. Some organisations spray their hardware with permanent
paint, perhaps in a particular colour (bright red is popular) or using stencilled shapes.
Hardware can be bolted to desks. If bolts are passed through the desk and through the bottom of
the hardware casing, the equipment can be rendered immobile.
Ensure that the organisation’s standard security procedures (magnetic passes, keypad access to
offices, signing in of visitors, etc) are followed.

Activity 5: Security measures (2)

Don’t worry if your suggestion is not in the solution - these are just illustrations to give you an idea
of the sort of thing you would see when considering IT security risks and controls.

204% Business and technology (FBT/BT)

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 ae | Control

|Human error | Input error Phen Pee) an hoaeteg: limitations on

| invoice | BESdeele ls entries

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software _ treatment user akuoele
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Natural disasters _ Fire in an office containing | Off= aepecs up Aah

_ systems and data _ physical controls (such as
|
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| Insider dealing eis monitoring
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Activity 6: Fintech
Again, your explanation may not exactly match the ones used in the solution, but as long as you
have a good, general understanding of each term, you should be Ce

| Automation |Moawine sonia can Becta ancien

|
| transactions from an organisation’s online bank account. This |
_ saves the accountant time and frees them up to focus on
more value- crete) activities (such as Smee)

| rate cliccnen Artificial fnelewnee (AN) iin accounting software can assign
transactions to appropriate nominal codes and record the
transactions appropriately in the accounts. This intelligence is
| achieved by the accountant recording the transactions
manually a few times before the system learns what types of
| transactions should be assigned to which nominal codes.
| Auditors can use Al systems that perform complete checks on
financial data held, allowing 100% of transactions to be
audited automatically on a continuous basis, removing the
need for an auditor to perform routine audit checks to verify
transactions.

Big data ae Lae encucen Peden anciees. poe orcas Better target their work on
key risks, improving the relevance of audits, for example it
can be used by an auditor to find all sales transactions
recorded near to or over the Uae SEIU level.

bisaiauted iseger fecnnoled Brockenain! isanone ea a distributed ledger. For

| accountants and auditors, distributed ledgers and Blockchain
| allow for increased clarity and transparency in the recording
of business transactions. This is because transactions are
_ posted to a public ledger on a Blockchain. Distributed ledgers
_ also reduce the need for auditors to audit transactions and
verify the ownership of assets because they have a source of
| information about the assets that they can trust (this is due
|to records being encrypted and as such, secure).

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206 Business and technology (FBT/BT) BPP
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 peumUnSaor,
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Learning outcomes
On completion of this chapter you should be able to:

Syllabus reference no.

erin the une under mach (auch is likelyto arise. Cra)

Identity Bierent typesee fraud in he organisation. . Cy (b) <=

Explain the implications of fraud 1 ihe reclelaneCilelsy | C7 (c) :

| Explain the role and duties of Chal managers in the ote C7 (d) '
detection andpeice lala process.

Beare the term mieney eve eatin C7 (e)

ere pecs of recognised Suen rer typical money C7 (f)

cuelllatel aloe fercle iotelars

Identify methods for detecting anh Breventte money C7 (g)

helSivesclalase)

Explain how suspicions of money laundering should be foported C7 (h)

to the appropriate authorities.

Exam context
This chapter considers the various types of fraud that an organisation may be prone to and which
may have to be investigated by internal audit. It is important that you are able to identify signs of
fraud in different circumstances.
You also need to have a good knowledge of both how fraud is prevented and detected. Although
there may be significant costs involved in implementing a good system of fraud prevention, the
consequences of successful fraud may be very serious, both for the reputation of the organisation
and the position of its directors. Money laundering represents a serious problem, but systems can
be set up to help detect and prevent this.
The practical aspects of fraud (where it might occur and how it can be detected) are the most
likely areas to be examined, as shown by the specimen exam where there was one Section A
question on the topic and part of one of the Section B questions featured the issue of internal
controls and fraud.
208 Business and technology (FBT/BT) 3 BPP
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Chapter overview
SLE EERIE
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What is - Potential Implications of fraud

fraud? | for fraud © for the organisation

|
Removal of funds or assets Dishonesty

| | |
Misrepresentation Motivation

|
Opportunity

Other fraud risk

assessment factors

Systems for detecting | Responsibility for detecting Money

' and preventing fraud — and preventing fraud laundering

Directors Typical money

| laundering offences

External auditor |
How to detect and prevent
money laundering

Reporting money
laundering suspicions

BPP ifyi
11:; Identifying f
and preventing frau
ting fraud 209
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 What is fraud?
meen

| Fraud: Fraud is defined as a false representation of fact made with the knowledge of its falsity,
or without belief in its truth, or recklessly careless, whether it be true or false.
sont Oe EST EST SE ISI OTE INES INEST ENEEIS EDDA LEAS

¢ Removal of funds or assets

* Misrepresentation

1.1 Removal of funds or assets

Removal of funds or assets from a business includes the following:
* Theft of cash, such as petty cash, or inventory (ranging from insignificant items of stationery
up to more high value items)
* Payroll fraud, for example claiming overtime for hours which they did not really work, inflating
someone’s rate of pay or even setting up a ghost employee and paying their wages to a
different bank account
* Teeming and lading (eg using one customer’s payments to cover theft from another account)
* Dispatching inventory to fictitious customers and then writing off the debt or colluding with
customers, such as charging a lower amount than is appropriate (in both these cases, the
fraudster has to have access to more than one aspect of the company’s operations)
* Bogus supply of goods or services or paying for goods not received (again, these would require
an insider to manipulate the amounts payable outside the organisation, so the extra amounts
spent are shared between supplier and fraudster)
* Misuse of assets, such as raiding pension funds, or disposal of assets to employees for a value
significantly below market price

fee Misrepresentation
Intentional misrepresentation of the financial position of the business is often caused by a desire
to overstate or understate profits. This could include:
* Over-valuation of inventory (via inventory count records / returns not recorded accurately)
* Irrecoverable debt policy may not be enforced, leading to inflated trade receivables
* Fictitious sales
* Manipulation of year end events via credit notes, invoices and goods inwards/outwards records
(this is sometimes called window-dressing)
* Understating expenses by failing to record certain amounts
* Manipulation of depreciation figures via inaccurate lifetimes or inappropriate policies.

Activity 1: Sales fraud

Suggest three ways of generating fictitious sales transactions or sales values.

Solution

210 Business and technology (FBT/BT)

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 Potential for fraud
There are generally three preconditions that are a prerequisite for fraud to occur.

ool Dishonesty
Honesty is a subjective quality, interpreted according to various ethical, cultural and legal norms.
That said, we may define dishonesty as a predisposition to act contrary to accepted ethical,
social and legal norms for fair and honest dealing. This tendency may arise from:
* Personality factors: a high need for achievement, status or security; a competitive desire to
gain advantage over others; low respect for authority.
* Cultural factors: national or familial values, which may be more ‘flexible’ or anti-authority than
the law and practice prevailing in the organisation. (Cultural values about the ethics of
business ‘bribes’ (or ‘gifts’), for example, vary widely. ‘Lying’ is also a very fluid concept: some
cultures value ‘saving face’ (or agreeing) over giving strictly truthful responses.)

2.2 Motivation
In addition to a general predisposition or willingness to act dishonestly, should the opportunity
arise, the individual needs a specific motivation to do so. Broadly, this involves a calculation of
whether a given action is worthwhile. Individuals weigh up:

i cat ehh Ban . i

_This considers the satisfaction of some need, | By contrast, this considers the deprivations
_ or the fulfilment of some goal. | required to carry it through.

The individual’s goal or motive for fraudulent behaviour may be:

* Financial needs or wants, or envy of others (in the case of theft or fraud for monetary gain)
* Adesire to exercise negative power over those in authority
* A desire to avoid punishment (in the case of cover ups, say).

2.3 Opportunity
Even if a person is willing to act dishonestly, and has a motive for doing so, they must still find an
opportunity or opening to do so; a ‘loophole’ in the law or control system that:
* Allows fraudulent activity to go undetected, or
* Makes the risk of detection acceptable, given the rewards available.
An individual will have a high incentive to commit fraud if they are predisposed to dishonesty and
the rewards for the particular fraud are high and there is an opportunity to commit fraudulent
action with little chance of detection or with insignificant sanctions if caught.

Activity 2: Fraud strategies

Considering the three prerequisites, what immediate control strategies can prevent fraud?

Solution

ae 11: Identifying and preventing fraud 211

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2.4 Other fraud risk assessment factors j
Signs of high fraud risk include indications of general factors such as:
* Lack of integrity
* Excessive pressures
* Poor control systems
« Unusual transactions
* Lack of audit evidence
A number of factors tend to crop up time and time again as issues that might indicate potential
fraud.
Attention should be drawn to them if any of these factors come to light when assessing external
and internal risks.

| External factors _|| Internal factors |}

_* The marketplace as a whole, (eg the trend _ Having considered the big picture, the next
| to delayer may reduce the degree of _ step is to apply the same logic at company
supervision) _ level. Focus on the general and specific risks in
_* The industry in which the firm operates, (eg | the firm itself.
the building industry may be particularly Be alert to circumstances that might increase
| prone to the risk of theft of raw materials, | the risk profile of a company.
the travel industry may face risks due to Changed operating environment
the extensive use of agents and |
New personnel
intermediaries and the retail industry must
| be vigilant to the abuse of credit cards). | + New or upgraded management
information systems
* |Inacompetitive industry, fraud may be a
tempting way of keeping up with the rest ° New overseas operations
of the market. _* Rapid growth
|* New technology
| |« New products
| * Corporate restructuring |
¢ The prevalence of cash sales.

Types of risk to be considered include:

* Business risk, such as profits deviating significantly from the industry norm or an unusually
complex corporate structure
* Personnel risk, including the behaviour and actions of staff
* Computer risk, such as the ease with which a hacker can gain access to an organisation’s
systems (compounded by a general lack of training or awareness among staff about this kind
of risk)
* Organisational risks, such as extensive authority given to dominant managers, unclear
structures of responsibility or a lack of supervision of remote locations
* Strategic risks, such as a lack of a business strategy or great emphasis being placed on
reward by results.

Activity 3: Fraud behaviour

What behavioural evidence could suggest that fraud is being committed?

212 Business and technology (FBT/BT) Err

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3 Implications of fraud for the organisation
Fraud often leads to the removal of funds or assets from a business which has the following
impacts:
* Immediate financial implications of reductions in profits and/or cash
Long-term effects on company performance, leading to possible collapse
* Intentional misrepresentation of the business's financial position or performance which can
mask its true condition and affect future strategy.
If results are overstated the impact is demonstrated buy:
* Excessive distribution of profits which can compromise financial stability
* Retained profits will be lower than believed
* Incorrect decisions will be made based on incorrect data
* Adverse impact on stakeholders (both investors and suppliers).
lf results are understated the impact is demonstrated by:
* Negative publicity and an adverse impact on reputation among investors
* Legal consequences if fraud is uncovered by the authorities.

Real life example

During 2020, the auditors of German payments company Wirecard refused to sign-off the
company’s financial statements due to an inability to find sufficient appropriate audit evidence
for substantial cash balances that made up around a quarter of its financial position. At the time
of writing, there have been allegations of widespread fraud within the company which have led to
investigations by the authorities in Germany as well as the loss of over 80% of the company’s
quoted value on the German Dax stock exchange.
(Source: ‘Wirecard shares slump over missing €1.9 bn’, BBC News
https://www.bbc.co.uk/news/business-53093305).

4% Systems for detecting and preventing fraud

Prevention of fraud must be an integral part of corporate strategy and a control system has to be
designed to detect and investigate fraud (such as that described in the chapter on internal audit).
General fraud prevention policies could include the following.
* Emphasising ethics can decrease the chances of fraud. Several businesses have formal codes
of ethics which employees are required to sign covering areas such as gifts from customers.
Management can also ensure that they set a good example.
* Personnel controls are a very important means of preventing fraud. Thorough interviewing
and recruitment procedures including obtaining references can be an effective screening for
dishonest employees. Appraisal and grievance systems can prevent staff demotivation.
* Training and raising awareness can be important. There are many examples of frauds taking
place where people who were unwittingly close were shocked that they had no idea what was
happening. Fraud awareness education should therefore be an integral part of the training
programme, particularly for managers and staff in high-risk areas such as procurement, and
staff with key roles in fraud prevention and detection, for example human resources.
The primary aim of internal controls should be to prevent fraud, but it is equally important that
the controls support frauddetection. Controls discussed in the previous chapter should be
selected and implemented with key risks in mind. Two key controls that are most useful in
combating fraud are segregation of duties and the proactive use of internal audit.

Ae 11: Identifying and preventing fraud 213

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Sl
Essential reading

For a thorough list of more specific controls that could be introduced to combat fraud, you should
read Chapter 11 Section 1 of the Essential reading.
The Essential reading is available as an Appendix of the digital edition of the Workbook.
en ARN SN EN

Responsibility for detecting and preventing fraud

5.1 Directors
Directors’ responsibilities should aim to achieve the following.
* Ensure that the activities of the entity are conducted honestly and that its assets are
safeguarded
* Establish arrangements to deter fraudulent or other dishonest conduct and to detect any that
occurs
- Ensure that, to the best of their knowledge and belief, financial information, whether used
internally or for financial reporting, is reliable.
It is therefore the responsibility of the directors to take reasonable steps to detect and prevent
fraud.

5.2 External auditor

The external auditor is responsible for expressing an opinion on whether the financial statements
give a true and fair view of the company’s financial situation and results. In order to achieve this,
the auditor should design audit procedures so as to have a reasonable expectation of detecting
material misstatements arising from fraud or error. It should be emphasised that, in the case of a
sophisticated fraud, which has been designed to escape detection by the auditors, a reasonable
expectation is all that they can have.
If the auditors become aware during the audit that fraud or error may exist, they should
document their findings and report them to management.
In the case of fraud, the auditors should then consider whether the matter should be reported to
an appropriate authority in the public interest. If they decide that this is the case, they request
that the directors make the report. If the directors do not do so, or if the fraud casts doubt on the
integrity of the directors, the auditors should make the report themselves.
If the auditors take the view that the financial statements are materially affected by fraud or
error, they should issue a qualified opinion within their auditor’s report.

Money laundering

Money laundering: Money laundering constitutes any financial transactions whose purpose is
_ to conceal the origins of the proceeds of criminal activity.
nacesezeowermancemeenesnt

The process of money laundering usually consists of three stages:

21% Business and technology (FBT/BT)

een
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 Figure 11.1: Money Laundering

( 1
Placement of | | Layering by passing |
| the proceeds of | | it through several |
| crime into the | institutions to mask
| financial Her ) its true identity

3
| Integration back
u into the legitimate |
eprom

* Placement of proceeds into the financial system — refers to how proceeds of criminal activity
are placed into the legitimate financial system — for example, many criminal organisations
operate legitimate cash-based businesses as fronts and inflate their revenues from these
businesses with the proceeds of the criminal activity. These are paid into the business bank
account.
« Layering — funds are transferred from one bank account to another, and then another, in a
chain, to hide the origin of the original funds. Holders of bank accounts used in layering are
offered a commission to accept and then pass on the funds. Layering - funds are transferred
from one bank account to another, and then another, in a chain, to hide the origin of the
original funds. Holders of bank accounts used in layering are offered a commission to accept
and then pass on the funds.
* Integrate back into the legitimate economy — the funds are used by the criminals for whatever
purpose they decide (eg buying yachts or expensive cars).

6.1 Typical money laundering offences

In essence there are three main types of offence:
* Having any contact with the proceeds of crime (whether deliberate or accidental)
* Failing to report any suspicions of criminal activity regarding money laundering to the
appropriate authority
* Tipping off — in other words, warning a client that money laundering suspicions about them
are going to be reported

Activity 4 Money laundering

Why should a professional adviser not give a warning to a client whom they suspect of money
laundering?

6.2 How to detect and prevent money laundering

Before starting any commercial relationship with a prospective client, the law usually requires
some kind of formal identification: for an individual, this could be a passport and a utilities bill;
for an organisation, it could be their financial statements or other formal records regarding their
existence.
Such a procedure is now so widespread that it serves as a deterrent against anyone attempting to
use a business or personal relationship simply for the purposes of money laundering. This is
another example of risk assessment and is known as customer due diligence.

BPP 11: Identifying

L and preventing fraud 215
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 Once this process is complete and any initial funds are considered legitimate, the individual or
organisation is monitored to ensure they do not attempt to exploit this new relationship. This may
take the form of gaining an understanding of the nature of any business activity and their
associated cash flows in order to spot suspicious activity in future.

6.3 Reporting money laundering suspicions

It is usually a requirement of laws and regulations across the world for an organisation to employ
someone who is responsible for dealing with any suspicions that money laundering might be
taking place. In the UK, this person is known as a Money Laundering Reporting Officer (MLRO)
and all suspicions are supposed to be reported (in the strictest confidence) to this MLRO. They will
then decide whether to escalate the suspicion and alert the relevant authority (in the case of the
UK, this is the National Crime Agency or NCA).

UH}
Essential reading

There is a more detailed overview of the various responsibilities associated with money laundering
within Chapter 11 Section 2 of the Essential reading.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

tn nn cnn
|PER alert
_ PER performance objective PO4 requires you to contribute to the effective governance of an |
| Organisation and raise awareness of risk. The material covered in this chapter will help you
_ achieve this.
ee |

216 Business and technology (FBT/BT) ( BPP

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Chapter summary
DEL
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What is Potential Implications of fraud

fraud? for fraud for the organisation
ia

Removal of funds or assets Dishonesty Detrimental financial impacts

* Theft of cash or inventory « Very subjective — tendency to on cash and/or sales
¢ Payroll fraud act contrary to fair and honest Possible financial collapse or
- ¢ Teeming and lading dealing masking of true position
* Dispatch or invoice fraud + May come from personality Overstatements create a false
* Misuse of assets factors sense of security, leading to
« May be more of a reaction to poor decisions
society and/or culture Understatement leads to poor
_ Misrepresentation reputation among stakeholders
* Over-valuation of inventory
' « Manipulation ofirrecoverable Motivation
debts * A balance between reward and
* Fictitious sales consequences
¢ Manipulation of year end « May stem from a financial
events need or a need to exercise
« Understating expenses power
* Manipulation of depreciation « May even be a desire to avoid
figures some form of punishment

Opportunity
« Usually presented by a
loophole or gap in a set of
controls

Other fraud risk assessment

factors
« External factors (such as the
competitiveness of the industry
or the way that things are
generally done)
¢ Internal factors (such as
changes to technology, staff
and systems, or the reliance on
cash sales)
« Any combination of business,
personnel, computer,
organisational or strategic risk

BPP 11: Identifying and preventing fraud 217

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 Systems for detecting Responsibility for detecting | Money
and preventing fraud and preventing fraud laundering

’ | I
Emphasising the importance of Directors « Placement of criminal property
ethics « Activities are conducted
in the banking system
Good systems of recruitment honestly and assets are * Layering via many different
and appraisal safeguarded financial institutions to mask
Greater training and risk Arrangements to deter its true origin
awareness fraudulent or other dishonest « Placement back in the hands
Prevention and detection via a conduct and to detect any of the money launderer to
combination of segregation of that occurs imply some form of legitimacy
duties and internal audit Ensure reliable and trustworthy
financial information
Typical money laundering
offences
External auditor + Having any contact with the
* Opinion on financial proceeds of crime
statements regarding material * Failure to report any suspicions
misstatements whether due to * Tipping off
fraud or error
Any indication of fraud
|
uncovered during the audit How to detect and prevent
should be reported to money laundering
management * Formal identification
Opinion of reasonable procedures on initial contact
assurance (not absolute) * Regular monitoring of cash
communicated via auditor's flows to understand nature of
report business
* Known as customer due
diligence

|
Reporting money laundering
suspicions
+ Prompt reporting of suspicions
to delegated person before
possible escalation to regulator
* In the UK, the MLRO acts in this
role and decides whether or
not to inform the NCA

218 Business and technology (FBT/BT) Cy BPP

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 Knowledge diagnostic
LDS PTT EN ILA SESIT IIT IEC SEWN SRE SBE LESEY SD:ETSI AEE ITE DEINE DEBE REN TOTS CEP OTR EI EVIE ET EL SEL AEDES ODS POI ELLIE LIL

. Types of fraud
—,

The practical aspects of fraud (where it might actually occur, how it can be detected) are the
most likely topics to be examined. Common frauds include payroll frauds, conspiracy with other
parties and stealing assets. More subtle measures including teeming and lading and manipulation
of bank reconciliations and cashbooks to conceal theft.

. Fraud preconditions
There are three broad prerequisites or ‘preconditions’ that must exist in order to make fraud a
possibility: dishonesty, motivation and opportunity. Signs of high fraud risk include indications of
lack of integrity, excessive pressures, poor control systems, unusual transactions and lack of audit
evidence.

. Fraud indicators
A number of factors tend to crop up frequently as indicators of potential fraud situations; these
can be categorised under business and personnel risks. In order to prevent fraud, managers must
be aware of the risks and signs of fraud.

. Fraud controls
Prevention policies include emphasis on ethics and personnel and training procedures. Controls
within particular business areas, such as segregation of duties and documentation requirements,
are also significant. Controls must be developed in a structured manner, taking account of the
whole spectrum of risk and focusing on the key risks identified in each area of the business.

. Fraud responsibilities
Managers and staff should be aware of their responsibilities to help in detecting fraud. Fraud
detection is also helped by having information readily available and allowing whistleblowing.
Organisations should establish a fraud response plan, setting out how the method and extent of
the fraud and possible suspects should be investigated. It is the responsibility of the directors to
take such steps as are reasonably open to them to prevent and detect fraud.

. Money laundering
The growth of globalisation has created more opportunities for money laundering which
governments and international bodies are trying to combat with legislation. In the UK, there are
various offences relating to money laundering, including tipping off a money launderer (or
suspected money launderer) and failing to report reasonable suspicions. Reporting in the UK
should be via the MLRO to the National Crime Agency.

BPP 11: Identifying and preventing fraud 219

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Further study guidance

Question practice
Now try the following from the Further question practice bank [available in the digital edition of
the workbook]: -

Q49O Exam Section A fo 1 min

Q50 Exam Section A 2 | 2mins

cee — =e — sec pee pesng
O51 Exam Section A 1 | 1Tmin

Q52 Exam Section A ee | 2 mins

rs 4 pe _

Q53 | Exam Section A lee | 2mins

b — + — ——— — 2
Q54 | Exam Section A 2 | 2 mins
a eee ee ee ee By a hos 2 $
O55 _ Exam Section A 4 | 5 mins

Further reading
You should keep looking online to see if any new articles on fraud have been published.

Own research
Fraud and money laundering are (sadly) regularly in the news, so you should keep an active eye
on the media for stories related to this. Here are some examples that are fairly recent (and one
that is not!):
* Wirecard
+ Patisserie Valerie
* Lehman Brothers
* Tesco
* Enron

220 Business and technology (FBT/BT) Gr BPP

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Activity answers
SSSI SSCS DERE OTE LESS TNE IRI ISL EIS SES AIT ENE ILE PET SEE SS IP RIT PPO EEE RIES OIE AE EN

Activity 1: Sales fraud

The following are just three obvious suggestions, but others will exist:
(1) Generation of false invoices
(2) Overcharging customers for goods or services
(3) Selling goods to friends (with a promise of buying them back at a later date).

Activity 2: Fraud strategies

Dishonesty
Don’t employ people with predispositions to dishonesty, if possible: undertake legitimate and
appropriate background and CV checks when carrying out recruitment and selection. (The more
opportunity for fraud there is in the job, the more carefully dishonesty should be screened.)
Motivation
Reduce motivations for fraud. This is highly subjective, but the organisation should give attention
to such matters as ensuring equity in pay and rewards; monitoring employees for signs of
financial difficulty and its possible causes (eg gambling addiction) and offering counselling and
support where required; providing generally good and equitable working terms and conditions;
and establishing clear rules and strong sanctions for fraudulent behaviour.
Opportunity
Reduce opportunities for fraud. This is the function of a range of internal checks and controls,
separating duties so no one person has sole control over a system; requiring authorisations for
expenses/timesheets, cheques, and so on; using data security measures such as passwords;
security checks; identification on office equipment to deter theft; and so on.

Activity 3: Fraud behaviour

Here are some common examples of the type of behaviour that a fraudster would typically
display:
* Secretive behaviour
* Extravagant lifestyle
¢ Reluctance to take holidays
¢ Refusal to share information
* Excessive working hours

Activity 4: Money laundering

Tipping off a suspected money launderer is an offence. Alerting the suspect would be likely to
hamper any subsequent investigation by the authorities as the suspect would most likely destroy
any incriminating evidence and the case against them would collapse.

BPP 11: Identifying and preventing fraud 221

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222 Business and technology (FBT/BT)
BPP
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 Skills checkpoint 3
Approaching corporate
governance questions

Chapter overview

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Introduction
Corporate governance is introduced in the BT/FBT exam. It is included in many of the subsequent
ACCA exams, especially the auditing exams and the strategic business leader exam. The examiner
has reported that candidates generally do well on the simpler knowledge based questions, but
find the application type questions more difficult. This skills section therefore aims to improve your
approaches to these questions. In this chapter we focus on the skills needed to answer the exams
rather than covering the theory of corporate governance again. The skills covered here are
transferable and could be applied to a number of other topics.

Corporate governance - key knowledge

There are quite a few principles or rules to learn in the syllabus relating to corporate governance.
On the exam day itself, you may encounter a question which covers a particular detail that you
can’t remember. Remembering the following ‘key points’ of corporate governance may guide you
to a more informed answer:
* Agency problem - the directors of a company (the agents) act on behalf of the shareholders
and other stakeholders of a company (the principals). Their objectives may conflict.
Corporate governance aims to ensure that the directors act in the interests of the stakeholders
rather than in their own interests.
 * Good corporate governance will mean that no individual or group of individuals becomes too
powerful, because if they do they may make bad decisions. Non-executive directors are a key
control to avoid this, by challenging and scrutinising the actions of the executive directors. The
roles of chair and chief executive should also be separated, with the chair being a non-
executive director.
» Risk management is a key issue of corporate governance. The board of directors should take
ultimate responsibility for managing the risks that the company is taking on.
* The audit committee is responsible for the system of internal controls and overseeing the
internal and external auditors. In order to allow auditors to discuss any concerns openly, the
committee should be made up entirely of independent non-executive directors.
* The remuneration committee is responsible for setting the remuneration policies of the
company. This committee should also be made up of non-executive directors, to avoid the
situation where directors set their own pay.

Approach to questions
Exam questions on corporate governance could appear in both sections of the exam. In both
sections, you may be given a short scenario. Typically, the situation in the scenario will challenge
good corporate governance practices and you would be required to think about what should be
done. A good approach to such questions is:
STEP 1 Read the requirement. What do you have to do? Be sure to note the instructions carefully, making sure you
don’t miss important words such as ‘NOT’. Don’t read the options at this stage.
STEP 2 Read through the scenario. Think about the following as you read through it:
¢ Why does the situation present a threat for good corporate governance?
* What should/could be done to reduce the threat?
STEP 3 Read the options: (While there are many different types of OT question, most involve choosing one or more
items). Are there any options that can be eliminated straight away? Perhaps they describe things that you
know are not done in the real world, or perhaps they are unrealistic. After this, you will need to rank the
remaining options in terms of which you think are the most likely, or most effective in achieving the
corporate governance principles summarised above.

Exam success skills

The following question is an example of the sort of question you could see in your exam.
For this question, we will also focus on the following exam success skills:
* Managing information. Where there is information provided in the scenario you need to be
able to absorb this quickiy. Begin by reading the requirements so that you know what you are
looking for in the scenario. While the scenario for each individual question may not look
significant, given the number of questions you have to answer, any inefficiencies in reading will
add up.
* Correct interpretation of requirements. Make sure that you note what you have to do
carefully.
* Good time management - by actively reading the scenarios and knowing what you are
looking for you will be using your exam time more effectively.

Skill activity
Question: Source: ACCA F1 examiner’s report Dec 2014
Max is an independent non-executive director of PLK Company, a private company in which 75%
of the equity is owned by members of one family. At a recent board meeting, Max was informed
that the executives had entered into a one-year contract with VCV Company, a new supplier.
Although the executives did not know this, Max’s sister is an executive director of VCV Company.

224 Business and technology (FBT/BT)

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 Which of the following statements is correct?
(a) Max should resign from the company as he can no longer be truly independent
(b) Max should disclose his family connection with VCV Company immediately
(c) Max needs to do nothing, as PLK Company is a private company
(d) Max should have been consulted about the contract before it was signed
Applying the steps suggested above to this question:
B is the correct answer. C is incorrect as good corporate governance does not just apply to listed
companies. In the case of PLK, 25% of the shares are owned by people who are not members of
the family that owns the majority of the shares, and these shareholders would appreciate an
independent non-executive director who would look after their interests.
STEP 1 The requirement. “Which of the following statements is correct?” All we know at the moment is that we will
have to choose one statement. It is a multiple choice question. We don’t read the options yet.
STEP 2 Read through the scenario.
Is there a threat to good corporate governance? Max is an independent non-executive director. The fact
that the company has entered into a contract with VCV could potentially threaten Max’s independence,
since Max’s sister is an executive director of VCV. However, given that the contract has already been
signed by the executive directors, without Max actually being aware of it does suggest that the contract
has been made on normal commercial terms. The directors were unaware of Max’s connection with VCV.
It would NOT therefore appear to be a significant threat to Max’s independence.
* What should be done to remove or reduce the threat? Let’s assume that you don’t know what should be
done, so you will have to read the options and use a process of elimination to identify it.
STEP 3 Read the options:
(a) Max should resign from the company as he can no longer be truly independent
(6b) Max should disclose his family connection with VCV Company immediately
(c) Max needs to do nothing, as PLK Company is a private company
(d) Max should have been consulted about the contract before it was signed
Are there any options that you can eliminate straight away?
* Option A would appear to be rather extreme. As discussed in Step 2, the contract would not appear to
present a significant threat to Max’s independence.
¢ Option D also appears unlikely. Contracts with suppliers are negotiated as part of the course of doing
business. It would not usually be necessary to gain approval of commercial contracts from non-
executive directors. The executive directors were not aware of Max’s connection to VCV.
Having eliminated two options we are left with B and C. Intuitively, B would perhaps appear as the most
sensible. By disclosing his family connection and presumably avoiding voting on any matters relating to the
contract, should there be any, he can maintain his independence. So B would be the best guess.
B is the correct answer. C is incorrect as good corporate governance does not just apply to listed
companies. In the case of PLK, 25% of the shares are owned by people who are not members of the family
that owns the majority of the shares, and these shareholders would appreciate an independent non-
executive director who would look after their interests.

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 Exam success skills diagnostic
Every time you complete a few questions, use the diagnostic below to assess how effectively you
demonstrated the exam success skills in answering the questions. The table has been completed
below for the above activity to give you an idea of how to complete the diagnostic.

| Managing information |Did you read the requirements first? |

| | Reading the requirement before you read the scenario |
| _ ensures that, when you read the scenario, you are focussed
on what information you are looking for. |
|
‘ erie latic
Correct interpretation of In the question above, there should have been little difficulty
| requirements _ in interpreting what is required, but do ensure you read all |
| requirements carefully.
|

| Efficient numerical analysis _ Not generally applicable to BT/FBT questions.

_ Good time management | On average you should be spending 1.2 minutes per mark. It |
_ does not make sense to time every question you do - some
questions do take longer than this and some take less. Time
_ yourself for groups of questions instead to give yourself an
idea of whether you are working at the correct pace.

Most important action points to apply to your next question

Summary
Being able to answer scenario-based questions which require application of your knowledge is
important in the BT/FBT exam. Key skills to focus on throughout your studies will therefore include:
* As you read a scenario, ask yourself what the problem with the current situation is.
* What should be done about it?
* Read the options in the question and eliminate those that are clearly not correct.
* Look at the remaining options and choose which would be most likely based on your analysis
of the scenario above.

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ae
226
 : 2,\ Leading and ‘managing
: Se Bence areata ees
J

Learning outcomes
On completion of this chapter you should be able to:

Sees Beene no.

Define leadership, management and supervision and explain D1 (a)

the eon between these terms.

econ Ne nature of aecomene D1 (b)

(a) Scientific/classical theories of management — Fayol, Taylor
(b) The human relations school — Mayo
(c) The functions of a manager — Mintzberg, Drucker

Say the areas oi managerial authority and responsibility. D1 (c)

Sen the eriaicnal functional and contingency approaches D1 (d)

to leadership with reference to the theories of Adair, Fiedler,
Bennis, Kotter and Heifetz.

Beseriee ecceenin Brulee and contexts using the models of D1 (e)

Ashridge, and Blake and Mouton.

Exam context
The first part of this chapter deals with the issues of management and considers a variety of
different theories — you should note that the theories discussed in this chapter are noted
specifically in the syllabus Study Guide, and hence are eminently examinable — and it’s fair to say
that the major challenge of this topic is learning the detail of the various theories. We then go on
to consider the difference between managers and leaders. Popular exam topics include leadership
style models, the difference between management and leadership and the difference between
trait theories, style theories and contingency approaches. There were four questions in the
specimen exam on topics covered in this chapter.
228 Business and technology (FBT/BT)
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Chapter overview
EBTLOE LEIS LS DELILE
ELLIE LLL DELI TAS

| Leading and managing

ALENT ELOISE RNS OLE “Cencemmemanst
SEES

Leadership The _ The development of Leadership

and process of management and
management management leadership theory

What is leadership? Mintzberg roles Fayol: five functions Trait theory

of management of management

What is management? The Ashridge

Elements of Taylor: scientific Management
management management College model

Authority Elton Mayo: Blake and Mouton's

human relations managerial grid

Power
Drucker Fiedler

Mintzberg; the Adair action

manager's role centred leadership

Bennis

Heifetz

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 Leadership and management
1.1 What is leadership?
Leadership is the process of influencing others to work willingly towards goals, to the best of their
capabilities, perhaps in a manner different to that which they would otherwise have chosen.
A leader exercises acts of influence frequently and persistently.
Key leadership skills include:
(a) Entrepreneurship
(b) Interpersonal skills
(c) Decision-making and problem solving
(d) Time management and personal organisation
(e) Self development

1.2 What is management?

Management is the process of getting activities completed efficiently and effectively, with and
through other people.

y ¢

Management: Management is responsible for using the organisation’s resources to meet its i
| . . . . . r
| goals. It is accountable to the owners: shareholders in a business, or government in the public
i sector. j
i
An organisation has been defined as ‘a social arrangement for the controlled performance of
collective goals.’ This definition suggests the need for management.
(a) Objectives have to be set for the organisation.
(6) Somebody has to monitor progress and results to ensure that objectives are met.
(c) Somebody has to communicate and sustain corporate values, ethics and operating
principles.
(d) Somebody has to look after the interests of the organisation’s owners and other stakeholders.

Activity 1: Management structure

John, Paul, George and Ringo set up in business together as repairers of musical instruments.
Each has contributed $5,000 as capital for the business. They are a bit uncertain as to how they
should run the business and, when they discuss this in the pub, they decide that attention needs
to be paid to planning what they do, reviewing what they do and controlling what they do.
Required
Suggest two ways in which John, Paul, George and Ringo can manage the business assuming no
other personnel are recruited.

Solution

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 Different organisations have different structures for carrying out management functions. For
example, some organisations have separate strategic planning departments. Others do not.
In a private sector business, managers act, ultimately, on behalf of shareholders. In practical
terms, shareholders rarely interfere, as long as the business delivers profits year on year.
In a public sector organisation, management acts on behalf of the government. Politicians in a
democracy are in turn accountable to the electorate. More of the objectives of a public sector
organisation might be set by the ‘owners’ — ie the government — rather than by the management.
The government might also tell senior management to carry out certain policies or plans, thereby
restricting management’s discretion.

WM,
Essential reading

See Chapter 12 Section 1 of the Essential reading for more detail on leading and managing.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

The process of management

2.1 Mintzberg: three key management roles:
Figure 12.1: The Role of Management

| Mgt role |

| Interpersonal | | Informational | | Decisional |

eg figure head eg Communications — eg Resource allocator

We shall be looking at this in more detail in Section 3, but for now the important point is to be
aware of the range of tasks that a manager has to take care of.

2.2 Elements of management

A manager is an integral part of the organisational structure and therefore has:
(a) Authority — the right to do something
(b) Responsibility — the obligation to get something done
(c) Accountability — the readiness to accept responsibility, judgement by others
(d) Power — the ability to do something.
Delegation enables management to allocate responsibility and authority to subordinates, whilst
retaining overall accountability.
It is the role of the manager to take responsibility and organise people to get things done. This
involves the use of authority and power and implies a hierarchy in which power is delegated
downwards while accountability is rendered upwards.
These elements are important, and we need to go into these in more detail in the following
sections. Make sure you understand the concepts and can differentiate between them.

pe ae

[meetin Theee to do tenes in an organisation it is the right of a manager to require

f

|a subordinate to do something in order to achieve the goals of the organisation.

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 A person’s (or office’s) authority can come from a variety of sources, including from above
(supervisors) or below (if the position is elected). Managerial authority thus has three aspects.
* Making decisions within the scope of one’s own managerial authority
* Assigning tasks to subordinates
* Expecting and requiring satisfactory performance of these tasks by subordinates
Weber (1947) put the kind of authority we see in organisations into a wider context, proposing that
there were three ways in which people could acquire legitimate power (or authority).
Figure 12.2: Bases ofee

| Charismatic | Traditional | oe legal

een sence ntenenenenn et eeecnnrneeenerereenennareemncencne” ‘ne

(a) Charismatic authority arises from the personality of the leader and their ability to inspire
devotion through, for example, sanctity, heroism
(6) Traditional authority rests on established belief in the importance of immemorial tradition
and the status it confers.
(c) Rational-legal authority arises from the working of accepted normative rules, such as are
found in organisations and democratic governments.

2.4 Responsibility and accountability

Responsibility is the liability of a person to discharge duties. Responsibility is the obligation to do
something; in an organisation, it is the duty of an official to carry out assigned tasks.
With responsibility, we must associate accountability. Managers are accountable to their
superiors for their actions and are obliged to report to their superiors how well they have exercised
the authority delegated to them.
Delegation of authority occurs in an organisation where a superior gives a subordinate the
discretion to make decisions within a certain sphere of influence. This can only occur if the
superior initially possesses the authority to delegate.
When a superior delegates authority to a subordinate, the subordinate is accountable to the
superior. However, the superior remains fully accountable to their superiors; responsibility and
accountability cannot be abdicated by delegation.
As well as being essential for running an organisation, delegation brings a number of other
benefits.
(a) Training. Subordinates gain experience of problems and responsibility, which helps to
prepare them for promotion and contributes to the avoidance of crises of management
succession.
(b) Motivation. Herzberg found that responsibility was an important factor in job satisfaction
and motivation.
(c) Assessment. Subordinates’ performance in relation to delegated responsibility can be used as
a measure of their need for further training and experience and their readiness for promotion.
(d) Decisions. Delegation brings decisions closer to the situations that require them, potentially
improving them by having them made by those with most knowledge of the problems and
factors involved.

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 Activity 2: Delegation
ape erm saceN
EREeS

You have a large complex spreadsheet which requires a large amount of data to be manually
input onto the spreadsheet on a monthly basis.

Required
Suggest three reasons why you may not want to delegate this piece of work.

Solution

Real life example

Probably the most often mentioned example of a leader with charismatic authority is Alexander
the Great. He was personally able to motivate his army through his actions and behaviour
because he, like them, was a soldier — his men trusted him and supported him through a long,
bloody and ultimately successful campaign against the Persian Empire. The chief drawback of
charismatic authority is that it is very difficult to pass onto anyone else; within thirty years of his
death, his vast empire stretching from the Mediterranean to India was almost gone.
Bringing things up to date, Queen Elizabeth II became head of the United Kingdom at the young
age of 27 because she was the eldest daughter of a king who left no male heir, and as such, she
inherited his title, and therefore
had traditional authority.
An elected government would be said to have rational legal authority, if it has followed the
accepted normative rules. A government that has rigged an election to win would be lacking in
authority and would find it more difficult to impose any form of control over the population of that
country. Notice that in this situation, the government, lacking authority, would rely instead on
power to influence the people, perhaps through intimidation or coercion.

2.5 Power

| Power: Power is distinct from authority but is often associated with it. While authority is the
| right to do something, power is the ability to do it.

Sources of power — French and Raven

French and Raven (1959) identified the following sources of power within organisations:

Power
Physical power |This is the power of superior force.

Resource power This is the control over resources which are

' valued by the individual or group.

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 _ Coercive (ns | This iis perce based.on feel et stingenend
a cae = a —— 4
—

|Reward power | This is| related to resource power. Senior

| . |managers may have the power to grant pay
| increases topode ee
| ak is the power dae is neceeete with a
|
| Position power or legitimate power
| _ particular job in an organisation. It is more or
| _less the same as CRTC

| Sasa See | This iis power which is paced:onAouesaiee:

|although it only works if others acknowledge
| |that coe:
- —— ————————EE - = = SS — =

|Rererent power Gite power festin ire Berend cuca. & te |

| [individual. |
_ —— - = — — $$$ ________-__—
i — — — ~— ——

_ Negative power |This is ie use oa Aeuptive otitades and

behaviour to ee gue: ei happening.
| eS a a ed

Activity 3: Power

What kind of power is used by a manager who promises a pay increase if productivity rises?
O Position power
Resource power
Reward power
©20Referent power

WM,
Essential reading

See Chapter 12 Section 2 of the Essential reading for more detail on the process of management.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

Development of management and leadership theory

We now move on to consider a number of writers who have addressed the issue of how best to
manage workers. Notice that here we are discussing theories — it is notoriously difficult to forecast
how people will react in a certain set of circumstances, and many theories have been developed
to explain employees’ motivations and expectations in the workplace. Below, we begin by giving a
timeline showing when some of the most influential theories were developed.
Figure 12.3: Management theories
Late c19th Early c20th 1930s 1950s

Classical Scientific Human Style Contingency

approach management resources theorists theorists
¢ Henri ¢ Frederick ¢ Elton Mayo — « Peter Druker ¢ Fiedler
Fayol Taylor ¢ Maslow ° Trait ¢ Adair
¢ Herzberg ¢ Ashridge College
¢ McGregor ¢ Blake/Mouton grid
(see Chap 13)

234% Business and technology (FBT/BT)

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 We shall look through some of these theories in more detail. These theorists are usually
categorised under three headings:
(a) Classical (or Scientific) theories of management - (i) Fayol, and (ii) Taylor
(6) Human relations school — Mayo
(c) The functions of managers — (i) Drucker and (ii) Mintzberg

3.1 Henri Fayol: five functions of management

Fayol (1967) classified five functions of management which apply to any organisation.

|Planning | Determining objectives, and strategies, policies, programmes and

| procedures for achieving those objectives, for the organisation and its
| _ sub-units

| Organising | Establishing a structure of tasks which need to be performed to

_ achieve the goals of the organisation; grouping these tasks into jobs
for individuals or teams; allocating jobs to sections and departments;
delegating authority to carry out the jobs; and providing systems of
information and communication, for the co-ordination of activities

Commanding Giving instructions to subordinates to carry out tasks, for which the
manager has authority (to make decisions) and responsibility (for
performance)

|Co-ordinating Harmonising the goals and activities of individuals and groups within
the organisation. Management must reconcile differences in
| approach, effort, interest and timing in favour of overall (or ‘super-
i ordinate’) shared goals.
|
| Controlling Measuring and correcting the activities of individuals and groups, to
|
ensure that their performance is in accordance with plans. Deviations
|
|
|
from plans are identified and corrected

You may be struck by two key ‘omissions’ from Fayol’s classification, from a more modern
viewpoint.
(a) ‘Motivating’ is not mentioned. It is assumed that subordinates will carry out tasks when
‘commanded’ or instructed to do so, regardless of whether or how far they may ‘want’ to.
(b) ‘Communicating’ is not mentioned, although it is irnplied by the process of commanding
(giving instructions), co-ordinating (sharing information) and controlling (giving feedback).
Fayol’s classification reflects the classical view that saw the act of management as the controlling
of resources and processes. The idea that management is an interpersonal process, involving
communication and the ability to influence and motivate, is a more recent concept.

3.2 F W Taylor: scientific management

Frederick W Taylor pioneered the scientific management movement in the US.
Taylor was an engineer and sought the most efficient methods.
He was among the first to argue that management should be based on ‘well recognised, clearly
defined and fixed principles, instead of depending on more or less hazy ideas.’ Taylor was a very
skilled engineer and took an engineering efficiency approach to management.
The principles of scientific management (Taylor, 1911) include the following.
(a) The development of a true science of work. ‘All knowledge which had hitherto been kept in the
heads of workmen should be gathered and recorded by management. Every single subject,
large and small, becomes the question for scientific investigation, for reduction to law.’
(b) The scientific selection and progressive development of workers. Workers should be carefully
trained and given jobs to which they are best suited.

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 (c) The application of techniques to plan, measure and control work for maximum productivity
(d) The constant and intimate co-operation between management and workers: ‘the relations
between employers and men form without question the most important part of this art’
In practice, scientific management techniques included the following key elements.
(a) Work study techniques were used to analyse tasks and establish the most efficient methods
to use. No variation was permitted in the way work was done, since the aim was to use the
‘one best way’.
(b) Planning and doing were separated. It was assumed that the persons who were intellectually
equipped to do a particular type of work were probably unlikely to be able to plan it to the
best advantage: this was the manager’s job.
(c) Jobs were micro-designed: divided into single, simple task components which formed a whole
specialised ‘job’ for an individual, rather than permitting an individual to perform whole or
part-task processes. (Task ‘meaning’ and ‘significance’, now considered essential to job
satisfaction, had not yet emerged as important values.)
(d) Workers were paid incentives on the basis of acceptance of the new methods and output
norms; the new methods greatly increased productivity and profits. Pay was assumed to be
the only important motivating force.
Scientific management as practised by Taylor and contemporaries such as Gilbreth and Gantt
was very much about manual work. However, elements of scientific management are still
practised today, whenever there is a concern for productivity and efficiency.

3.3 Elton Mayo: human relations

The main principles of the Human Relations school (Mayo 1933) are:
(a) Individuals seek more than financial satisfaction from their jobs.
(b) Individuals can often perform better if they are allowed control over their work.
(c) Group interaction is an important element in determining the behaviour of an organisation.
The human relations school of theorists has made a number of contributions to management
thought including:
(a) There are benefits in looking after and involving employees.
(b) Individual workers cannot be treated in isolation but must be seen as members of a group.
(c) The need to belong to a group and have status within it is more important than monetary
incentives or good physical working conditions.
(d) Informal groups exercise a strong influence on worker behaviour.
(e) Supervisors and managers must manage group operations rather than individuals.

Real life example

Mayo and his colleagues first thought that the level of lighting influenced output, so to test this
out, they increased the level of lighting in one of the production rooms of a factory, with the result
that productivity increased significantly. To have a comparison, they then reduced the lighting to
a level below the original level, expecting that output would fall.
It did not.
It stayed high. This was a shock, and so for completeness, they returned the lighting back to the
level it was before; the output stayed high.
Finally it was realised that the employees weren't performing more effectively because of the
lighting— it was because they were aware they were being studied. Not out of fear of being found
to be lazy, but because they felt special —management was interested in them. That was the
motivator.

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3.4 Style theories
Writers in the last fifty years have taken a more flexible view:
* The search for efficiency continues with work study and industrial engineering, whilst specific
techniques have been developed for project management.
* Human relations theory has been expanded through industrial psychology.
* Much writing has focussed on the managers’ task.
We shall now look at the work of a number of writers in this area, and again, it is important that
you know what they were talking about. If there is a diagram given, then it is recommended that
you learn it.

3.5 Drucker
Peter Drucker, an Austrian professor, believed that management has three basic functions
(Drucker 1993):
(a) Managing a business. The purposes of the business are:
* To create a customer
* Innovation
(b) Managing managers. The requirements here are:
* Management by objectives (MbO)
* Proper structure of managers’ jobs
* Creating the right spirit in the organisation
* Making a provision for the managers of tomorrow
_¢ Arriving at sound principles of organisation structure
(c) Managing worker and work
A manager's performance in all areas of management, including management of the
business, can be enhanced by a study of the principles of management, the acquisition of
organised knowledge (eg management techniques) and systematic self-assessment.
Drucker suggested that management could also be broken down into five categories:
Setting objectives for the organisation. Managers decide what the objectives of the organisation
should be and quantify the targets of achievement for each objective. They must then
communicate these targets to other people in the organisation.
Organising the work. The work to be done in the organisation must be divided into manageable
activities and manageable jobs. The jobs must be integrated into a formal organisation structure,
and people must be selected to do the jobs.
Motivating employees and communicating information to them to enable them to do their work.
The job of measurement. Management must:
(a) Establish objectives or yardsticks of performance for all personnel
(b) Analyse actual performance, appraise it against the objectives or yardsticks which have been
set, and analyse the comparison
(c) Communicate the findings and explain their significance both to subordinate employees and
to superiors
Developing people. The manager ‘brings out what is in them or he stifles them. He strengthens
their integrity or he corrupts them’.
Every manager performs alll five functions listed above, no matter how good or bad a manager
they are. However, a bad manager performs these functions badly, whereas a good manager
performs them well. Unlike Fayol, Drucker emphasised the importance of communication in the
functions of management.

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3.6 Mintzberg: the manager’s role @

Henry Mintzberg described managerial roles, arguing that management is a disjointed, non-
systematic activity. Mintzberg (1989) did a study of a small sample of US corporations. He
suggests that in their daily working lives managers fulfil three types of managerial role.

_ Interpersonal Figurehead (or ceremonial) A large part of a Chief

_ Based on manager’s formal | Leader Executive’s time is spent
authority or position representing the company at
Liaison
dinners, conferences, and so
on.
Hiring, firing and training
staff, motivating employees,
and reconciling individual
| goals with the objectives of
the organisation.
Making contacts outside the
vertical chain of command.
Some managers spend up to
half their meeting time with
their peers rather than with
their subordinates.

Informational | Monitor The manager monitors the

Based on managers’ access Spokesperson environment, and receives
to:
||
information from
| Disseminator
subordinates, superiors and
| *« Upward and downward
peers in other departments.
| channels
Much of this information is of
| *« Many external contacts an informal nature, derived
from the manager’s network
of contacts.
The manager provides
_ information on behalf of the
unit and/or organisation to
interested parties. The
manager disseminates
relevant information to
subordinates.
——— Stet
|
|| Entrepreneur A manager initiates projects
| Based on the manager’s | Disturbance handler to improve the department or
| formal authority and access | Resource allocator to help it react to a changed
|
_ to information, which allow environment.
Negotiator
|him or her to take decisions A manager has to respond to
_ relating to the work of the unexpected pressures, taking
department as a whole. decisions when there is
deviation from the plan.
A manager takes decisions
relating to the mobilisation
and distribution of limited
resources to achieve
objectives. Both inside and
outside the organisation,
negotiation takes up a great
deal of management time.
a

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 Mintzberg’s research challenged the classical view of the manager as separate to, or above, the
routine demands of day-to-day work.
(a) Managers are not always able to be reflective, systematic planners.
(b) Managerial work is disjointed and discontinuous.
(c) Managers do have routine duties to perform, especially of a ceremonial nature (receiving
important guests) or related to authority (signing cheques as a signatory) — contrary to the
myth that all routine work is done by juniors.
(d) Managers prefer verbal and informal information to the formal output of management
information systems. Verbal information is ‘hotter’ and probably easier to grasp.
(e) Management cannot be reduced to a science or a profession. According to Mintzberg,
managerial processes cannot be analysed scientifically or codified into an examinable body
of theory.
Mintzberg states that general management is, in practice, a matter of judgement and intuition,
gained from experience in particular situations rather than from abstract principles.
‘Fragmentation and verbal communication’ characterise the manager’s work.

Activity 4: Developing people

Who suggested that a primary managerial role is ‘developing people’?

O Handy
O Taylor
O Herzberg
O. Drucker

Leadership
There are three basic ‘schools of leadership theory’:
. aes .
5
Lilaal 2
i WN
AR ANG Austen alt Rupes pe San

| Trait theories | Based on analysing the personality characteristics or preferences of

successful leaders

| Style theories Based on the view that leadership is an interpersonal process

| whereby different leader behaviours influence people in different
_ ways. More or less effective patterns of behaviour (or ‘styles’) can
therefore be adopted

| Contingency theories Based on the belief that there is no ‘one best way’ of leading, but
| that effective leaders adapt their behaviour to the specific and
changing variables in the leadership context: the nature of the task,
| the personalities of team members, the organisation culture, and so
| on

4.1 Trait theory

Trait theories of leadership attempt to identify the distinguishing characteristics of successful
leaders. Most studies single out the following traits:
(a) Intelligence — above average but not genius level
(b) Initiative — independence and inventiveness, the capacity to perceive a need for action and
the urge to do it
(c) Self-assurance

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 (d) The helicopter factor — ability to rise above the particulars of a situation and perceive it in
relation to the overall environment
Other studies mention: enthusiasm, sociability, integrity, courage, imagination, decisiveness,
determination, energy, faith, virility, good health, above average height or well below it.
In general, criticisms of trait theory are:
(a) Possession of all traits becomes an impossible ideal.
(b) Too many exceptions to the rule.
(c) If reduced to the useful minimum they become at best necessary but not sufficient
(d) Traits are not well defined and not much use in practice for recruitment of leaders.
Trait theory has been more or less discredited.
(a) The premise that certain traits (or qualities) are absolutely necessary for effective leadership
has never been substantiated.
(b) The lists of traits proposed for leaders have been vast, varied and contradictory.
(c) Trait theories ignore the complexities of the leadership situation, and not everybody with
leadership ‘traits’ turns out to be a good leader.

Real life example

One trait that is often claimed for leaders is that they are tall; of the thirty presidential elections
between 1900 and 2016, the taller candidate won two thirds of the time. However, there are
notable exceptions to the theory that leaders should be tall - Napoleon Bonaparte was only
average height, Winston Churchill was only five foot six, Nicolas Sarkozy is five foot five. That’s the
trouble with Trait theory — no matter which trait you use, there are always lots of exceptions.

4.2 Style theories of leadership

There are various classifications of leadership style. Although the labels and definitions of styles
vary, style models are often talking (broadly) about the same thing — a continuum of behaviours
from:
(a) Wholly task-focused, directive leadership behaviours (representing high leader control) at one
extreme; and
(b) Wholly people-focused, supportive/relational leadership behaviours (representing high
subordinate discretion) at the other.
Key style models include:
* The Ashridge Model: tells, sells, consults, joins
* Blake and Mouton’s Managerial Grid: concern for task, concern for people

4.2.1 The Ashridge Management College model

This model distinguishes four different styles:
Figure 12.4: Ashridge’s leadership styles
Tight Loose

a aeenetaeneenanreereecneend >

| Tells | Sells | | Consults Joins

| (autocratic) | (persuasive) | | (consultative) | | (democratic) |

(a) Tells (autocratic)

The ‘tells’ style is where the leader makes all of the decisions and issues instructions which
must be obeyed without question. Quick decisions can be made when speed is required but it
does not encourage initiative and commitment from subordinates.

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 (b) Sells (persuasive)
This style is where the leader still makes all of the decisions but believes that subordinates
have to be motivated to accept them and carry them out properly. Employees are made
aware of the reasons for decisions but they may not accept the decisions.
(c) Consults
This style is where the leader confers with subordinates and takes their views into account
but retains the final say. This encourages motivation and employees can contribute their
knowledge but it may take much longer to reach decisions.
(d) Joins (democratic)
This style is where the leader and followers make the decision on the basis of consensus. This
can provide high motivation and commitment from employees but decision making might
become a very long process.
The Ashridge studies found that:
(a) In an ideal world, subordinates preferred the ‘consults’ style of leadership.
(b) People led by a ‘consults’ manager had the most favourable attitude to their work.
(c) Most subordinates feel they are being led by a ‘tells’ or ‘sells’ manager.
(d) In practice, consistency was far more important to subordinates than any particular style.
The least favourable attitudes were found among subordinates who were unable to perceive
any consistent style of leadership in their superiors.

4,
Essential reading

See Chapter 12 Section 3 of the Essential reading for more detail on management theory.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

Activity 5: Leadership style

Consider two situations:

(1) Due to external factors, the budget for your department has been reduced and 25% of your
staff must be made redundant. Records of each employee’s performance are available.
(2) There is a recurring administrative problem which is minor, but irritating to everyone in your
department. Several solutions have been tried in the past, but without success. You think you
have a workable remedy , but unknown problems may arise, depending on the decisions
made.

Required
Suggest an appropriate style of leadership for each of the two situations. Think about your
reasons for choosing each style in terms of the results you are trying to achieve, the need to
secure commitment from others, and potential difficulties with both.

4.2.2 Blake and Mouton’s managerial grid

Blake and Mouton’s managerial grid (Blake et al. 1964) looks at the two basic criteria for
leadership:
* Concern for task being achieved
* Concern for people/staff carrying out the task

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Figure 12.5: Blake and Mouton’s managerial grid

Concern for production (task)

1.9 (Country club) (team) 9.9

5,5)
(Middle road)

Concern
for
people

1.1 (impoverished) (task) 9.1

The extreme cases shown on the grid are:

(a) 1.1 impoverished: the manager is lazy, showing little interest in either staff or work.
(b) 19 country club: the manager is attentive to staff needs and has developed satisfying
relationships. However, there is little attention paid to achieving results.
(c) 91 task management: almost total concentration on achieving results. People’s needs are
virtually ignored.
(d) 5.5 middle of the road or the dampened pendulum: adequate performance through
balancing the necessity to get the task done with importance of team morale.
(e) 99 team: high work accomplishment through ‘leading’ committed people who identify
themselves with the organisational aims.
The managerial grid was intended as an appraisal and management development tool. It
recognises that a balance is required between concern for task and concern for people, and that
a high degree of both is possible (and highly effective) at the same time.

Activity 6: Managerial Grid

Which position on Blake and Mouton’s grid do you think each of the following statements
represents?

| attend because it is expected. | either go

along with the majority position or avoid
expressing my views.

| try to come up with good ideas and push for |

a decision as soon as | can get a majority |
behind me. | don’t mind stepping on people if
it helps a sound decision.

| like to be able to support what my boss

wants and to recognise the merits of
individual effort. When conflict rises, |doa |
good job of restoring harmony.

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 4.3 Contingency theories
Contingency theories see effective leadership as being dependent upon a number of variable
factors; there are a number or theorists in this area whose work is specifically mentioned in the
syllabus and we look at these in turn here — perhaps the best approach would be to learn the key
variables that each of the theorists focuses on in order to be able to recognise which one is being
referred to in a question. While it is perhaps the case that Fiedler and Adair are the most widely
known of the contingency theorists, it would be unwise to ignore the others, as they are
specifically mentioned in the syllabus.

4.3.1 Fiedler
Fiedler (1967) identified two variables in leadership:
* Favourability of the situation for the manager
* Proximity of manager to their team
Where the ‘favourability of situation to manager’ (favourable, unfavourable or in the middle)
determines the ‘psychological proximity of manager’ to their team (close or distant)
* If the situation for the manager is in the extremes the manager needs to be distant from their
team, eg things are going really well, the manager should adopt a distant stance, or may be
accused of favouritism when give out bonus. Or if things going really badly and need to make
employees redundant, then better to be distant.
* Only if the situation is in the middle does the manager benefit from being close to team. For
example, motivating them to meet targets which are almost in reach.
Situational factors include:
* Task structure
* Power of the leader
* Trust

4.3.2 John Adair - action centred leadership

The ‘action-centred’ or ‘functional’ leadership model (Adair, 1973) is part of the contingency
school of thought, because it sees the leadership process in a context made up of three
interrelated variables: task needs, the individual needs of group members and the needs of the
group as a whole. These needs must be examined in the light of the whole situation, which
dictates the relative priority that must be given to each of the three sets of needs. Effective
leadership is a process of identifying and acting on that priority, exercising a relevant cluster of
roles to meet the various needs.
Figure 12.6: Adair’s action centred leadership

Task roles
Initiating
Information-seeking |
Diagnosing
| Opinion-seeking
| Evaluating
| Decision-making

aee| ee
> a ~<
Fa Fai TEN
or f \ \ Z 4. - 4 : z — ‘

ee iste t eee rer i | ree ) \ | Individual maintenance |

intenance | / \
eee ae fe NN vn . \ | roles
E |ft z Tiere \ | Goal-setting
| In | roup | \lndividual \ |
cer ae \) needs | Feedback
Wi toenabeatrial ;,
se ihre) NG ON jf | Recognition
Clarifying | ror pea seg A |Painind
Counselling
Standard-seeking } Total sityat™

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 Adair’s theory is often known as ‘action centred leadership’. Action in one area will impact the
other areas. Managers must therefore balance their attention between the three variables.
Managers need to deveiop their leadership skills to:
(a) Energise and support change
(b) Secure commitment from their staff
(c) Set direction
(d) Develop people

4.3.3 Bennis
Warren Bennis puts forward some specific differences between the role of the manager and the
role of the leader.
(a) The manager administers and maintains, by focusing on systems and controls and the short
term.
(b) The leader innovates, focuses on people and inspires trust, and holds a long-term view.
As a further distinction, Bennis distinguishes between the manager as someone who ‘does things
right’ and the leader who ‘does the right thing’.
Bennis studied leadership by examining leaders of every description in the hope of finding some
common characteristics and concluded that there is no one right way to lead, but it does set out
common competencies displayed by leaders. Bennis (1985) calls them:
(a) The management of attention: a compelling cause or vision, to give focus
(b) The management of meaning: the ability to communicate
(c) The management of trust: being consistent and honest
(d) The management of self: being aware of personal weaknesses and strengths
Other tasks of the leader that Bennis sees as important are:
(a) Constantly reminding people why their work is important
(b) Creating an atmosphere of trust
(c) Encouraging curiosity and risk taking in the organisation culture
(d) Fostering an atmosphere of ‘hope’ which can be particularly helpful when things go wrong
Bennis believes that leadership in the modern age is a shared task, with power spread around
rather than centralised. It could be that the most important role of modern leaders is deciding who
will be in their teams.

4.3.4 Heifetz: dispersed leadership

This approach recognises the importance of social relations, the need for a leader to be accepted
and the fact that nobody will be an ideal leader in every circumstance. Also referred to as
‘informal’ or ‘emergent’, it proposes that individuals at all organisational levels can exert a
‘leadership influence’.
Heifetz (1994) distinguishes between the exercise of ‘leadership’ and the exercise of ‘authority’.
This separates leadership from the formal organisational hierarchy and traditional positions of
‘power’. The leader can only be identified by examining relationships with the ‘followers’ in the
group — they could quite easily be someone who ‘emerges’, rather than someone who has been
predefined as the leader from the outset.
This approach is more sociological and political in its basis than traditional management thinking,
drawing as it does upon the prevailing organisational culture and context. A leader’s individual
qualities are less important than the leadership process, and the relationships created and
sustained within it.

4,
Essential reading

See Chapter 12 Sections 3 of the Essential reading for more detail on Leadership.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

244 Business and technology (FBT/BT)

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Chapter summary
A" ETL LE ETL LISLE ENED LESELMER
ELVINEE LTO OBIE ERTL EIN
& >

' Leading and managing |

SSSI LR LES IETS BET a

Leadership The _ The development of Leadership

and process of management and
management management leadership theory
I :
What is leadership? Mintzberg roles of Fayol: five functions of Trait theory
+ Entrepreneurship management management * Aim to identify
* Interpersonal skills + Interpersonal * Planning distinguishing
- * Decision making and * Informational * Organising characteristics of
problem solving * Decisional * Commanding successful leaders
* Time management and I * Co-ordinating * Many exceptions to
personal organisation * Controlling rules so not useful
Elements of
* Self development 1 |
management
i Taylor: scientific The Ashridge
* Authority
What is management? * Responsibility management Management College
* Set objectives ¢ Accountability « Development of model
- * Monitor progress and * Power science of work * Tells
results * Scientific selection * Sells
* Corporate values Authority and development * Consults
* Interests of owners * Techniques to plan, * Joins
and stakeholders ¢ Charismatic authority measure and control |
¢ Traditional authority work
¢ Rational legal Blake and Mouton's
¢ Constant co-operation managerial grid
authority between management
* Responsibility and and workers
* Two basic criteria
accountability concern for task and
4
I concern for people
Elton Mayo: human ¢ Extreme cases:
Power relations — Impoverished
« Physical * More than financial — Country club
¢ Resource satisfaction — Task management
* Coercive * Control over work — Team
*« Reward ¢ Group interaction
* Legitimate
| Fiedler
* Expert
° Referent Drucker * Task structure
« Negative * Objective setting * Power of the leader
* Work organisation * Trust
* Motivation J
¢ Measuring Adair action centred
performance and leadership
control
¢ Needs of the task
* Developing people
¢ Needs of the individual
| * Needs of the group
Mintzberg; the
|
manager's role
Bennis
« Interpersonal
* Managerv leader
¢ Informational
* Decisional J
Heifetz
* Distinguishes between
leader and authority
+ Leaders may emerge
from group

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 Knowledge diagnostic
ESOP SALSA I RPE LIERONS REIT IPL LESLIDS AIELLO
I I ELL IEISIE,

. Management
Management is the process of getting things done. Leadership on the other hand is about
providing direction and influencing others to follow that direction. Supervisors are lower level
managers who are more hands on and day-to-day and are less likely to have line responsibility
for staff.

. Mintzberg’s managerial functions

Mintzberg identifies managerial functions as interpersonal, informational and decisional roles. We
can distinguish authority, responsibility, accountability and power. Ideally they should all
coincide however that is not always the case.

. Delegation
Delegation is the process of passing down responsibility and authority whilst retaining
accountability

. Development of management and leadership theory

Management theory has developed over time. Classical — Fayol’s Management functions;
Planning, Organising, Commanding, Coordinating and Controlling. Scientific — Taylor’s four
principles. Human Relations — Elton Mayo (emphasised group dynamics and concern for
individual motivation).
Style — Drucker’s three basic functions

. Leadership theory
Trait Theory which looks at a wide range of personality factors and so has had much criticism.
Style — Ashridge (tell, sell, consult and join), and Blake & Mouton’s grid.
Contingency theory — Fiedler (situation and proximity) and Adair (task, group and individual).
This approach suggests that the appropriate style depends on a range of factors.

246 Business and technology (FBT/BT)

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Further study guidance

Question practice
Now try the following from the Further question practice bank [available in the digital edition of
the workbook]:

Exam Section A

“Exam Section A

Exam Section A
|

O60 Exam Section A |

Further reading
There is an article on the ACCA website entitled ‘Theories of leadership style’ that is relevant to
material in this section. You are strongly advised to read this article in full as part of your
preparation for the FBT exam.

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Activity answers

Activity 1: Management structure

The purpose of this exercise has been to get you to separate the issues of management functions
from organisational structure and hierarchy. John, Paul, George and Ringo have a number of
choices. Here are some extreme examples. _
(1) All the management activities are the job of one person.
In this case, Paul, for example, could plan, direct.and control the work and the other three
would do the work.
(2) Division of management tasks between individuals could be carried out (repairing drums and
ensuring plans are adhered to would be Ringo’s job, and so on).
(3) Management by committee. All of them could sit down and work out the plan together, etc. In
a small business with equal partners this is likely to be most effective.

Activity 2: Delegation
Reasons to delegate:
* Fear of being undermined if the junior discovers a quicker way to input the data
* Frustration — quicker to do it yourself
* Lack of confidence in a junior’s ability
* Loss of power, whilst not the biggest issue in this example, in certain situations the manager
may not like to relinquish power over this spreadsheet.
(Only three were required)

Activity 3: Power
The correct answer is: Reward power
Reward power is an aspect of resource power so, while Option 2 is not incorrect, it is not as good
an answer as Option 3.

Activity 4: Developing people

The correct answer is: Drucker

Activity 5: Leadership style

Appropriate style of leadership:
(1) You may have to ‘tell’ here: nobody is going to like the idea and, since each person will have
their own interests at heart, you are unlikely to reach consensus. You could attempt to ‘sell’, if
you can see a positive side to the change in particular cases: opportunities for retraining,
say.
(2) You could ‘consult’ here: explain your remedy to staff and see whether they can suggest
potential problems. They may be in a position to offer solutions — and, since the problem
affects them too, they should be committed to solving it.

Activity 6: Managerial Grid

Statement, position on grid:

|
| attend because it is expected. | either go | 1.1: low task, low people
|along with the majority position or avoid |
expressing my views.
SE ee

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Statement Position on grid
| try to come up with good ideas and push for 9.1: high task, low people
a decision as soon as | can get a majority
behind me. | don’t mind stepping on people if
it helps a sound decision.
on
| like to be able to support what my boss 19 high people, low task
wants and to recognise the merits of
individual effort. When conflict rises, |do a
good job of restoring harmony.

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250 Business and technology (FBT/BT)
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 _ Recruitment and
LIBERTE LIEGRE EPS
SDE SIE BE SPE GLE EBA SIO

f
be:
selection
fp
f

os oo
Titteoresas a

Learning outcomes
On completion of this chapter you should be able to:

Syllabus reference no.

Explain the importance of effective recruitment and selection to the De@

good sceon.

Desc the recruitment and SEs Toa process nana eeolemn the eee D2)
in this process.

Describe the roles of those involved in the recruitment and selection “D2
processes.

Describe the methods through which organisations seek to meet their D2 (d)
recruitment needs.

Ean the eavantaces ane Upecvameces of erent recruitment D2 (e)

and Sa uclasIBS Mees:

Resin the: purposes ane Hence of et sR aie opportunities D2 (6)

Poles within the human resources plein:

Een ihe practicd! st6196 therean Gigeubanennmay take to ensure D2 (@)

the effectiveness of its diversity and equal opportunities policy.

Exam Context
This part of the syllabus is a rich source of potential questions. There were two questions from the
specimen exam relating to this topic.
252 Business and technology (FBT/BT) 7) BPP
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Chapter overview
LOE SSL SOLEIL CLIT
RR

_ Recruitment and selection

SAID)
am
ae:
isis AS

Recruitment _ Job requisition — _ Advertising

and selection | and analysis

: Media for advertising

Overview of recruitment Overview
and selection

Competences
Importance of recruitment
and selection |
| Mintzberg's parameters

Responsibility for recruitment |

and selection
Job Descriptions

Overview of the
. Person specifications
recruitment process

Selection Discrimination
at work

|
Outline of process Group selection methods Equal opportunities

| | |
Interviews References Types of discrimination

| | |
Selection testing Evaluating recruitment and Anti discrimination laws
selection practices

The practical implications Diversity

Equal opportunities policy Concept

Other initiatives Diversify in the workplace

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 Recruitment and selection :

1.1 Overview of recruitment and selection

The aim of the recruitment and selection process is to obtain the quantity and quality of
employees needed to fulfil the organisation’s objectives. It comprises three main stages:
(a) Defining the requirements
(b) Attracting applicants
(c) Selecting the right candidates
Ss CSC ONAN SITY ILE NISMO SSAS CURT RH a ESI ENE SESOO RE eS RR SEE PET ICAI SAE DETR NSCD . Sar Det NTE SSAA LOREEN ARESNID ESES TS SES EEN

Recruitment : The part of the process concerned with finding applicants: it is a positive action
| by management, going into the labour market (internal and external), communicating |
' opportunities and information, and generating interest.
| Patan i
| Selection: The part of the employee resourcing process which involves choosing between i
! applicants for jobs: it is largely a ‘negative’ process, eliminating unsuitable applicant. |
LS OTC NASER
SENSAAN SALT ie cPSLA (IRA PEUTREEIAE CM STEN ROE TALES OLDER TYCSREES MEADE OU OE I!IC ABMS TRDSE IESE

1.2 Importance of recruitment and selection

Human resources management (HRM) believes that employees are a scarce and crucial resource
and so recruitment and training issues are key to achieving the organisation’s strategy.
* There may be skills shortages in key areas
* In modern “knowledge based” economies, people with the right aptitudes are essential.
Detailed human resource planning defines what resources the organisation needs to meet its
objectives, and what sources of labour (internal and external) are available. The organisation’s
skill requirements may be met through recruitment — but there may also be plans for reducing
staff numbers, redeployment, training and development, promotion, retention (to reduce loss of
skills through staff turnover), and so on.

1.3 Responsibility for recruitment and selection

Numerous people may be included in the recruitment and selection process:
(a) Senior managers (for senior positions and HR planning)
(6b) Human Resources (HR) department
(c) Line managers
(d) Recruitment consultants

Activity 1: Recruitment consultants

Suggest three advantages and three disadvantages of using external recruitment consultants.

Solution

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1.4 Overview of the recruitment process
The recruitment process can be summarised by the following diagram:
Figure 13.1: The recruitment process

Step 1 Job requisition |

ee ey | Job description |
Step 2 | Job analysis | pe eee
gy = | Person specification |

Stans Identify potential

| internal candidates |

| Recruitment | |

Gren 4a | Advertise internally |

| andexternally |

sehen Determine selection |

methods

| Selection |

Step 6 Select candidates |

2 Job requisition and analysis

2.1 Overview
Job requisition is a process to ensure all vacancies are valid and authorised.
Job analysis is the process of collecting, analysing and setting out information about the content
of jobs. This leads to two documents:
* Job description — tasks and duties, skills and knowledge
¢ Person specification — personal attributes required of job-holder

Competences
Competences are commonly used during the process of defining job descriptions:
fa RAEN
ER PTO NB BRE REG AESEF EPEC BTL TOSSODAS REA = sea SOHO Cac ONSEN

| Competence: An individual’s capacity that leads to behaviour that meets the job demands
_ within the parameters of the organisational environment and that, in turn, brings about
| desired results.
eB PRI TOA SSPPES EDITS STEEP CS BSS EEE TINY SSS EDS EES ILI

Different categories of competence include:

* Behavioural/ personal - eg ability to relate well to others
* Work based/ occupational competences - eg ability to produce financial statements
* Generic competences are competences that are not specific to any one particular job eg
problem solving.

13: Recruitment and selection 255

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 2.3 Mintzberg’s parameters
Mintzberg (1989) proposes three parameters of job design:
(a) Job specialisations:
(i) How many different tasks are contained within the job and how multi-skilled do the job
holders need to be?
(i) To what extent does the worker have control over the work?
(b) Regulation of behaviour - how does the organisation control the behaviour to ensure co-
ordination.
(c) Training in skills and indoctrination in organisational values.

2.4 Job descriptions

Job descriptions (or job specifications) are detailed accounts of the job role of the individual or
groups of workers of a particular type. The contents of a job description include:
(a) Job title and job grade
(b) Department/section and location
(c) Wage salary/range
(d) Function of department and main purpose of job
(e) Duties and responsibilities
(f) Specific limits to authority
(g) Responsible to and for
(h) Date prepared and Reference number

2.5 Person specifications

A person specification is a set of role-specific attributes used to attract applications and used as
a benchmark against which to compare candidates’ actual attributes when making the selection
decision. These may be derived from analysis of attributes of known high-performing job holders
in similar roles.

2.5.1 Rodger’s seven-point plan

One method that has been used for the selection process is Alec Rodger’s Seven Point Plan
(Rodger, A (1952)):

|apace! make-208 Strength, GER ocEanes, Rech

x = —|
"Attainments |Qualifications, career achievements |
ee So eh Ce ee ae Ss a ae 2eae ee
r }

"General intelligence “Average, ateneece

r i * | t ors
| Specialaptitudes / Manual dexterity Figatal sharpness
r Wrst so That erly Tin Monee worntwt.|
| intersects Mechanica) neon: BSS

|Disposition | Calm, independent

Circumstances
ini re [a ee ee eee e e ae ee
Location, car owner

4,
Essential reading

See Chapter 13 Section 1 of the Essential reading for more detail on recruitment and job design.
The Essential reading is available as an Appendix of the digital edition of the Workbook.
en

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 Advertising
3.1 Objectives of advertising
The objective of advertising vacancies is to attract suitable applications from people likely to fit
job and person specifications and job advertisements should aim to:
(a) Clearly describe the job on offer.
(b) Provide information about the company.
(c) Arouse interest from readers.
(d) Deter unsuitable persons from applying.
(e) Hold reader’s attention.

3.2 Media for advertising

Media for recruitment advertising include:
(a) Informal (word of mouth, staff recruit others)
(b) In house (magazine, notice board, memo to managers)
(c) Publications (trade journals, local and national press)
(d) Careers service (schools, job centre, Professional & Executive register)
(e) Recruitment fairs (‘milk round’, local business groups)
(f) Specialist Agencies (Secretarial Bureau, “head-hunter’)
(g) Local radio, television and cinema
(h) Internet including social media

Selection
Outline of process:
Step 1. Deal with responses to adverts (application forms and CVs)
Step 2 Assess each application against criteria
Step 3. Sort applications
Step 4 = Invite candidates for interview
Step 5 Selection testing
Step 6 Contact applications: Provisional offer or rejection

4.1 interviews

4.1.7 Objectives of interviews

Most organisations use interviews as a basis for selection and interviews should be a two-way
process to achieve the following:
(a) Find the best person
(b) Ensure applicants understand the job
(c) Give the best possible impression of the organisation
(d) Offer fair treatment to all applicants

Real life example

We have all been in an interview, and we all know how scary it can be. Some interviews are well
conducted and allow both parties to see if they can work with the other, so they can make a
decision — the interviewer deciding if they want to hire the candidate in front of them, and the
- interviewee deciding if this job is something they believe will help them achieve their long term
career goals — but often interviews fall short. In this section we consider the different types of
interviews, the features that interviews should (in theory) possess, and conclude with a discussion

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 employees.
of the pros and cons of interviews as a technique for identifying appropriate potential
As you're reading through it, try to relate it to your experiences of good and bad interviews.
a

Types of interviews
There are three types of interview:
(a) Individual (one to one or face to face) interviews
(b) Panel interviews - two or three people interview the candidate (eg and HR specialist and the
manager of the department where the successful candidate will work
(c) Selection boards - A large panel interviews the candidate

4.1.3 Advantages of interviews

Advantages of interviews include:
(a) Personal information assessed more easily
(b) Allows more flexible approach
(c) Can put applicant on the spot

4.2 Limitations of interviews

Scope An interview is too brief to ‘get to know’ |

| _ candidates in the kind of depth required to
make an accurate prediction of work |
| _ performance.
|
|
_ Artificiality _ An interview is an artificial situation: |
|
_ candidates may be on their best behaviour or, |
|

| conversely, so nervous that they do not do |

themselves justice. Neither situation reflects |
|
what the person is really like.

| The halo and horns effects The tendency for people to make an initial
| general judgement about a person (either
| positive or negative) based on a single obvious |
attribute, such as how they are dressed or |
their size. This single attribute will colour later
perceptions, and make an interviewer mark
the person up or down on every other factor in
_ their assessment.

_ Contagious bias |The interviewer changes the behaviour of the |

|

applicant by suggestion. The applicant might |

|

| be led by the wording of questions, or non-

| _verbal cues from the interviewer, to change
_ what they are doing or saying in response.
thee 5 ————————— — a sail

| Stereotyping |Stereotyping groups together people who are |

| assumed to share certain characteristics |
; |
(women, say, or vegetarians), then attributes |
|
|
certain traits to the group as a whole. It then |
| assumes that each individual member of the
| | supposed group will possess that trait. |
ey oe te — = = — ae — — ————— ee tas ee ll

| Incorrect assessment | Qualitative factors such as motivation,

| _ honesty or integrity are very difficult to define
and assess objectively.

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 |Logical error _ For example, an interviewer might decide that
_ a young candidate who has held two or three
jobs in the past for only a short time will be
unlikely to last long in any job. (This isn’t
necessarily the case.)
Inexperienced interviewers _ Inexperienced or unskilled interviewers may
| undermine the process through:
| a6 F F
|* Inability to evaluate information about a
candidate properly
|* Failure to compare a candidate against
| the job description or person specification
+ Failure to take control of the direction and
length of the interview
* Using inappropriate question types to elicit |
data or put candidates at ease
* Areluctance to probe into facts or |
challenge statements where necessary

UL
Essential reading

See Chapter 13 Section 2 of the Essential reading for more detail on interviews.
The Essential reading is available as an Appendix of the digital edition of the Workbook.
er rn NN RS A tn

4.3 Selection testing

Selection testing involves submitting applicants to formal tests to identify:
+ Degree of competence in performing required skills
« Attributes such as intelligence and personality

4.3.1 Types of testing

(a) Psychometric testing:
(i) Personality assessed against known scales (introversion/extroversion, Belbin types,
cognitive style etc)
(ii) Resulting profile compared to norm tables — ie profiles of good performers in similar roles
(iii) Used to select candidates and to pinpoint areas for personal development
(b) Proficiency and attainment testing:
(i) Intelligence tests — seeks to assess basic IQ or verbal reasoning
(ii) Aptitude/skills testing (eg numerical, dexterity, spatio-visual ability)
(iii) Job simulation/work sampling to test proficiency (eg typing speed, telesales role play)

4.3.2 Evaluation of selection testing:

(a) Advantages
(i) Ensure fulsome coverage of all aspects of a candidate
(ii) Test of ability not just blind acceptance of a CV
(iii) Good accuracy record for some types of testing
_(b) Disadvantages
(i) Can be very time consuming
(ii) Candidate might feel affronted
(iii) High expense of buying tests or employing consultants/specialists

BPP
re 13: Recruitment and selection 259
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 (iv) Can measure current skills and not potential
(v) Interpretation of tests results

4. Group selection methods

Group selection methods (sometimes known as ‘assessment centres’) are used for jobs requiring
leadership and/or team working. It is a process involving small groups of participants undertaking
a series of tests and exercises under observation with a view to assess their skills and
competencies.
The above process often lasts several days (‘country weekend’) and may include:
(a) Decision-making simulations
(b) Communication exercises
(c) Structured interviews and tests
(d) Leadership and team challenges
Participants observed by multiple assessors who report back later on their overall assessment of
each participant.

Activity 2: Assessment centre

Suggest three advantages and disadvantages of using assessment centre

Solution

4.5 References
References are used by employers mainly to verify straightforward factual information such as
previous job details and the period of employment. Any information on the applicants’ personality
must make allowances for bias and blandness. References may be written or via the telephone:
(a) Advantages
(i) Independent opinion
(ii) Honest feedback
(6b) (b) Disadvantages
(i) Bias for/against
(ii) Bland (fear of being sued)

4.6 Evaluating recruitment and selection practices

To get a clear idea of how efficient their recruitment and selection practices are, firms can ask
themselves these questions.
* Can we identify human resources requirements from the business plans?
* How fast do we respond to demands from line managers for human resources?
* Do we give/receive good advice on labour market trends?
* Dowe select the right advertising media to reach the market?
* How effective (and cost effective) is our recruitment advertising?

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* How do our recruits actually perform — do we end up employing the right people?
* Do we retain our new recruits?
Recruitment and selection practices can be reviewed in various ways.

Review === + +Comment

Performance indicators |Each stage of the process can be assessed by performance
indicators; for example, the time it takes to process an application.
Data can be collected to check oie) pce from standard.

Coen,effectiveness ce seers nee Bt relevant responses perSeo enaeiset ea or

_ cost of various advertising media per application elicited (or person |
onigilice),

Monitoring the High staff ercoren Guesneeein ane Aree plans eacretions
workforce among new recruits) may reflect poor recruitment and selection.
Lack of WelRueite ei tuts eon coc num aype

Attitude surveys |Bie fae can sak its recruits what they onan of the BOIS

Actual individual job A person’s actual performance can be compared with what was
performance pa peaeawhen dingwere Pues

Real life example

Smith and Abrahamsen (1992) developed a scale that plots selection methods according to how
accurately they predict a candidate’s future performance in the job.
This is known as a predictive validity scale. The scale ranges from 1 (meaning that a method is
right every time) to O (meaning that a method is no better than chance).

_ % use byfirms Predictive validity |

Interviews

same ee le Te | 74 | 013 anita

Work pamuplings zat , aacthct! 18 1 | } Oya A

Asteementcentress t=<iSti oe ida oto

Personality tests ( . | | 13 0.40 %

Sk aa | ie
Biodeta cccoie eueisee ee on ii 4 mhusib fethate 0.40 .

Graphology (handwriting analysis) j | — 3 ae 0.00 mG

The results surprisingly show a pattern of employers relying most heavily on the least accurate
selection methods. Interviews in particular seem not much better than tossing a coin.

wasn
BPP 13: Recruitment and selection 261
 Discrimination at work

Equal opportunities
Many countries have legislation to prevent discrimination (eg on the basis of gender, race or
disability).
NEE AP ARS OPS LAISTENA REN MDT SSSI CAE TERS ICT INAS TEIN ESO ASE se OSES AEAESIO BESTE NLS PESTA ND BALE AIEEE OES ETI

| Equal opportunities: An approach to the management of people at work based on equal

| access and fair treatment .|
| cc tn SER SO AE AIDE EE LEE

Equal opportunities relates to all aspects of employment:

(a) Adverts
(b) Recruitment and selection
(c) Access to training
(d) Promotion
(e) Disciplinary procedures
(f) Redundancy and dismissal
(g) Pay and conditions
(h) Prohibiting discrimination on the ground of gender and marital status.

Activity 3: Benefits of equal opportunities

How does equal opportunities benefit organisations?

5.2 Types of discrimination

There are four main types of discrimination:
* Direct discrimination - one group is treated less favourable than another
* Indirect discrimination -a policy is fair in form but discriminatory in practice
+ Victimisation - a person is penalised for giving information or taking action in pursuit of a
claim of discrimination
* Harassment - the use of threatening, offensive or abusive language or behaviour.

Activity 4: Indirect discrimination

Suggest four examples of practices that would constitute indirect discrimination on the grounds of
gender.

Solution

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5.3 Anti-discrimination laws
Many countries have introduced various laws aimed to prohibit different types of discrimination:
Race Relations laws prohibit discrimination on the grounds of:
* Colour
* Race
* Nationality
* Ethnic or national origin
Other forms of discrimination laws:
* Rehabilitation of offenders
* Disability
* Sexual orientation
* Religious belief
* Age

The practical implications

6.1 Equal opportunities policy
One recommendation is that organisations should develop an equal opportunities policy. This
should include policy statements and a code of practice on equal opportunities.
Setting up a successful equal opportunities policy requires:
(a) Secure support from top management: create senior accountabilities
(b) Set up a representative working party to produce a Code of Practice
(c) Formulate action plans and allocate resources to publicise/implement policy
(d) Implement monitoring and review of minority staff entering/progressing/leaving
(e) Plan and implement positive action initiatives to facilitate minority access to opportunities

6.2 Other initiatives

Some employers are doing more than the legal minimum by addressing the underlying causes of
discrimination. Positive action initiatives include:
(a) Flexible hours/part time working
(b) Career break or return to work schemes
(c) Putting equal opportunities higher on the agenda (eg appointing equal opportunity
manager) and positive action (to encourage applications from minorities)
(d) Fast tracking school leavers (as well as graduates)
(e) Training for women returnees
(f) Awareness training
(g) Counselling and disciplinary policies

Diversity
7.1 Concept
Diversity goes further than just providing equal opportunities in the workforce. Diversity’s main
thrust is to ensure, within a legally acceptable framework, the composition of the workforce
reflects the population as a whole. Here the rationale is that a diverse organisation will both
understand and meet its customer’s needs better.

In order to reflect diversity and to see it as an opportunity not a hurdle, managers need to ensure
that organisational systems also support diversity.

Y BPP 13: Recruitment and selection 263

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 For example:
(a) Recruitment and selection
(b) Education and training
(c) Career development
(d) Communications methods and channels
(e) Work/life balance

7.2 Diversity in the workplace

Diversity in the workplace means:
(a) Managing co-operative working in diverse teams
(b) Tolerance of individual differences
(c) Communicating effectively with an ethnically diverse workforce
(d) Managing workers with diverse family structures and responsibilities
(e) Managing the adjustments to be made by an ageing workforce
(f) Managing diverse career paths and aspirations
(g) Confronting educational/qualification issues in an international workforce
The steps in implementing a diversity policy are:
Step 1 Analyse your business environment
Step 2 Define diversity and its business benefits
Step 3 Introduce the diversity policy into the corporate strategy
Step 4 Embed diversity into core HR processes and systems
Step 5 Involve staff at all levels
Step 6 Communicate, communicate, communicate
Step 7 Understand your company’s needs
Step 8 Evaluate

264% Business and technology (FBT/BT)

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Chapter summary
}_ Recruitment and selection
STR
TEDE
19:
af

Recruitment | _ Job requisition Advertising

and selection © and analysis

Overview of recruitment and Overview Media for advertising

selection * Job requisition * Word of mouth
* Recruitment — finding ¢ Job analysis * In house
- applicants — Job description * Publications
* Selection — choosing between — Job Person specification + Careers service
applicants * Recruitment fairs
| « Agencies
Competences ¢ Local radio, television and
. Importance of recruitment and * Behavioural cinema
selection * Work based/occupational * Internet
* Obtain skills needed to achieve * Generic
objectives |
* Employees are a scarce
resource Mintzberg's parameters
| ¢ Job specialisations
* Regulation of behaviour
- Responsibility for recruitment » Training
and selection
* Senior managers
¢ Human resources Job Descriptions
* Line managers + Job title/grade
* Recruitment consultants * Department
j ¢ Wage/salary range
* Function of department and
Overview of the recruitment main purpose of job
PeVorer + Duties and responsibilities
* Job requisition |
* Job analysis
* Identify potential internal Person specifications
candidates * Role specific attributes
* Advertise internally and » Rodger's Seven-point plan
externally — Physical
* Determine selection methods = Atroinments
* Select candidates ~ Intelligence
" — Aptitudes
: — Interests
: — Disposition
: — Circumstances

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 _ Selection Discrimination
at work

ana SS ae
Outline of process Group selection methods Equal opportunities
¢ Deal with responses to adverts + Small groups + Management of people based
« Assess each application « Tests under observation on equal access and fair
* Sort applications * For jobs requiring leadership treatment
¢ Invite candidates for interview
* Selection testing
'* Contact applicants (offer or References Types of discrimination
rejection) « Used to confirm factual ¢ Direct
information ¢ Indirect
¢ Victimisation
Interviews ¢« Harassment
* Objectives Evaluating recruitment and
* Types selection practices
« Advantages + Performance indicators Anti discrimination laws
¢ Limitations * Cost effectiveness * Race relations
¢ Monitoring the work force + Rehabilitation of offenders
Attitude surveys * Disability
Selection testing ¢ Actual individual job ¢ Sexual orientation
_* Psychometric testing performance + Religious belief
* Proficiency and attainment « Age
testing
— Intelligence tests
— Aptitude tests
— Job simulation

The practical implications Diversity

|
Equal opportunities policy Concept
* Support from top management -* Composition of workforce
* Code of practice reflects population
¢ Will understand and meet
customers’ needs better
Other initiatives
* Flexible hours/part time
working Diversify in the workplace
¢ Return to work/career break + Analyse business environment
* Define diversity and benefits
* Introduce diversity policy
* Embed into core HR processes
* Ensure leaders implement
* Involve staff
* Communicate
* Understand company's needs
* Evaluate

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 Knowledge diagnostic
alana ase! te ALAS SF PLN SEES STR AE NSS TSRNWS ICIP SO SNS CURES SU Dt) ES AEE SOO SE RSI ASCENDO PST J EMPe

. Recruitment and selection

ot

The aim of the recruitment and selection process is to obtain the quantity and quality of
employees needed to fulfil the organisation’s objectives.

- People involved in recruitment

Various people and groups may be included in the recruitment and selection process, including
senior managers, the HR department, line managers, and recruitment consultants.

. Approach to recruitment
Recruitment is the process of attracting candidates of the appropriate skill and calibre.
Techniques include advertising, recruitment fairs and use of agencies. A systematic approach to
recruitment will begin with a job analysis from which a job description and person specification
will be drawn up.

. Selection
Selection is the process of choosing the appropriate candidate from those who have been
recruited.

. Review
Recruitment and selection practices should be reviewed to ensure that they are appropriate.

. Equal opportunities
Equal opportunities is about providing equal access to opportunities and treating people fairly.
Legislation in some countries covers discrimination on the grounds of sex, race, age and
disability. It is unlawful in these regimes to base decisions such as selection and pay on those
factors.

. Equal opportunities policy

Establishing an equal opportunities policy requires an organisation to undertake a number of
steps which might include securing support from top management, and setting up a working
party to produce a Code of Practice.

. Diversity
Diversity management is about having systems and management approaches that make the
most of the diverse workforce to better meet customer needs and the objectives of the
organisation.

13: Recruitment and selection 267

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 Further study guidance '

Question practice
Now try the following from the Further question practice bank [available in the digital edition of
the workbook]: ‘

Number level __. Approximate time_

O67 | Exam Section A 2 mins
= = a 2s ——— = — a

Q68 Exam Section A 1 min

L =— a eee) 2 —_— sag «|
Q69 Exam Section B 4 i 5 mins

Further reading
There is an article on the ACCA website entitled “Equal opportunities” that is relevant to material
in this section. You are strongly advised to read this article in full as part of your preparation for
the FBT exam.

ma
268 Business and technology (FBT/BT) ¢ BPP
Activity answers
SA ASE ATG SISSIESIEE SS TN RTI
SEE RSD BSCR ESET
SS BIA GSAT OTIS TIS

Activity 1: Recruitment consultants

Advantages:
* Time savings for internal HR department
* Quality of service provided
* Can be used to screen candidates to eliminate unsuitable candidates
Disadvantages:
* Cost - usually at least two or three months’ salary
* Risk - of unsuitable candidates being recruited
* Access to company information is shared with an external body

Activity 2: Assessment centre

Advantages:
* More time to assess candidates
* Wider range of skills can be tested
* Reduce bias in selection process
Disadvantages:
* Time
* ‘Cost
* Candidates may modify their behaviour to ‘pass’.

Activity 3: Benefits of equal opportunities

Benefits of equal opportunities to organisations:
¢ Retention of staff
* Company image/PR
* Motivation
* Reduced risk of litigation

Activity 4: Indirect discrimination

Here are four examples, but clearly the list is not exhaustive!
(1) Advertising a vacancy in a primarily male environment, where women would be less likely to
see it.

(2) Offering less favourable terms to part-time workers (given that most of them are women).
(3) Specifying age limits which would tend to exclude women who had taken time out of work for
child-rearing.
(4) Asking in selection interviews about plans to have a family (since this might be to the
detriment of a woman, but not a man).

BPP 13: Recruitment and selection

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Qg BPP
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 _Individuals, groups and
§2 f 4 g LEBYS SG RENE 38
DSF SLITS IESE RE LAAT 2 PDP EEE IR RS ETSTEE BEETLE IOI

Si
— teams

Learning outcomes
On completion of this chapter you should be able to:

Syllabus reference
no.

Deseribe-ttthe main pherccterctics of maiicuel and seule Behaviour D3 (a)

POutine theco
eOuTIbUHORE of nena ae teams to poancotendl D3 (b) ;
success.

Identify aulicdtel and team n approaches to work. pared D3 (c)

; Explain the differences pevest a group and a team. | | D4 (a)

oan itthe lees ofaa team, D4 (b)

Eola the role of Heemanager in building the team and aeelooine D4 (c)
individuals within the team.
(a) Belbin’s team roles theory
(b) Tuckman’s noel) of team evelopment

Met the nie CAE BF Br ecue and ineffective teams. D4 (d)

Desens tools and ences that can be used to build the team and D4 (e)
improve team effectiveness.

Exam context
Relationships within a team and the management of teams often figure in the examinations,
including named models such as Tuckman and Belbin. A question featured the work of Tuckman in
the specimen exam.
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Chapter overview
(eer =
zs

; Individuals, groups and teams

:}

\"REREAD NASA SAS DIALS GESTS LISTSEP REELS

AD
Ree
LED
NATT

Individuals | Groups | Teams

Perception What is a group? Meaning of team Limitations of

teamworking

Personality Formal and Strengths of

informal groups teamworking Organising teamwork

Attitude
Individual and
group contribution

_ Team member roles | Building a team Successful teams

hile
Belbin's team roles Team identity Shared objectives Evaluating team
effectiveness

A balanced team Team solidarity

Rewarding effective
teams
Tuckman's stages

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 1 Individuals
Managers need to understand what motivates individuals within the groups and teams they
control. Key variables include:
* Perception
« Personality
* Attitude

1.1 Perception
Perception is the process by which the brain selects and organises information in order to make
sense of it. People behave according to what they perceive — not according to what really is.
Perception can therefore have an impact on how the individual approaches their work:
Figure 14.1; Perception

(How'do they | alee | Ute oem tote me

| see the task? -/—— Ielveelecl | see their colleagues? |
| eghard
perception | eg competent

(
q

| How do they |
| see the role? |
| eg important |

1.2 Personality
In order to identify, describe and explain the differences between people, psychologists use the
concept of personality.
Personality is the total pattern of characteristic ways of thinking, feeling and behaving that
constitute the individual’s distinctive method of relating to the environment.
Figure 14.2: Personality

Personality ) — RTT ae.

| Types/traits aes wel oR ee | Suitability |
ee ae | eg fit the role |

| Compatibility |
| eg to colleagues |

1.3 Attitudes
Attitudes are our general standpoint on things: the positions we have adopted in regard to
particular issues, things and people, as we perceive them.
Figure 14.3: Attitudes

Processes |
eg having | People
| steps to follow | | eg ina suit |
Attitudes |
towards...
' Authority “| Change |
| eg the police | |eg not like

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( iz Activity 1: Individuals’ behaviour

In what ways do you feel or behave differently at work compared to when you are with your
family/social group/sports team?

Essential reading

See Chapter 14 Section 1 of the Essential reading for more detail on individuals.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

Groups
2.1 What is a group?
A group is any collection of people who perceive themselves to be a group.
Groups have certain attributes that a random crowd does not possess.
(a) Asense of identity. There are acknowledged boundaries to the group which define who is in
and who is out, who is us and who is them.
(b) Loyalty to the group, and acceptance within the group. This generally expresses itself as
conformity or the acceptance of the norms of behaviour and attitudes that bind the group
together and exclude others from it.
(c) Purpose and leadership. Most groups have an express purpose, whatever field they are in:
most will, spontaneously or formally, choose individuals or subgroups to lead them towards
the fulfilment of those goals.

2.2 Formal and informal groups

Informal groups will invariably be present in any organisation. Informal groups include workplace
cliques, and networks of people who regularly get together to exchange information, groups of
‘mates’ who socialise outside work, and so on. They have a constantly fluctuating membership
and structure.
Formal groups will be intentionally organised by the organisation, for a task for which they are
held responsible — they are task oriented and become teams. Although many people enjoy
working in teams, their popularity in the workplace arises because of their effectiveness in
fulfilling the organisation’s work.

Activity 2: Group support

What groups are you a member of in your study or work environment(s)? How big are these
groups? How does the size of your class, study group, work team — or whatever:
(1) Affect your ability to come up with questions or ideas?
(2) Give you help and support to do something you couldn’t do alone?

2.3 Individual and group contribution

People contribute different skills and attributes to the organisation as individuals than they do as
group members because:
(a) Human behaviour is different in groups than in solo or interpersonal situations: group
dynamics have an effect on performance.

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 (b) Groups offer synergy: the pooling and stimulation of ideas and energies in a group can allow
greater contribution than individuals working on their own. (‘None of us is as smart as all of
us’, (quote ascribed to Kenneth Blanchard).
(c) Group dynamics and synergy may also be negative: distracting the individual, stifling
individual responsibility and flair, and so on. Individuals may contribute more and better in
some situations.

A set of skills A mix of skills

aa aS eae eae ee e es a aa
Objectives set by manager Some teams can set their own objectives under the
corporate framework

A point of view | Anumber of different points of view, enabling a swift

| overview of different ways of looking at a problem
— a $$$ $$$ ______— eee ee — —

Creative ideas related to the Creative ideas arising from new combinations of
| individual’s expertise | expertise

| different ways

Opportunity for exercising control

ire wr Se oe

3 Teams
3.1 Meaning of team
A team is a group of people with complementary skills who have a common purpose and
objectives for which they hold themselves accountable.
A team is more than a group. It has joint objectives and accountability and may be set up by the
organisation under the supervision or coaching of a team leader, although self-managed teams
are growing in popularity.

3.2 Strengths of teamworking

Teams are particularly well adapted to the following purposes:

_ Work | Teams combine the skills of different individuals.

organisation Teams are a co-ordinating mechanism: they avoid complex
communication between different business functions.

Fear of letting down the team can be a powerful motivator: team loyalty
can be used to control the performance and behaviour of individuals.

Idea generation Teams can generate ideas, eg through brainstorming and information
sharing.
———s Sane ke a sett

Decision-making Decisions are evaluated from more than one viewpoint, with pooled
|
information. Teams make fewer, but better evaluated, decisions than
| individuals.

3.3 Limitations of teamworking

Teams and teamworking are very much in fashion, but there are potential drawbacks.
(a) Teamworking is not suitable for all jobs — although some managers do not like to admit this.

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 (b) Teamwork should be introduced because it leads to better performance, not because people
feel better or more secure.
(c) Team processes (especially seeking consensus) can delay decision-making. The team may
also produce the compromise decision, not the right decision.
(d) Social relationships might be maintained at the expense of other aspects of performance.
(e) Group norms may restrict individual personality and flair.
(f) ‘Group think’ (Janis, 1982): team consensus and cohesion may prevent consideration of
alternatives or constructive criticism, leading the team to make risky, ill-considered decisions.
(g) Personality clashes and political behaviour within a team can get in the way of effective
performance.

3.4 Organising teamwork

There are three basic approaches to the organisation of teamwork:
Multidisciplinary teams bring together individuals from different departments who each have a
particular skill or specialism so that knowledge is pooled.
Multiskilled teams bring together individuals who can perform any of the group’s tasks, allowing
greater flexibility in the allocation of roles.
Virtual teams bring together individuals working in remote locations, reproducing the social,
collaborative and information-sharing aspects of teamworking using Information and
Communications Technology (ICT).

Team member roles

4.1 Belbin’s team roles

Meredith Belbin (Belbin 1993) characterised the successful mix of team roles in an effective team
as follows:
Figure 14.4: Belbin’s team roles
Ideas

Monitor-evaluator

Chairman

Resource Completer
Investigator Finisher

Expert/
specialist

Team Company
worker Shaper worker

People Task

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 Plant
| Creative, imaginative, Solves difficult problems Ignores details, too
| unorthodox preoccupied to communicate
effectively

| Resource investigator
Extrovert, enthusiastic, Explores opportunities, Over-optimistic, loses interest
_ communicative develops contacts ~ once initial enthusiasm has
passed
|
|

_ Co-ordinator (chair)
_ Mature, confident, a good Clarifies goals, promotes Can be seen as manipulative,
chairperson decision-making, delegates delegates personal work
well

_ Shaper
|Challenging, dynamic, thrives Has the drive and courage to Can provoke others, hurts
on pressure overcome obstacles people’s feelings
- a. |
| Monitor-evaluator
_ Sober, strategic and Sees all options, judges _ Lacks drive and ability to
discerning accurately inspire others, overly critical

|Teamworker
| Co-operative, mild, Listens, builds, averts friction, | Indecisive in crunch
| perceptive and diplomatic ' calms the waters |
|
situations, can be easily
_ influenced

_ Implementer (cmpny worker)

| Disciplined, reliable, Turns ideas into practical Somewhat inflexible, slow to
_ conservative and efficient actions _ respond to new possibilities
| a4 See]
_ Completer-finisher
|

| Painstaking, conscientious, Searches out errors and | Inclined to worry unduly, re-
|anxious omissions, delivers on time _ luctant to delegate, nitpicker
t

| Specialist
|
| Single-minded, self-starting,
|
Provides knowledge and skills | Contributes only on a narrow
|dedicated in rare supply |front, dwells on technicalities,
overlooks the ‘big picture’

4.2 A balanced team

These team roles are not fixed within any given individual. Team members can occupy more than
one role, or switch to ‘backup’ roles if required, hence there is no requirement for every team to
have nine members. However, since role preferences are based on personality, it should be
recognised that:
* Individuals will be naturally inclined towards some roles more than others.
* Individuals will tend to adopt one or two team roles more or less consistently.
* Individuals are likely to be more successful in some roles than in others.
The nine roles are complementary, and Belbin suggested that an ‘ideal’ team should represent a
mix or balance of all of them. If managers know employees’ team role preferences, they can
strategically select, ‘cast’ and develop team members to fulfil the required roles.

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 | ienensemsememseetie ete
5 aaaanee © = SSS q

PER alert

Knowledge of these different roles may help you in leadership and management tasks under
performance objective POS, requiring you to ‘show initiative within your team, working
towards organisational goals, collaborating with and supporting others.’
SE
eee
peer
RS SEP SBT CLT TS EUSA PENS
CEB EASES POE a

Activity 3: Belbin

The following phrases and slogans project certain team roles:

(Examples are drawn from Belbin (1993))
(1) The small print is always worth reading.
(2) Let’s get down to the task in hand.
(3) In this job you never stop learning.
(4) Without continuous innovation, there is no survival.
(5) Surely we can exploit that?
(6) When the going gets tough, the tough get going.
(7) | was very interested in your point of view.
(8) Has anyone else got anything to add to this?
(9) Decisions should not be based purely on enthusiasm.

Required
Identify which team role each slogan projects.

Team development
5.1 Tuckman‘s stages
Four stages in group development were identified by Tuckman (1965).

Step 1 _ Forming
|The team is just coming together. Each member wishes to impress their
_ personality on the group. The individuals will be trying to find out about each
_ other, and about the aims and norms of the team. There will at this stage
_ probably be a wariness about introducing new ideas. The objectives being
| pursued may as yet be unclear and a leader may not yet have emerged.

| Step 2 | Storming
|This frequently involves more or less open conflict between team members.
| There may be changes agreed in the original objectives, procedures and norms
established for the group. If the team is developing successfully this may be a
fruitful phase, as more realistic targets are set and trust between the group
| members increases.

Step 3 _ Norming
|A period of settling down: there will be agreements about work sharing,
_ individual requirements and expectations of output. Norms and procedures may
| evolve which enable methodical working to be introduced and maintained.

dee 14: Individuals, groups and teams 279

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 | Step 4+
|

| Performing
.
|
| The team sets to work to execute its task. The difficulties of growth and |
_development no longer hinder the group’s objectives. api PORT EA

Later writers added two stages to Tuckman’s model:

(a) Dorming. Once a group has been performing well for some time, it may get complacent, and
fall back into self-maintenance functions, at the expense of the task.
(b) Mourning/adjourning. The group sees itself as having fulfilled its purpose — or, if it is a
temporary group, is due to physically disband. This is a stage of confusion, sadness and
anxiety as the group breaks up. There is evaluation of its achievements, and gradual
withdrawal of group members. If the group is to continue, going on to a new task, there will
be a renegotiation of aims and roles: a return to the forming stage.

Activity 4: Team formation stages

Read the following descriptions of team behaviour and decide to which category they belong
(forming, storming, norming, performing, dorming).
(1) Two of the group arguing as to whose idea is best
(2) Progress becomes static
(3) Desired outputs being achieved
(4) Shy member of group not participating
(5) Activities being allocated

5.2 Shared objectives

Getting commitment to the team’s shared objectives may involve a range of leader activity:
* Clearly setting out the objectives of the team
* Allowing the team to participate in setting objectives
* Giving regular feedback on progress and results with constructive criticism
* Getting the team involved in providing performance feedback
* Offering positive reinforcement (praise etc) for co-operative working and task achievement by
the team as a whole (rather than just ‘star’ individuals)
* Championing the success of the team within the organisation.

Team building
In the previous section, we suggested that teams have a natural evolutionary life cycle, and that
four stages can be identified. Not all teams develop into mature teams and might be stuck,
stagnating, in any one of the stages.
So, it often falls to the supervisor or manager to build the team. There are three main issues
involved in team building.

Team erty |Get Beep to see eps Senics as oan of thisICE |

eam solidarity: |aeennee looats Xe that omeee put in extra Sffort = ihe etka on |
_ the team |
| Phered ebleetives | Encore heeteam to commit Healt toatest nae obiecives one % |
_ co-operate willingly and effectively in achieving them |

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 Team development can be facilitated by active team building measures to support team identity,
solidarity and commitment to shared objectives.

Activity 5: Team building exercises

The following are commonly used team building exercises:

(1) Sending a project team (involved in the design of electronic systems for racing cars) on a
recreational day out karting.
(2) Sending two sales teams on a day out playing ‘War Games’, each being an opposing
combat team trying to capture the other’s flag, armed with paint guns.
(3) Sending a project team on a conference at a venue away from work, with a brief to review
the past year and come up with a vision for the next year.
Required
State why each of the exercises might be effective for team building.

Solution

6.1 Team identity

A manager might seek to reinforce the sense of identity of the group. Arguably this is in part the
creation of boundaries, identifying who is in the team and who is not.
(a) Name. Staff at McDonald’s restaurants are known as the Crew. In other cases, the name
would be more official, describing what the team actually does (eg Systems Implementation
Task Force).
(b) Badge or uniform. This often applies to service industries, but it is unlikely that it would be
applied within an organisation.
(c) Expressing the team’s self-image. Teams often develop their own jargon, especially for new
projects.
(d) Building a team mythology. Over time, groups and teams build up their own history and
character. Stories from the past may take on an almost mythical nature (mistakes as well as
successes).
(ec) A separate space. It might help if team members work together in the same or adjacent
offices, but this is not always possible. (A team intranet page may perform this function for a
virtual team.)

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7 S and€ it teams S 281
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6.2 Team solidarity
Team solidarity implies cohesion and loyalty inside the team. A leader might be interested in:
(a) Expressing solidarity
(b) Encouraging interpersonal relationships — although the purpose of these is to ensure that
work gets done
(c) Dealing withconflict by getting it out into the open; disagreements should be expressed and
then resolved
(d) Controlling competition — the team leader needs to treat each member of the team fairly
and to be seen to do so; favouritism undermines solidarity
(e) Encouraging some competition with other groups, if appropriate; for example, sales teams
might be offered a prize for the highest monthly orders; London Underground runs best-kept
station competitions.

Activity 6: Group cohesion

Can you see any dangers in creating a very close-knit group? Think of the effect of strong team
cohesion on:
(1) What the group spends its energies and attention on
(2) How the group regards outsiders, and any information or feedback they supply
(3) How the group makes decisions.
What could be done about these dangerous effects?

Solution

Successful teams
7.1 Evaluating team effectiveness
The task of the team leader is to build a ‘successful’ or ‘effective’ team. The criteria for team
effectiveness include:
(a) Task performance: fulfilment of task and organisational goals
(6b) Team functioning: constructive maintenance of team working, managing the demands of
team dynamics, roles and processes
(c) Team member satisfaction: fulfilment of individual development and relationship needs.
There are a number of factors, both quantitative and qualitative, that may be assessed to decide
whether or how far a team is operating effectively. Some factors cannot be taken as evidence on
their own but may suggest underlying problems — accident rates may be due to poor safety
systems, for example — as well as poor morale and lack of focus due to team problems.

282 Business and technology (FBT/BT) cide

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 Some of the characteristics of effective and ineffective teams may be summarised as follows:

Quantifiable |
ee eS ee eee eeeyee a :
Labour turnover _ Low High
t ae oe geet = 5 ey e —
heedent ree Low High

Notontecion ~ Low ital ware ; |

Output and productivity High |Low ete |

esoi output High _ Low |

Individual roe Achieved | Not ie |
b ———— pf - ————-- —————
leroppaces ane interruptions | Low High (eg because of |
to the workflow _ misunderstandings, |
_ disagreements)
Qualitative | | ; |

eSomaiment t6 targa ath | High Low |

See 00! goals |
| 2a ee sf pt astelwi : Beppe Me eee a.
Understanding of ome S Woe lAigh Low |
and why it exists | |
Le2 ee ee dh wns ete a os = salt = a

| Upee aeieiae Baaniaal | High / Low

roles within the team | |
L Ss a a ote
@anmmonieaticn Benveen Free and open | Mistrust
team members ei |
Ideas |enored {Gr ine team’s sbenetite Gnned: ‘God Ricca Ay
| | _ individuals for their own
| benefit
Be ie Seon me = S aoe :

amsi lees |“Constructive criticism Paint scoring,scans ounvatincs

|procaine-solving : Addresses causes ond looks at SUUBIEeIAS

| intcrece in Hels decisions ae Passive acceptance

eee” A ee ee eee a athe 22 : ——— aa he or Sra AE. = =

|“Opinions "Consensus | Imposed SUENIaaS

| Job satisfaction. eA Low

Metvation! in eadereSs High | ‘When the cat’s away.. |

| absence

7.2 Rewarding effective teams

Organisations may try to encourage effective team performance by designing reward systems
that recognise team, rather than individual, success. Indeed, individual performance rewards
may act against team co-operation and performance.
(a) They emphasise individual rather than team performance.
(b) They encourage team leaders to think of team members only as individuals, rather than
relating to them as a team.

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 For team rewards to be effective, the team must have certain characteristics.
* Distinct roles, targets and performance measures (so the team knows what it has to do to earn
the reward)
* Significant autonomy and thus influence over performance (so the team perceives that extra
effort will be rewarded)
¢ Maturity and stability
* Co-operation
+ Interdependence of team members (so that the team manages member contribution,
everyone ‘pulls their weight’, no one feels they could earn higher rewards on their own).
Reward schemes which focus on team (or organisation) performance include:
(a) Profit sharing schemes, based on the distribution of a pool of cash related to profit
(b) Gain sharing schemes, using a formula related to a suitable performance indicator, such as
added value. Improvements in the performance indicator must be perceived to be within the
employees’ control, otherwise there will be no incentive to perform.
(c) Employee share option schemes, giving staff the right to acquire shares in the employing
company at an attractive price.

284 Business and technology (FBT/BT)

sane
BPP
Chapter summary

Individuals

Perception What is a group? Meaning of team Limitations of

> Task * Sense of identity * Objectives and teamworking
* Role * Loyalty to the group accountability * Not always suitable
oy Colleagues + Purpose and « Common purpose * Can delay decision
i leadership i making

Personalit Y J Strengths of ¢Petes

Personality clashes
° Traits Formal and informal teamworking
- * Compatibility SIO S * Combine skills
* Suitability - . © Informal eg cliques at * Coordinating Organising teamwork
reas workplace mechanism ¢ Multidisciplinary
; * Formal — intentionally * Control via team « Multiskilled
Attitude ;
organised loyalty i
¢ Virtual
* Processes i * Idea generation
¢ Authority : hee * Better evaluated
+ People Individual and group decisions
» Change contribution
¢ Group dynamics
impact performance
* Group synergy
* Groups may be
negative

_ Team member roles Building a team Successful teams

Belbin's team roles Team identity Shared objectives Evaluating team

* Plant * Name * Clear objectives effectiveness
* Resource investigator * Badge/uniform « Participation in setting * Criteria
¢ Chair * Team's self image objectives — Task performance
* Shaper ¢ Mythology ¢ Regular feedback — Team functioning
* Monitor evaluator * Separate space * Positive reinforcement — Team member
* Teamworker | satisfaction
:
° Implementer ia
Completer-finisher Team solidarity
Rewarding effective
* Specialist « Express solidarity
i * Interpersonal teams
relationships * Team performance
A balanced team * Dealing with conflict rather than individual
* Mix of all skills * Controlling * Characteristics of
i competition team for rewards to
* Competition with succeed
Tuckman's stages other groups * Possible schemes:
¢ Forming — Profit sharing
* Storming — Gain sharing
¢ Norming — Employee share
* Performing options

BPP L puseatht :
Y LEARNING 14: Individuals, groups andteams 285
 Knowledge diagnostic
SSSI PERRIN
2 TTY EOE EPR TEN STATO TION 8 ISLETS ITO IE ELLIS

. Individuals
Managers need to understand the key variables that impact on individual behaviour — perception,
personality and attitude.

. Groups
A group is any collection of people within the organisation. These may be either formal and
informal and individuals may be members of more than one group.

. Teams
A team is a formal organised group with common goals and complementary skills. They may be
multidisciplinary or multiskilled.

. Belbin
Belbin described nine roles within a team: chair, shaper, plant, monitor- evaluator, company
worker, resource investigator, teamworker, completer-finisher, and specialist.

. Tuckman
Tuckman identified the stages of group development: forming, storming, norming and performing.

. Team building
Managers may be required to build the team. Three issues to consider when building a team are
how to create a team identity, how to encourage team solidarity and how to ensure that all
members of the team are committed to the shared objectives of the team.

286 Business and technology (FBT/BT)

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Further study guidance

Question practice
Now try the following from the Further question practice bank [available in the digital edition of
the Workbook]:

N r M : . 2 Approximate time
Q70 | Elam cention A |F R ene | 1 cn a
ae ae Ta mins |
Grind ne apceeon A.== heal "i |2 mins |
Q73 aa Bane soron A 2 a i lp mins m0 _

Further reading
There is an article on the ACCA website entitled ‘The importance of teams’ that is relevant to the
material in this section. You are strongly advised to read this article in full as part of your
preparation for the FBT exam.

aan
14: Individuals, groups andteams 287
BPP
Activity answers
s
sea

Activity 1: Individuals’ behaviour

Here are some possible answers:
* Strive towards an identifiable objective
* Actively seek to develop new skills
* Seek approval and recognition from colleagues and superiors
* Adopt a more formal approach/response
- Defer to colleagues at a higher level
* Conform to regulations and conventions
* Complain a lot
* Get more and more frustrated about the inadequate systems
* Stab people in the back — play power games.

Activity 2: Group support

Your primary groups are probably your tutor group or class. If at work, it would be the section in
which you work. If the groups are large, you may feel reluctant to put forward ideas or ask
questions, but even within a large group you should feel there is support and that help is at hand
if you need it.

Activity 3: Belbin
Team roles:
(1) Completer-finisher
(2) Implementer/company worker
(8) Specialist
(4) Plant
(5) Resource investigator
(6) Shaper
(7) Teamworker
(8) Co-ordinator/chair
(9) Monitor-evaluator

Activity 4: Team formation stages

Categorising the behaviour of group members in the situations described results in the following:
(a) storming, (6) dorming, (c) performing, (d) forming, (e) norming.

Activity 5: Team building exercises

Exercising effective for team building:
(1) Recreation helps the team to build informal relationships: in this case, the chosen activity
also reminds them of their tasks, and may make them feel special, as part of the motor racing
industry, by giving them a taste of what the end user of their product does.
(2) Ateam challenge forces the group to consider its strengths and weaknesses, to find its
natural leader. This exercise creates an ‘us’ and ‘them’ challenge: perceiving the rival team as
the enemy heightens the solidarity of the group.
(8) This exercise encourages the group to raise problems and conflicts freely, away from the
normal environment of work and also encourages brainstorming and the expression of team
members’ dreams for what the team can achieve in the future.

a
288 Business and technology (FBT/BT) BPP
Activity 6: Group cohesion
Problems may arise in an ultra-close-knit group because:
(1) The group’s energies may be focused on its own maintenance and relationships, instead of
on the task.
(2) The group may be suspicious or dismissive of outsiders and may reject any contradictory
information or criticism they supply; the group will be blinkered and stick to its own views, no
matter what; cohesive groups thus often get the impression that they are infallible: they can't
be wrong — and therefore can’t learn from their mistakes.
(3) The group may squash any dissent or opinions that might rock the boat. Close-knit groups
tend to preserve a consensus — falsely, if required — and to take risky decisions, because they
have suppressed alternative facts and viewpoints.
This phenomenon is called ‘group think‘ ( Janis 1982 ). In order to limit its effect, the team must be
encouraged to:
(1) Actively seek outside ideas and feedback
(2) Welcome self-criticism within the group
(3) Consciously evaluate conflicting evidence and opinions.

BPP 14: Individuals, groups and teams 289

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290 Business and technology (FBT/BT) ‘ BPP
tev
 Motivating individuals
LEE IEELISLE TEL OLE oa TREES REI LEE AES DEE RIDE TE ESO
TGRII

andggroups

Learning outcomes
On completion of this chapter you should be able to:

Syllabus reference no.

Define motivation and explain its importance D5 (a)

to the er ansahon: teams and peseMals:

asin content ee: process nbeores oi D5 (b)

motivation: Maslow, Herzberg, McGregor and
Vroom.

Explain and identify types of intrinsic and D5 (c)

extrinsic reward.

Explain how reward systems can be designed D5 (d)

and implemented to motivate teams and
individuals.

Exam context
Motivation is likely to appear regularly in the exam and so the various theories must be well
understood. There was one question in the specimen exam which related to motivation.
292 Business and technology (FBT/BT) Y BPP
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Chapter overview
ERNETULLE TES NT ELE) PLETE LTSA aN ILE = a

Motivating individuals and group :

Overview of motivation Content theories — Process theories

| of motivation of motivation

What is motivation? Importance of Maslow's hierarchy Vroom's expectancy

“ motivation of needs theory

Needs and goals | |

Theories of motivation Herzberg's
two-factor theory

Choosinga — Rewards and Rewards

- motivational | incentives )
approach

|
McGregor: Theory X Rewards and motivation Rewards and motivation Performance
and Theory Y r related pay

Participation Types ofteward

Rewarding the team

BPP 15: Motivating individuals and groups 293

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 Overview of motivation ‘

1.1 What is motivation?

a
Motivation is concerned with what causes people to act in a certain way, whether it be drinking
glass of water to reduce thirst or working hard to achieve a promotion at work.
If managers understand what motivates their staff, they can actively use this knowledge to drive
towards the organisation’s objectives.

Activity 1: What is motivation?

80% of respondents expressed the view that they would continue to work even if they had no
economic need to do so.

Required
Discuss why people would work if they had no economic reason to do so.

1.2 Need and goals

The basic assumptions of motivation are that:
(a) People seek to satisfy their needs and goals
(b) Organisations can offer some of the satisfaction people seek
(c) Organisations can influence people’s behaviour
(d) If people’s needs and goals are met they will have job satisfaction and a positive attitude to
work.

1.3 Importance of motivation

The impact of motivation and job satisfaction on performance is difficult to measure accurately.
(a) Motivation is about getting extra levels of commitment and performance from employees,
over and above mere compliance with rules and procedures. If individuals can be motivated,
by one means or another, they might work more efficiently (and productivity will rise) or they
will produce a better quality of work.
(b) The case for job satisfaction as a factor in improved performance is not proven.
(c) The key is to work ‘smarter’ — not necessarily ‘harder’.
The signs by which low morale or dissatisfaction are gauged are also ambiguous.
(a) Low productivity is not invariably a sign of low morale. There may be more concrete problems
(eg with work organisation or technology).
(b) High labour turnover is not a reliable indicator of low morale: the age structure of the
workforce and other factors in natural wastage will need to be taken into account. Low
turnover, likewise, is no evidence of high morale: people may be staying because of a lack of
other opportunities in the local job market, for example.
However, there is some evidence that satisfaction correlates with mental health, so symptoms of
stress or psychological dysfunction may be a signal that all is not well. (Again, a range of non-
work factors may be contributing.)
Motivation is a useful concept, despite the fact that the impact of motivation, job satisfaction and
morale on performance are difficult to measure.

Activity 2: Demotivation

How does demotivation manifest itself in organisations?

RE NNN

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1.4 Theories of motivation
There are two groups of theories that attempt to explain motivation and how people can be
motivated:
Figure 15.1: Content and process theories of motivation
ee

Theoretical
views

Content |

sn agen os
theories

WHAT motivates | | HOW can people |

people? be motivated? }
= er | eae ae

Maslow Vroom
Herzberg

2 Content theories of motivation

2.1 Maslow’s hierarchy of needs
Abraham Maslow (1908-1970), an American psychologist, produced his hierarchy of needs as
follows (Maslow, A.H. (1943)):
Figure 15.2: Maslow’s hierarchy of needs

Fulfilment of
personal potential

actualisation Pt

For independence, recognition,

Esteem needs = \ status, respect from others
—|

: So For relationships, affection, |

Love/social needs belonging

% For security, order, predictability, |

Safety needs freedom from threat |
iat catia line
Food, shelter |
Physiological needs
] b+

(a) An individual’s needs can be arranged in a ‘hierarchy of relative pre-potency’ (as shown).
Each level of need is dominant until satisfied; only then does the next level of need become a
motivating factor. A need which has been satisfied no longer motivates an individual’s
behaviour.
(b) The need for self-actualisation can rarely be satisfied.
(c) In addition, Maslow described:
(i) Freedom of enquiry and expression needs (for social conditions permitting free speech,
and encouraging justice, fairness and honesty)
(ii) Knowledge and understanding needs (to gain knowledge of the environment, to explore,
to learn).

BPP 15: Motivating individuals and groups 295

LEARNING
Zz Activity 3: Maslow’s hierarchy of needs snail acti

Decide which of Maslow’s categories the following fit into:

(1) Receiving praise from your manager
(2) A family party
(3) An artist forgetting to eat
(4) Aman washed up on a desert island
(5) A pay increase
(6) Joining a local drama group
(7) Buying a house
(8) Being awarded a Nobel prize.

2.1.1 Key limitations to Maslow’s hierarchy of needs

(a) An individual’s behaviour may be in response to several needs.
(b) The same need may cause different behaviour in different individuals.
(c) Not all needs manifest themselves in a hierarchical order.

2.2 Herzberg’s two-factor theory

Frederick Herzberg produced his two factor theories of motivation (Herzberg, F. et al (1959)). He
concluded that certain factors led to job satisfaction (motivators) and a different group led to
dissatisfaction (hygiene factors).

Recognition |Policies and Siministratlon

Si oo. wee
FAchivement- Fh Se a ee nl ee eeeeiame y
ladvancement = =—S—S—S=*«=<C«*‘«“‘«*«~*SCWNrKg colton =
— — ae SS ee oo Se
tttttst~=CS
a a a a

A lack of motivator factors will encourage employees to concentrate on the hygiene factors.
These, although they can be regarded as motivators in the very short term, will eventually
dissatisfy.
Herzberg suggested that where there is evidence of poor motivation, such as low productivity,
poor quality and strikes, management should not pay too much attention to hygiene factors, such
as pay and conditions. Despite the fact that these are the traditional targets for the aspirations of
organised labour, their potential for bringing improvements to work attitudes is limited. Instead,
Herzberg suggested three types of job design which would offer job satisfaction through
enhanced motivator factors.
* Job rotation - the planned transfer of staff from one job to another to increase staff variety.
- Job enlargement- the attempt to widen jobs by increasing the number of operations in
which a job holder is involved.
- Job enrichment - planned, deliberate action to build greater responsibility, breadth and
challenge of work into a job. Job enrichment is similar to empowerment.

MW,
Essential reading

See Chapter 15, Section 1 of the essential reading for more details about job design.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

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 3 Process theories of motivation
3.1 Vroom’s expectancy theory
Vroom’s “Expectancy Theory’ (Vroom, V. (1964)) is based on a simple calculation:
The expectancy equation may be stated as:
F=VxEx|
where:
F = the force or strength of the individual’s motivation to behave in a particular way
V = valence: the strength of the individual’s preference for a given outcome or reward
E = expectancy: the individual’s perception that the behaviour will result in a particular
| = instrumentality, the individual’s belief that achieving a particular performance goal will lead to
a reward.
In this equation, the lower the values of valence, expectancy or instrumentality, the less the
motivation. An employee may have a high expectation that increased productivity will result in
promotion (because of managerial promises, say), but if they are indifferent or negative towards
the idea of promotion (because they dislike responsibility), they will not be motivated to increase
their productivity. Likewise, if promotion is very important to them — but they do not believe higher
productivity will get them promoted (because they have been passed over before, perhaps), their
motivation will be low.

Real life example

A colleague has told you that if you spend two hours every evening studying for your FIA/ACCA
exams, you will pass your exams, and then you will get a promotion. Your motivation to study will
depend on the following:
¢ Expectancy — your belief that studying two hours every evening will ensure that you pass your
exams
¢ Instrumentality — your belief that if you pass your exams you will get the promotion
* Valence — how important is the promotion to you?

Choosing a motivational approach

4.1 McGregor Theory X and Theory Y
McGregor (1987) presented two opposing assumptions held by managers about employees,
which affected how they managed and motivated them. These theories are opposite ends of a
continuum.
Theory X assumes that individuals have an inherent dislike for work and will avoid it if they can. A
Theory X employee:
(a) Prefers to be directed
(b) Has little ambition
(c) Is resistant to change, gullible
(d) Must be coerced and controlled
Theory Y asserts that work is as natural as play or rest. A Theory Y employee has:
(a) Self-direction
(b) Self-control
(c) An emphasis on self-actualising needs.
Theory X employees need a ‘carrot and stick’ approach whilst Theory Y employees need
managers to encourage motivation by influencing the circumstances of work.

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ne 15: Motivating individuals and groups 297
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 Rewards and incentives '

5.1 Rewards and motivation

A reward is something given to an individual or team in recognition of contribution and success.
* Intrinsic rewards are related to the job itself, eg love being a nurse
* Extrinsic rewards are outside of the job réle: eg financial (you like the pay), or non-financial
(you like the hours/working environment).
An incentive is the offer of a reward designed to motivate current and future performance.
Motivation can come from the following areas:
* Financial rewards and incentive (extrinsic) can motivate (see Section 6).
* Job satisfaction (intrinsic) is a key motivator and is created through:
(a) Variety
(b) Task identity/clarity
(c) Autonomy/ownership
(d) Constructive feedback
(e) Task significance

5.2 Participation
Participation in decision making is usually perceived as a motivator.
Participation works as a motivator if the “5 Cs‘ are present:
(a) Certainty — participation should be genuine.
(b) Consistency — efforts to establish participation should be made consistently over a long
period.
(c) Clarity — the purpose of participation is made clear.
(d) Capacity — the individual has the ability and information to participate effectively
(e) Commitment — the manager believes in and genuinely supports participation.

Reward

6.1 Rewards and motivation

Pay has a central — but ambiguous — role in motivation theory. It is not mentioned explicitly in any
need list, but it offers the satisfaction of many of the various needs.
Individuals may also have needs unrelated to money, which money cannot satisfy, or which the
pay system of the organisation actively denies (eg the need for leisure/family time — not
overtime!) So to what extent is pay an inducement to better performance? Can pay be an
effective motivator or incentive?
Maslow and Herzberg both recognise money as a means of satisfying some needs and
symbolising worth. However, pay does not satisfy higher order needs and should thus be
considered a hygiene factor.

6.2 Types of reward

An organisation may offer a range of rewards to employees, perhaps combined in a reward
package. The range offered may include some or all of the following.
* Basic wages or salary
* Overtime payments (perhaps for employees paid a wage based on hours worked)
* Performance-related bonus
* Shares
* Share options (the opportunity to buy shares at a favourable price)
* Benefits in kind (for example personal use of a company vehicle)

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 * Pension contributions
* Service contracts and termination payments.
Packages for employees at different levels are likely to differ.

Performance-related pay
[pr sre car SSS VES SNR — pe Ne

Performance related pay (PRP): Pay that is related to output (in terms of the number of items
produced or time taken to produce a unit of work), or results achieved (performance to defined
standards in key tasks, according to plan).
q . o
_* The most common individual PRP scheme for wage earners is straight piecework: payment
of a fixed amount per unit produced, or operation completed.
* For managerial and other salaried jobs, a form of management by objectives will probably
be applied. PRP is often awarded at the discretion of the line manager, although guidelines
'
may suggest, for example, that those rated exceptional get a bonus of 10% whereas those
i who have performed less well only get, say, 3%.
* For service and other departments, a PRP scheme may involve bonuses for achievement of
i ° .
: key results, or points schemes, where points are awarded for performance of various
criteria (efficiency, cost savings, quality of service, and so on). Certain points totals (or the
highest points total in the unit, if a competitive system is used) then win cash or other
awards.

6.3.1 Benefits of PRP

* Improves commitment and capability
¢ Improves focus on the business's performance objectives
* Encourages two-way communication
* Allows greater supervisory responsibility
« Recognises achievement when other means are not available.

6.3.2 Potential problems with PRP

* Subjectivity of awards for less measurable criteria (eg ‘teamwork’)
* Encouraging short-term focus and target-hitting (rather than improvements)
* Divisive/against teamworking (if awards are individual)
° Difficulties gaining union acceptance (if perceived to erode basic pay).

Activity 4: PRP

Why might PRP fail to motivate?

Rewarding the team

6.4.1 Group bonus schemes
Group incentive schemes typically offer a bonus for a team which achieves or exceeds specified
targets. Offering bonuses to a whole team may be appropriate for tasks where individual
contributions cannot be isolated, workers have little control over their individual output because
tasks depend on each other, or where team building is particularly required. It may enhance team
spirit and co-operation as well as provide performance incentives, but it may also create
pressures within the group if some individuals are seen not to be pulling their weight.

6.4.2 Profit sharing schemes

Profit-sharing schemes offer employees (or selected groups) bonuses, directly related to profits or
value added. Profit sharing is based on the belief that all employees can contribute to
profitability, and that that contribution should be recognised. The effects may include profit-

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 consciousness and motivation in employees, commitment to the future prosperity
of the
organisation, and so on.

The actual incentive value and effect on productivity may be wasted, however, if the scheme is
badly designed.

Activity 5: Equitable pay

How can organisations ensure equitable pay?

300 Business and technology (FBT/BT) BPP

ABN
Chapter summary
GP
LEERLLLY LL EDEL IT ELLE TLE EDEL NE CIEE NOTIN LCLDPOSSELEELE ALETDD Ry

_ Motivating individuals and groups :

,
LLG SALLIE
IED LOPLI EGE TCLS SCS Se ol

Overview of motivation _ Content theories Process theories

of motivation of motivation

What is motivation? Importance of Maslow's hierarchy of Vroom's expectancy

* Causes individuals to motivation needs theory
act in a certain way ¢ Impact on * Physiological needs ¢ Force
* Managers can use performance difficult « Safety needs « Valence
to measure ¢ Social needs « Expectancy
* Motivation might lead ¢ Esteem needs
- Needs and goals to greater efficiency * Self actualisation
¢ People seek * Signs of low morale
satisfaction
' ¢ Job satisfaction if Herzberg's two-factor
' needs met Theories of motivation - theory
¢ Content theories ¢ Motivators
(Maslow, Herzberg) « Hygiene factors
* Process theories * Job design
(Vroom)

Choosing a Rewards and Rewards

motivational incentives
approach

McGregor: Theory X and Rewards and motivation Rewards and motivation Performance related
Theory Y ¢ Intrinsic — eg job + Pay satisfies basic pay
* Theory X — individuals satisfaction needs Piecework
dislike work, need to * Extrinsic — eg financial « Pay may not satisfy Management by
be directed rewards higher needs objectives
* Theory ¥Y — work is as Points schemes
natural as play
{ Benefits
Participation Types of reward Potential problems
* Certainty Basic wages
* Consistency Overtime
Performance related Rewarding the team
* Clarity
* Capacity bonus + Group bonus scheme
* Commitment Shares + Profit sharing schemes
Share options
Benefits in kind
Pension contributions
Service contracts

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 Knowledge diagnostic :
= sores RETIN TOPSITE
TETEI ELSE NLS IRANI SOM TESDNGE OEE LEAL PESTO TELA

. Overview of motivation
Motivation is the urge to do something or avoid something. Knowledge of what motivates staff
can help managers to improve performance.

. Content and process theories

Content theories — such as Maslow’s hierarchy of needs and Herzberg’s two factor theorem —
look at what motivates staff. Vroom’s expectancy theory looks at how to motivate and so is a
process theory.

. McGregor
McGregor presented two types of employees — theory X, who dislike work, and therefore need to
be controlled and directed, and theory Y who enjoy work, so should be given the opportunity to
manage themselves. In reality most employees are somewhere between these two extremes.

. Rewards and motivation

Rewards can be intrinsic or extrinsic. An incentive is the offer of a reward designed to motivate
current and future performance. Extrinsic rewards such as pay may not motivate employees. Job
design can lead to greater motivation, such as job rotation, job enlargement and job enrichment.

. Profit related pay

Profit related pay may motivate employees to work towards the organisation’s objectives.
However, poorly thought out schemes, such as rewards based on subjective judgement of
managers may fail to achieve this. Group bonus schemes and profit-sharing schemes may be
used to motivate teams.

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Further study guidance
SURREAL OS ARIE SEES IBIS SSSES RESIS TNC AS ISS AES SA AS IPS I Ra PO TE IS

Question practice
Now try the following from the Further question practice bank [available in the digital edition of
the workbook]:

: Number ae
075 ee ew —

cpt =a Cone eee a mins

O77 - ae learn este = |2 ; ; | 2 mins ‘

oe ae ae eee 2 mins ;
ee one. ald oan Rae ,
Further reading
There are two articles on the ACCA website that are relevant to the material in this chapter. The
first is entitled “Let’s get motivated’ and the second is entitled ‘Understanding Herzberg’s
motivational theory’. You are strongly advised to read these articles in full as part of your
preparation for the FBT exam.

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Activity answers
ELIA SI SGA pluie
NENSE ShRNASE SNL BLLES LALEN SSE
SANOSNADER LET ELD
OA REUTER SIAR ES NEES TED AISLE AS SENDS NV UTES ANSSTILE
. SE ETA
IEENILE cases SLYNRTee

Activity 1: What is motivation?

Reasons cited were
» Interest or accomplishment (particularly amongst managerial class)
* To keep occupied (particularly amongst working class and farmers)
They said they would miss most
* Friends and contacts (31%)
* Feeling of doing something (25%)
* The kind of work they do (12%)

Activity 2: Demotivation
Demotivation can manifest itself in the following:
« Poor time keeping
« Absenteeism
* Staff turnover
« Missed targets
¢ Indifference

Activity 3: Maslow’s hierarchy of needs

Maslow’s categories:
(1) Esteem needs
(2) Social needs
(3) Self-actualisation needs overriding lower-level needs!
(4) Physiological needs
(5) Safety needs initially; esteem needs above a certain income level
(6) Social needs or self-actualisation needs
(7) Esteem needs
(8) Self-actualisation or esteem needs.

Activity 4: PRP
PRP might fail to motivate because:
(1) The rewards from PRP are often too small to motivate effectively. Anyhow, some employees
may not expect to receive the rewards and hence will not put in the extra effort.
(2) It is often unfair, especially in jobs where success is determined by uncontrollable factors.
(3) If people are rewarded individually, they may be less willing to work as a team.
(4) People may concentrate on short-term performance indicators rather than on longer-term
goals such as innovation or quality. In other words, people put all their energy into hitting the
target rather than doing their job better.
(5) PRP schemes have to be well designed to ensure performance is measured properly, people
consider them to be fair and there is consent to the scheme.

Activity 5: Equitable pay

Organisations can ensure equitable pay by:
* Benchmarking internally

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* Benchmark externally
* Create pay scales linked to job descriptions.

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 Skills checkpoint 4
Approaching multi-task
questions

Chapter overview

Approach to
Learning
objective test
the models
questions

Approaching
Approaching
corporate
ethics
governance
questions
questions

Effective writind
9nd presentatio™

Introduction
MTQs in Section B comprise 24% of your exam (via six 4-mark questions, usually broken down into
two parts of two marks each). It is therefore important that you give adequate revision time to
practising these questions. The technical content is the same as in Section A of the exam, however
the format and the mark allocation varies.
All syllabus areas will be covered by MTQS and there will be one question for each section of the
syllabus as follows:

A ieies swsiees organisation, its Barone der and the external environment

B Business organisational structure, honcHOnS and governance

eC | Accounting and reporting systems, compliance! control, technology ae security

D Sean narAnishiiere aie Ineividualle and teams

mm Batearnal bceaaeiienats and eeRhhicauon

| Professional ethics in accounting and business

| . . . . .

| -
 Types of question '
In Section B, there is more variety in the types of question that can be used. You may see some or
all of the following types of question in your exam:
* Multiple response questions with more than four options - for example, choose two items from
six or four from eight.
- Gap fill questions - where you need to Complete a paragraph by filling gaps that appear in
the text. Responses are selected by clicking on the gap and selecting the correct response
from a drop down menu.
* Multi response matching - where candidates select responses according to a grid of choices.
Task 1 of the skills activity below is an example of multi response matching.
* Hotspot questions - where you have to clock on the relevant part of a symbol or diagram. For
example, there may be a number of boxes where you are required to select the boxes that
apply.
* Number entry question - where you will need to calculate a value and enter it into a box. Such
questions will not be common in BT/FBT as most of the syllabus covers qualitative topics rather
than quantitative.
The good news about Section B is that there will be partial marking. In a two mark multiple
response question for example, which requires you to select two items from six, you would get one
mark if only one of your answers was correct. In Section A, you only get marks for multi response
questions if you all of your selections are correct.

Approach to multi-task questions

The following step by step approach is recommended:
STEP 1 Read the requirements of all tasks. There are usually two tasks worth 2 marks each in each Section B
question.
STEP 2 Recall relevant technical theory that you will need to answer the question.
STEP 3 Read the scenario to identify the relevant information.
STEP 4 Answer each task in turn - doing the easier task first

Exam success skills

The following question is an example the sort of MTQ (multi-task question) you could see in
Section B of your exam.
For this question, we will also focus on the following exam success skills:
(a) Managing information
(b) Correct Interpretation of requirements
(c) Good Time Management
* Managing information. There is a scenario associated with this MTQ which runs to around 320
words. It can feel daunting. It is important therefore to know what you are looking for when
you read the scenario and this means reading the requirement of the task first, before you
read the scenario. After reading the task, think about the technical knowledge you will need to
answer the question. When you do read the scenario, you will be much more focussed on what
you need to look for in the scenario.
* Correct reading of requirements. Sometimes when you are focused on applying technical
knowledge you have learned it is easy to misinterpret the requirements of a question. For
example, giving the highest value when the lowest is asked for. Also, the order of the
information given in the scenario may be different to the order of the information given in the
part of the question where you give your answer.
* Good time management. You should be guided by the mark allocation in MTQs as the sub
questions can have different requirements, there is no set format for these questions so you
need to react to what is presented, however the rule of 1.2 minutes per mark still applies. You
may have completed section A of the exam in less time, which is good news for Section B as the

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 scenarios can be quite time consuming to read and digest. As with section A, the questions in
Section B with shorter scenarios are usually quicker to attempt and may give you more time
for the calculations. You do not have to answer the sub questions in order, you should play to
your exam strengths, which means attempting the questions you are most confident about
first.

Skill activity
The following question is from the ACCA web site, and is one of the additional multi-task questions
provided alongside the specimen exam:
Go Car Co is a car sales company. The company employs four sales staff (Ahmed, Ben, Critica
and Damla) at their largest branch. A new vacancy has arisen for an area sales manager for the
region, based at the Head Office in another city.
The four people were asked to an interview by their own manager to review their own performance
and to indicate whether they were motivated to apply for the new role and the following were part
of their responses to the manager’s question about that.

| “| have all the skills for the role and wish to further my career and take on
a more senior role. | think | will be successful because | trust the interview
panel to act fairly and transparently, so | am reasonably confident that
they will recognise me as the most suitable candidate.”

“| have performed well over the last 12 months and have been rewarded
with a very good performance bonus as a result. If |apply for the
manager’s role and am successful, | may not be better off financially
| because | would no longer get the sales commission or a performance
bonus in my new role. Also, it would be more convenient for me personally
to be based here than at Head Office, because of the extra travelling
involved.”

Critica | “Il work extremely hard on training and developing myself in the sales role,
but the training materials we are using do not seem to be very effective.
When | use the suggested selling techniques, | don’t seem to be able to sell
| | any more cars, so | don’t feel |am confident enough to apply for a
| promotion just yet.”

/ Damla “lam really keen to apply for the role and possess the relevant skills and a
masters’ degree in management. The problem | have with applying for the
role is that | do not think | will be successful because | think the interview
panel have already identified other people who they prefer for the role. |
fear that however highly qualified | am and even if | perform well at the
| interview, | will not be successful.”
[ee ee a ee ee

Task 1:
Which of the following three elements of the Vroom theory of expectancy is MOST significant in
affecting each of the candidates’ motivational force regarding a potential application of the
sales manager’s role? (2 marks)
r
| Expectancy |Instrumentality _Valence
oS a. : =e! ==

Damla

Critica
|

- Ben |
i

Ahmed

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Task 2:
Chloe
The manager of four other car sales staff at another branch of Go Cars Go (Alwyn, Bob,
and Dumy) has been asked to complete a grid for Head Office to estimate the overall Vroom’s
motivational force of each of these sales people to apply for the vacant manager's role at Head
Office.
The following scores out of 10 were given by. the manager for the potential candidates, against
each of the three elements of motivational force:
1
|

Element of motivational force | | Alwyn Bob Chloe Dumy |

| | | |
| Prpesianct | | | i |8 ke : | san |

|Instrumentality . 8 Lh Ousirstess [2 |

Volcnce aa , | | | | y Merah ey, 8 |

Which candidate has the LOWEST motivational force, overall, to apply for the new role of
manager at Head Office? (2 marks)
O Dumy
O Chloe
O Bob
O Alwyn

Approach
(a) Read the requirement of the two tasks. In the first task you have to identify which element of
Vroom’s theory is demonstrated by each of four people. In the second, you need to state
which candidate has the LOWEST motivational force overall.
(b) Recall the technical theory - in this case, Vroom’s expectancy theory:
(i) Motivational force = Expectancy x instrumentality x valence
(ii) Expectancy is the belief that effort will achieve a performance goal.
(iii) Instumentality is the belief that achieving the goal will lead to a reward.
(iv) Valence is the value that one places on the reward..
(c} Now you know what you are looking for. For task 1, you will need to decide which of the
three variables (expectancy, instrumentality or valence) appears to be the most important for
each person. For task 2 you need to do a calculation for each person to see who has the
lowest motivation.
(d) You may have noticed that the scenario for task 2 is quite a bit shorter than that of task 1, so
it would be better to do this task first. In this question, task 2 does not require any information
from the scenario for task 1, so it is fine to do this.
(e) Read the scenario for task 2 - you just need to multiply the three scores for each individual,
and the one with the lowest scores is the correct answer.
(f) Read the scenario for task 1, remembering that what you need to know for the first task is
which of the three variables is likely to be strongest for each candidate: After reading each
candidate, put your answer for that candidate in the grid by highlighting the appropriate
radio button. BEWARE! In the answer grid, the names of the four candidates are shown ina
different order to how they are presented in the scenario.

310 Business and technology (FBT/BT)

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Solutions
Task 1

— | Expectancy Instrumentality Valence

|Damla -. ® ee c y my Pree

|Sh wnat ds ie :
|Ban i |

|Ahmed SD ea ta =

Justification:
* Damla does not believe that her effort (having the relevant skills) will result in the desired
performance goal (getting offered the job). She is therefore focused on the expectancy
variable.
* Critica believes that she has met a desired performance goal, as she has mastered all the
training materials, but does not believe that these have helped her get the reward, which is
making more sales. She is therefore focussing on instrumental.
* Ben is very focussed on rewards. He feels that the rewards of the job would do not make it
attractive, but in his current job he does believe that the rewards are good. He is clearly
motivated by the valence.
* Ahmed is motivated by the fact that he believes that having the right skills will lead to the
reward - being offered the job. He is therefore focussing in the instrumental aspect.
Note. In task 1, the answers relating to Ahmed and Ben are more obvious that Damla and Critica.
Even if you only got 2 out of the four correct, you would still get 1 mark out of 2, so all would not
be lost.
Task 2
The overall scores achieved by multiplying the scores for each element by each other are as
follows:
Alwyn: (4 x 8 x 7) = 224
Bob = 144
Chloe = 147
Dummy = 112
Dummy has the lowest score and therefore the lowest motivation.

Exam success skills diagnostic

Every time you complete a Section B MTQ, use the diagnostic below to assess how effectively you
demonstrated the exam success skills in answering the questions. The table has been completed
below for the question in this checkpoint to give you an idea of how to complete the diagnostic.

_ Exam Success Skill Your reflections/observations

_ Managing | Did you read the requirements before reading the detail in the
| information scenario?

Correct _ Did you do what the requirement asked? (eg in task 2, state who has
Interpretation of _ the lowest motivation rather than the highest)
| requirements | It would have been disappointing to get the answer correct, but fail to
| get the marks because you didn’t follow the instructions given.

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_ Answer planning | n/a |
|
| Efficient numerical = n/a
| analysis |

| Effective writing and n/a

| presentation |

Good Time Did you manage to attempt the entire question in 5 minutes?
| Management Did you attempt the sub questions in the order set, or did you think
| _ about how long each one would take and devise an action plan to give
you the most time for the calculation elements?

| Most important action points to apply to your next question |

Make sure that you remember to practice MTQs as part of your exam preparation,
| endeavouring to attempt all elements in the time allowed (5 minutes) |

Summary
* Make sure that you remember to practice MTQs as part of your exam preparation,
endeavouring to attempt all elements in the time allowed (5 minutes)
* Remember that you don’t have to answer the tasks within a question in order and that the
answer from one task will never be needed to answer the second one.
* Read the question carefully and use the mark allocation to guide how long it should take to
answer and how complex it is likely to be.
* Next steps — Try question 30 from the further question practice in the workbook. Try to apply
the techniques described above when you do this question, in particular, reading the
requirements first, then thinking about the technical knowledge before reading the scenarios.
Would you do task 1 first or task 2?

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 Training and
IEEE LEE LEN EDL DETREI II IDE OIE EDIE SRE SERED LEDS ELLIS EID ESR
IEDRDONEGRIL AESEO IOIOE SE
LINED EI BLESI TN

development

Learning outcomes
On completion of this chapter you should be able to:

‘Syllabus Pen no.

Eraiain fhe oeranes of ene se D6 (a)

co eee in the TNS,

Describe the eames process: (eet aa D6 (b)

Mumford, Kolb.

Descnes the rae & the hanon resources Dé (c)

department and individual managers in the
Honing HOS

Describe the trained Gaal Paclusucn. Dé (d)

process: identifying needs, setting objectives,
eyes ee aeINey and validation.

Explain the terms Aeeiainee Aes semen oe Dé (e)

‘education’ and the SCSI CHEMIE of each.

‘List ‘she benetits a Se trainiae and Dé (f)

SOE lua in unepot ee:

Exam context
Training and development are very examinable topics, especially if linked to appraisal and
performance management. There were two questions in the specimen exam relating to this
chapter.
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Chapter overview
ea EEA DDE CENTS PPS LOL PE ES ESO Ee

|Training and development |

qRE SESGU EEE EES SS ARS SS ,

The learning process © . Training and Training

| naconssia development methods

Lessons from Kolb's learning cycle Purposes of training Main types

learning theory | and development |

| Learning organisations | Induction training

Learning styles: Training and
Honey and Mumford development strategy

Benefits of training

Responsibility Evaluating Development

for training and training
development _ programmes

Responsible parties The five-level What is development?

evaluation model

Training manager's Approaches to

responsibilities development

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 1 The learning process
1.1 Lessons from learning theory
Learning theory offers certain useful propositions for the design of effective training programmes
and the role of the human resources department in developing such programmes.

| The individual should be The advantages of training should be made clear, dasorina
motivated to learn. | to the individual’s motives — money, opportunity, valued skills
_ or whatever.

| There Should a alear | Each stage of learning should present a challenge, without |
objectives and standards set, | overloading trainees or making them lose confidence. Specific |
| so that each task has some | objectives and performance standards will help trainees in the |
| meaning. | planning and control process that leads to learning, and
_ provide targets against which performance will constantly be
| | measured. |
t+ ——
| There should be timely, Tees will seu a provided by the trainer ae on be |
| relevant feedback on |concurrent — or certainly not long delayed. If progress reports |
| performance and progress. _ or performance appraisals are given only at the year end, for |
example, there will be no opportunity for behaviour
ene or sieliniintel.in the meantime.

Positive and negative Recognition oe Siecuceemens enhenee Toney

reinforcement should be confidence in their competence and progress: punishment for
judiciously used. poor performance — especially without explanation and
| _ correction — discourages the learner and creates feelings of
| | guilt, failure and hostility.
[Bere ae ele eis Nae 5+ SS ————————— —

| Active participation is more | Ifa Fign dearee of cor een is pupeeani practice Ey
telling than passive reception | repetition can be used to reinforce receptivity. However, |
(because of its effect on the participation has the effect of encouraging ‘ownership’ of the |
motivation to learn, process of learning and changing — committing individuals to
concentration and it as their own goal, not just an imposed process.
Fone Couey

1.2 Learning styles: Honey and Mumford

Honey and Mumford (1986)identified four learning styles that people adopt. Knowledge of the
style favoured by the learner helps to tailor learning activities.
(a) Theorists — seek to understand underlying theoretical concepts taking an intellectual, logical
approach to actions.
(b) Reflectors — observe and consider phenomena then act at their own pace
(c) Activists — like to learn by’doing something. They act first and consider the consequences
afterwards.
(d) Pragmatists — study if there is a direct link to practical problems (on the job training). They
like to learn how to do something rather than the underlying theory.

1.3 Kolb’s learning cycle

The learning cycle (D. Kolb 1984) demonstrates that experiential learning involves trainees
learning through experience.

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 Figure 16.1: Kolb’s learning cycle

1st Stage
(have an experience)

| Concrete experiences |

Ath Stage | Apply/test implications 2nd Stage

| Observation
(plan next steps) | of concepts in new situations | (reflect on the
| | and reflection
experience)

Formation of abstract
| concepts and generalisations |
A=

3rd Stage
(draw conclusions from the experience)

Suppose that an employee interviews a customer for the first time (concrete experience). They
observe their own performance and the dynamics of the situation (observation) and afterwards,
having failed to convince the customer to buy the product, the employee thinks about what they
did right and wrong (reflection). They come to the conclusion that they failed to listen to what the
customer really wanted and feared, underneath their general reluctance: they realise that the key
to communication is active listening (abstraction/generalisation). They decide to apply active
listening techniques in their next interview (application/testing). This provides them with a new
experience with which to start the cycle over again.

1.4 Learning organisation

RS ga PTR ADS EYTREE EAE TERN CE PSO RRR AS ERTS PRD SRS A OS = ecco

oN Learning organisation: One that facilitates the learning of all its members by gathering and
au | sharing knowledge, tolerating experience and solving problems analytically.
Rare TEN SIT TSS RE SES IS ROSNERIS ET ARE SO ES RL IR RIA OEP EOL

Learning organisations are good at:

* Experimentation, ie tolerate risk that things may go wrong
* Learning from past experience
« Learning from others
* Transferring knowledge quickly and efficiently throughout the organisation.

{ ‘Za Activity 1: Learning organisation

Suggest some practical ways of becoming a learning organisation.

2 Training and development

2.1 Purposes of training and development
There are many factors affecting a person’s performance at work. Training and development is
one method by which an organisation may seek to improve the performance of its staff. The main
purpose of training and development is to raise competence and therefore performance
standards. It is also concerned with personal development, helping and motivating employees to
fulfil their potential.

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 Figure 16.2: Purposes of training, development and education

a Training methods ih

} Off the job | |On the job |

| training | | training |

| Courses (internal or external) | | Coaching

eae | | Observation
| E-learning via internet | | Job rotation
| Case studies/role play | Apprenticeships |

2.2 Training and development strategy

Organisations create ‘training and development’ strategies to tie in with the overall business
strategy. A systematic approach should be used to developing the strategy to ensure that the
training undertaken meets the needs of the organisation.
Figure 16.3: Training and development strategy

| Training | | Development | | Education |

Raises competence | Growth of a | Knowledge |

| levels in | person's ability | | acquisition |
current position | | and potential
rs

2.3 Benefits of training

Benefits of training for the organisation include:
(a) Improves productivity of staff
(b) Reduces accidents and errors at work (and associated costs)
(c) Improves motivation and retention of staff
(d) Improves quality of staff available internally for promotion
(e) Attracts better staff due to showing commitment and progression opportunities
(f) Enables succession planning and career development
(g) Source of competitive advantage through innovation
(h) Helps build corporate culture.
Benefits of training for the employee include:
(a) Enhances portfolio of skills.
(b) Psychological benefits (helps self-esteem and confidence in future)
(c) Social benefit (can help satisfy ‘social needs’)
(d) The job (helps them do it successfully).

4th
Essential reading

See Chapter 16 Section 1 of the Essential reading for more detail on evaluation of training needs.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

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Training methods
Types of training
Figure 16.4: Training methods

= Training methods =]

| Off the job | | On the job |

training training

Courses (internal or external) | | Coaching

CBT Observation
| E-learning via internet | Job rotation
| Case studies/role play | Apprenticeships |
\

Activity 2: External courses

What are the pros and cons to the organisation of sending people on off-site courses using an
external provider?

Solution

Activity 3: Internal training

What are the pros and cons to the individual of on the job training by an internal
manager/employee?

Solution

BPP
Y LEARNING 16: Training and development 319
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3.2 Induction training .
Induction training is the process whereby a person is formally introduced and integrated into an
organisation or department. Inductions should be an ‘ongoing’ process that involves mentoring,
coaching, training and monitoring.

VW,
Essential reading

See Chapter 16 Section 2 of the Essential reading for more detail on training methods.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

Responsibility for training and development

4.1 Responsible parties
Responsibility for an individual’s training is shared by several parties:
(a) Trainee — many people believe that the ultimate responsibility for training and development
lies with the employer rather than the employee.
(b) HR department or training department — centrally concerned with career development.
(c) Line managers — responsible for identifying training needs, coaching staff, assessing
competencies and offering on the job training opportunities.
(d) Training manager (reports to head of HR).

4.2 Training manager’s responsibilities

The training manager’s responsibilities include:
(a) Liaison (with operating depts)
(b) Scheduling
(c) Needs identification
(d) Programme design
(e) Feedback

Evaluating training programmes

ae REI RIES SEE SPS SS A AT SR IOI SIE ES oR ESE RS BO REE AD ARK TSS

Validation of training: Observing the results of the course and measuring whether the training
objectives have been achieved.
Evaluation of training: Comparing the costs of the scheme against the assessed benefits
| which are being obtained.
DIST
2ASS
OETERE
ETE
PEE ESA BOLE LER SE STS ELIE SI ION EEA EE EINECS SEE NOT I CLE AO EIS PEO ET EES EP REESE TENET REMIT SEY

5.1 The five-level evaluation model

The effectiveness of a training scheme may be measured at different levels (A. Hamblin 1974).

_ Level 1 _ Trainees’ reactions to the experience. These are usually measured by post-
| training feedback forms.

Level 2 | Trainee learning (new skills and knowledge): measuring what the trainees have
| _ learned on the course, usually by means of a test at the end of it. |
|Level 3 _ Changes in job behaviour following training: observing work practices and
outputs (products, services, documents) to identify post-training differences. |
|Level 4 Impact of training on organisational goals/results: seeing whether the training

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 scheme has contributed to the overall objectives of the organisation in terms of
|ecu ee (PRISE SUGGS retention, and so on.

Level 5 |Ultimate value: the impact of training on the eat ee oF aa pronation in

terms of stakeholder benefits, greater social responsibility, corporate
|growth/aurvival.

Activity 4: Evaluating and validating training

Outline why it is important to evaluate and validate a training programme.

Development
6.1 What is development?
A wider approach to fulfilling an individual’s potential than training and education. May include a
range of learning experiences:
(a) Work experience of increasing challenge and responsibility
(6) Guidance support and counselling
(c) Suitable education and training
(d) Help to plan individual’s future.

6.2 Approaches to development

Approaches to development include the following:

Management | Improving managerial effectiveness through a planned process.

| development | This may include the development of management/leadership
| | skills (or competences), management education (such as MBA
| programmes) and planned experience of different functions,
| positions and work settings, in preparation for increasing
|
| | USERS Proust:

|
| Career Ro foonente |Individuals plan career eee The rend for sane
|
| organisations has reduced opportunities for upward progression:
| ||| opportunities may be planned for sideways/lateral transfers,

| |
secondments to project groups, short external secondments, and
| so on, to offer new OPP Ol URES |

Pr
Professional | Brercconcl Beale offer struettred programmes 6F Dalinuine |
|development |professional development (CPD). The aim is to ensure that
|professional standards are maintained and enhanced through
| education, development and training self-managed by the
| |individual. A CPD approach is based on the belief that a
| | professional qualification should be the basis for a career lifetime
| |of development and adherence to a professional code of ethics
| and standards.
ae
|
Personal development | Bone are finerees tot Site employees wider-ranging
|} | development opportunities, rather than focusing on skills required
|} |
|
|| in their current job. Personal development creates more rounded,
| | competent employees who may contribute more innovatively and
|

| flexibly to the organisation’s future needs. It may also help to

|

foster employee job satisfaction, commitment and loyalty.

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[Z Activity 5: Hindrances to developing | on gi ee

What may prevent a staff member from learning or developing?

322 Business and technology (FBT/BT) Y BPP

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Chapter summary
Gf EEONER TICE ANTI LLL LITRE

; Training and development |

RASPES OLN TESS EIS LESTLON GIO BRITEOT TENE SS”

The learning process Training and Training

development methods
I
Lessons from learning Kolb's learning cycle Purposes of training and Main types
theory development
* Concrete experiences + Off the job training
* Individual should be * Observation and Training — raises * On the job training
motivated reflection competence
¢ Clear objectives and
|
* Formation of abstract Development — growth
standards concepts and of potential Induction training
* Timely feedback generalisations Education — * Introduction to
¢ Reinforcement * Apply/test implications knowledge acquisition organisation
* Participation of concepts in new * Ongoing process
=A 1 situation
Training and
Learning styles: Honey development strategy
and Mumford Learning organisations Assess training needs
* Theorists * Tolerate risk things ° Set training objectives
¢ Reflectors may go wrong Design training
¢ Activists + Learning from past content
* Pragmatists experience Deliver course
* Learning from others Evaluate results
* Transfer knowledge
throughout
organisation Benefits of training
. Benefits for the
employer
Benefits for the
employee

Responsibility Evaluating Development

for training and training
development programmes
I
Responsible parties The five-level evaluation What is development?
* Trainee model Work experience
* HR or training Trainees’ reaction Guidance, support,
department Trainee learning counselling
* Line managers Changes in job Education and training
¢ Training manager behaviour Planning future
Impact on
I
organisational goals/
Training manager's results Approaches to
responsibilities Ultimate value development
¢ Liaison Management
* Scheduling development
« Needs identification Career development
* Programme design Professional
+ Feedback development
* Evaluation Personal development

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 Knowledge diagnostic é
OSCARS EATENTINY AHLESS CCE PAE NINN ASS NON VATION AEN AP NIE — EES APRN NEESER
AST EACLSARA SISNES SOB FSH QE TETIT ca eeeAERTSASE AACA SATIS POISE
ESE ELE LOLEESL2 IAABS HABIT IIE UE LE BTV SNIN

. The learning process

Learning theory helps design training events that are appropriate to the needs of the learners.
Honey and Mumford identified learning styles — theorists, reflectors, activists and pragmatists.
Kolb demonstrated a learning cycle based on experience that shows the opportunity for learning
to be a constant process.

. Training and development

Training is about raising particular competence levels while education is about acquiring
knowledge. Development is broader, involving growth of a person’s ability and potential.

. Training methods
There are a range of on and off the job methods that can be adopted to train staff.

. Responsibility for training and development

Responsibility for an individual’s training is shared by several parties: trainees, HR department,
line managers and the training manager.

. Evaluating training programmes

Training events can be evaluated using a five-stage approach including during the event and
once the trainee is back at the workplace.

. Development
Development methods include work experience, coaching, mentoring, job rotation and training.

324% Business and technology (FBT/BT)

ae
AR 3
Bae
Further study guidance

Question practice
Now try the following from the Further question practice bank [available in the digital edition of
the workbook]:

Number
Q80 Exam Section A - ere

oe ee ee yamine
| Bei Becucn A “| 2 "2 mins

Q83 Exam eee a 2 Yo mins |

O84 soe Exons Satin iAumsee ls Jamin

Own research
Do some research on the internet to find out what types of approaches are used for employee
benefit by some of the best employers.

BPP 16: Training and development 325

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Activity answers :
eenmeneenmeeenmmen nee

Activity 1: Learning organisation

Some practical ways of becoming a learning organisation include:
* Access to a range of training :
* Knowledge management systems
* Training budgets
* Encouragement of innovation
* Mentoring

Activity 2: External courses

Pros and cons:

Quality Quality/focus

Motivation Time delay

No distractions |Retention |

Activity 3: Internal training

Pros and cons:

Not standardised
——— ~ — ——as = = + — _ _ = ae {

Cost effective May not happen |

== ——_} ee ane aE RN ee
Flexible

Activity 4: Evaluating and validating training

Validation of a new course is important to ensure that objectives have been achieved. Evaluation
of it is more difficult, but at least as important because it identifies the value of the training
programme to the organisation. Both are required to improve effectiveness or cost effectiveness
next time.

Activity 5: Hindrances to developing

The following are some things that might prevent a staff member from learning or developing:
* Motivation
* Lack of awareness
* Lack of confidence
* Lack of encouragement.

326 Business and technology (FBT/BT)

BEY
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 \ _ Performance appraisal
y

@. a
es ae
"teers acre

Learning outcomes
On completion of this chapter you should be able to:

Syllabus
reference no.

Explain the importance of poea nce assessment. | D7 (a) .

Explain how Sickel Wels assess the eealncinaicinet: of human resources. D7 (b)

7 Benne Peo ilelble appraisal ane SOU SENits purposes. | D7 or

eonee the Boumonce appraisal process. . D7 (d)

? “aaeitt the benefits of effective apprise! | | D7 (e)

Identity, dheleeumae to erecie appraisal on how these may be al D7 ()

overcome.

Exam context
This topic is a rich source of potential exam questions. The approaches to performance appraisal
featured in one of the specimen exam questions.
328 Business and technology (FBT/BT)
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Chapter overview
Srarinat ae otters tee

Performance appraisal —
4
%
ENE TN I A ERE SIN DEAR ISTE
S E

Performance _ The purpose of The process of Barriers to

management performance performance effective
and assessment appraisal appraisal appraisal

The process of Main components Overview of the Problems in practice

performance of appraisal appraisal process
management |
| Appraisal and pay
Objectives of Appraisal techniques
performance review
|
The appraisal interview

New techniques
for appraisal

Follow up

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 1 Performance management
The purpose of performance management is to improve organisational performance by ensuring
that individuals within it are performing to the best of their ability and developing their potential
for improvement.
“ ——————— ee menneneeeenmemeaenammmmmnmans |

Performance management: Performance management is a means of getting better results by

managing performance within an agreed framework of goals, standards and competence
requirements. It is a process to establish a shared understanding about what is to be achieved,
ee and
ee an approach to managing and developing people in order to achieve it.
se2 RRA PDR OSES A SIE ISDS ASE EAISEES AS NE TICLES NDE NN CSE NEON ALORS ssn SEI OSS OT SETLIST enero
OST
ST

1.1 The process of performance management

A systematic approach to performance management might include the following steps.
Step 1 From the business plan, identify the requirements and competences required to carry it
out.
Step 2. Draw up a performance agreement, defining the expectations of the individual or team,
covering standards of performance, performance indicators and the skills and
competences people need.
Step 3. Draw up a performance and development plan with the individual. These record the
actions needed to improve performance, normally covering development in the current
job. They are discussed with jobholders and will typically cover:
* The areas of performance the individual feels in need of development
* What the individual and manager agree is needed to enhance performance
* Development and training initiatives
Step 4 Manage performance continually throughout the year, not just at appraisal interviews
done to satisfy the personnel department. Managers can review actual performance,
with more informal interim reviews at various times of the year.
(a) High performance is reinforced by praise, recognition and increasing responsibility.
Low performance results in coaching or counselling.
(b) Work plans are updated as necessary.
(c) Deal with performance problems by identifying what they are, establish the reasons
for the shortfall, take control action (with adequate resources) and provide
feedback.
Step 5 Performance review (performance appraisal). At a defined period each year, success
against the plan is reviewed, but the whole point is to assess what is going to happen in
future.
In order for learning and motivation to be effective, it is essential that people know exactly what
their objectives are. This enables them to do the following.
(a) Plan and direct their effort towards the objectives
(b) Monitor their performance against objectives and adjust (or learn) if required
(c) Experience the reward of achievement once the objectives have been reached
(d) Feel that their tasks have meaning and purpose, which is an important element in job
satisfaction
(e) Experience the motivation of a challenge: the need to expend energy and effort ina
particular direction in order to achieve something
(f) Avoid the demotivation of impossible or inadequately rewarded tasks. As we have discussed in
the chapter on motivation, there is a calculation involved in motivated performance. If
objectives are vague, unrealistic or unattainable, there may be little incentive to pursue them:
hence the importance of SMART objectives.

330 Business and technology (FBT/BT)

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 The differences between performance management and performance appraisal:
Performance management is a much wider remit and-covers the whole organisation
* Appraisal is more individual

The purpose of performance appraisal

2.1 Main components of appraisal
The general purpose of any appraisal system is to improve the efficiency of the organisation by
ensuring that the individuals within it are performing to the best of their ability and developing
their potential for improvement. This has three main components:
(a) Reward review: measuring the extent to which the employee deserves a bonus or pay
increase.
(b) Performance review: for planning and following up training and development programmes.
(c) Potential review: aid to planning career progression and succession planning.

ec Objectives of performance appraisal:

More specific objectives of appraisal may be summarised as follows:
(a) Establishing what the individual has to do in a job in order that the objectives for the section
or department are realised
(b) Establishing the key or main results which the individual will be expected to achieve in the
course of their work over a period of time
(c) Comparing the individual’s level of performance against a standard, to provide a basis for
remuneration above the basic pay rate
(d)_ Identifying the individual’s training and development needs in the light of actual performance
(e) Identifying potential candidates for promotion
(f) Identifying areas for improvement
(g) Establishing an inventory of actual and potential performance within the undertaking, as a
basis for human resource planning
(h) Monitoring the undertaking’s selection procedures against the subsequent performance of
recruits
(i) Improving communication about work tasks between different levels in the hierarchy

Activity 1: Formal appraisal

List four disadvantages to the individual of not having a formal appraisal system.

Solution

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Y LEARNING 17: Performance appraisal 331
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 sq) Essential reading ,

See Chapter 17 Section 1 for more detail on the purpose of performance appraisal.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

3 The process of performance appraisal

3.1 Overview of the appraisal process
There are three basic requirements for a formal appraisal system
(a) The formulation of desired traits and standards against which individuals can be consistently
and objectively assessed
(b) Recording assessments; managers should be encouraged to utilise a standard framework,
but still be allowed to express what they consider important, and without too much form-
filling
(c) Getting the appraiser and appraisee together, so that both contribute to the assessment and
plans for improvement and/or development
A systematic appraisal system can be depicted as follows:
Figure 17.1: A systematic appraisal system

Corporate
plan

Purpose of
appraisal

| SEA TPE antGe a age” ais ee | Jointl ~~

| Identification | | Assessment | /{ ee ih = a )
| > RS eat | | Assessment |_| agreed | | | Follow-up |
of criteria hd | (report > | ; p> | sp :
| bags ; | (Interview) | | concrete | ; action }
| for assessment |# | bymanager) | | ol i h
Ree ew ) en | conclusion | poo
SS | i a ee Oo \ Sere a te" i
| ¢ r
i i
Job ; Employee's :
requirements : performance 4

t , Feedback
?
|

'
analysis

3.2 Appraisal techniques

A combination of methods may be used to measure the effectiveness of employees:
(a) Overall assessment: narrative of manager’s judgement
(b) Guided assessment: comments by manager and appraisee under specific performance
elements
(c) Grading: manager applies a numerical grade against each performance element
(d) Behavioural incident methods: success or failure based on critical job behaviour
(e) Results orientated schemes: assessment against specific, measurable objectives

332 Business and technology (FBT/BT)

ies
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(& Activity 2: Appraisal techniques _
AAO A EY NAR AEN PEF

What sort of appraisal systems are suggested by the following examples?

Teese at a Re Bund aay Lendhenat the |

end of each term to the parents of the school’s |
pupils. Typical phrases include ‘a satisfactory |
term’s work’, and could, do better’. |

A firm of anshion assess Oe eeronenee ote

their staff in four categories: technical ability, |
relationships with clients, relationships with
other members of the audit team, and
professional attitude. On each of these
criteria staff are marked from A (= excellent) to
E(= poo

A firm of insurance Bros: assesses the:

performance of its staff by the number of | |
clients they have visited and the number of |
|iRelicies sold. |

3.2.1 Self-appraisal
Self-appraisal is where the employee assesses their own performance against criteria, identifies
issues, and discusses with their manager how to resolve them. This emphasises development.

Activity 3: Self appraisal

What are the pros and cons of self-appraisal?

Solution

3.3 The appraisal interview

Maier identifies three approaches to appraisal interviews (Maier N. 1975):
(a) Tell and sell style - the manager tells the employee how they have done and tried to ‘sell’ the
evaluation.
(b) Tell and listen style - the manager tells the employee how they have done and then invites
the employee to respond.
(c) Problem solving style - the manager takes on the role of coach, rather than appraiser,
discussing problems and helping the employee to find solutions.

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 3.4 New techniques for appraisal .

3.4.1 Upward appraisal

A notable modern trend adopted by some companies is upward appraisal, whereby employees
are not rated by their superiors but by their subordinates. The followers appraise the leader.
Advantages of upward appraisal include the following:
(a) Subordinates tend to know their superior better than superiors know their subordinates.
(b) As all subordinates rate their managers statistically, these ratings tend to be more reliable —
the more subordinates the better. Instead of the biases of individual managers’ ratings, the
various ratings of the employees can be converted into a representative view.
(c) Subordinates’ ratings have more impact because it is more unusual to receive ratings from
subordinates. It is also surprising to bosses because, despite protestations to the contrary,
information often flows down organisations more smoothly and comfortably than it flows up.
When it flows up it is qualitatively and quantitatively different. It is this difference that makes
it valuable.
Problems with the method include fear of reprisals, vindictiveness, and extra form processing.
Some bosses in strong positions might refuse to act, even if a consensus of staff suggested that
they should change their ways.

3.4.2 Customer appraisal

In some companies, part of the employee’s appraisal process includes taking into account
feedback from ‘customers’ (whether internal or external). Some organisations go further and make
customer feedback a key element of employee remuneration. This reflects the view that customers
are the best judges of customer service.

3.4.3 360 degree appraisal

Taking downwards, upwards and customer appraisals together, some firms have instituted 360
degree appraisal (or multi-source appraisal) by collecting feedback on an individual’s
performance from the following sources.
(a) The person’s immediate manager
(b) People who report to the appraisee, perhaps divided into groups
(c) Peers and co-workers: most people interact with others within an organisation, either as
members of a team or as the receivers or providers of services, and can offer useful feedback
(d) Customers: if salespeople know what customers thought of them, they might be able to
improve their technique
(e) The manager personally: all forms of 360 degree appraisal require people to rate themselves,
and those ‘who see themselves as others see them will get fewer surprises’
Sometimes the appraisal results in a counselling session, especially when the result of the
appraisals are conflicting. For example, an appraisee’s manager may have quite a different view
of the appraisee’s skills than subordinates.

3.5 Follow up
After the appraisal interview, the manager may complete the report, with an overall assessment,
assessment of potential and/or the jointly reached conclusion of the interview, with
recommendations for follow-up action. The manager should then discuss the report with the
counter-signing manager (usually their own superior), resolving any problems that have arisen in
making the appraisal or report, and agreeing on action to be taken. The report form may then go
to the development adviser, training officer or other relevant people as appropriate for follow-up.
Follow-up procedures may include the following:
(a) Informing appraisees of the results of the appraisal, if this has not been central to the review
interview
(b) Carrying out agreed actions on training, promotion, and so on
(c) Monitoring the appraisee’s progress and checking that they have carried out agreed actions
or improvements

334 Business and technology (FBT/BT) BPP

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 (d) Taking necessary steps to help the appraisee to attain improvement objectives, by
guidance, providing feedback, upgrading equipment, altering work methods, and so on

Activity 4: Follow up

What would happen without follow-up?

Barriers to effective appraisal

4.1 Problems in practice
Problems with appraisal are its implementation in practice and a range of misperceptions about it
(Lockett, 1992). New techniques of appraisal aim to monitor effectiveness from a number of
perspectives.
Lockett pointed out that barriers to effective appraisal can be identified as follows:

| Appraisal as confrontation Many people dread appraisals, or use them ‘as a sort of show
down, a good sorting out or a clearing of the air.’ In this kind of
climate:
* There is likely to be a lack of agreement on performance
levels and improvement needs.
* The feedback may be subjective or exaggerated.
| | ¢ The feedback may be negatively delivered.
|¢ The appraisal may focus on negative aspects, rather than
looking forward to potential for improvement and
development.

Appraisal as judgement The appraisal is seen as a one-sided process in which the

manager acts as “judge, jury and counsel for the prosecution”.
| This puts the subordinate on the defensive. Instead, the process
of performance management ‘needs to be jointly operated in
| order to retain the commitment and develop the self-awareness
| of the individual.’
| Appraisal as chat The appraisal is conducted as if it were a friendly chat ‘without
_ ... purpose or outcome ... Many managers, embarrassed by the
| need to give feedback and set stretching targets, reduce the
| | appraisal to a few mumbled “well done!” and leave the
| interview with a briefcase of unresolved issues.’

_ Appraisal as bureaucracy | Appraisal is a form-filling exercise, to satisfy the personnel

department. Its underlying purpose, improving individual and
organisational performance, is forgotten.

| Appraisal as unfinished |Appraisal should be part of a continuing future-focused

|business process of performance management, not a way of ‘wrapping
| _ up’ the past year’s performance issues.

Appraisal as annual event Many targets set at annual appraisal meetings become
_ irrelevant or out of date. Feedback, goal adjustment and
| | improvement planning should be a continuous process.
|

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4.2 Appraisal and pay ,
Another problem is the extent to which the appraisal system is related to the pay and reward
system. Many employees consider that positive appraisals should be rewarded, but there are
major drawbacks to this approach.
(a) Funds available for pay rises rarely depend on one individual’s performance alone — the
whole company has to do well.
(b) Continuous improvement should perhaps be expected of employees as part of their work and
development, not rewarded as extra.
(c) Performance management is about a lot more than pay for past performance — it is often
forward looking with regard to future performance.

ge ore semeran aoe SIP

OES STB SAS TSI TITEIIODIEP ETAINEE LSCP N/IIS D UCR SESE ES TT TG SSDORE IY SO NOES IIT I NELIRIODOOIED SM STE iS ay EMT ay

PER alert

Performance objective PO2, relating to stakeholder relationship management, includes the

_ maintenance of ‘productive business relationships’. Planning for and engaging positively with
the appraisal process provides an example of a practical step you could take in this area.
loveswancyeeen Se
STEERS SRP ONEANDE LETHE S HOE EE SES ROS ERIE TESS EET: OESTEALS
TEESE SPI CT I LIS ES AAS TE

336 Business and technology (FBT/BT)

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Chapter summary
ores SAAS RSP PSE ROLE TEEN LA ROS TERED CD

| Performance
q

%
appraisal |
F

>
"caaa RDB EAGER ID BCE RAILS RELIES SSS RES: eee dl

Performance The purpose of _ The process of Barriers to

management performance performance effective
and assessment appraisal appraisal appraisal

' The process of Main components of Overview of the Problems in practice

performance appraisal appraisal process * Confrontation
management * Reward review Formulation of desired + Judgement
Identify competences ¢ Performance review traits and standards * Chat
required ¢ Potential review Recording « Bureaucracy
Performance assessments ¢ Unfinished business
agreement Getting appraiser and ¢ An annual event
Performance and Objectives of appraisee together
development plan performance review I
Manage performance * Communicate Appraisal and pay
continually objectives Appraisal techniques * Funds available
Performance review * Establish expected Overall assessment * Continu
results Guided assessment * Funds available
¢ Assess current Grading
performance Behavioural incident
+ Identify development methods
needs Results oriented
* Improve schemes
communication

The appraisal interview

* Three styles (Maier)
— Tell and sell
— Tell and listen
— Problem solving

New techniques for

appraisal
° Upward appraisal
Customer appraisal
360 degree appraisal

Follow up
Informing appraisees
« Agreed actions
Monitoring progress
Help attain objectives

BPP 17: Performance appraisal 337

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 Knowledge diagnostic
SANT erates: coin BSS SER ES ASPENS AD LPS EI IRENA = ALTOS
“i PBRDEESLEA NLL
NCE LIEDores
I MOEN LETTS(ELT SLPS LOND DLS LOPES TIS

. Objectives of performance management

The performance management process aims to improve organisational performance within an
organisation by agreeing goals and standards with individuals and developing their potential for
improvement. Performance management is a continuous process. Part of the process is the formal
performance appraisal.

. Objectives of performance appraisal

The performance review or appraisals assesses performance and set future goals as well as
determining development needs. Appraisals may assess reward, performance and or potential.

. Approaches to appraisal
There are a range of approaches to appraisal. These include overall assessment, guided
assessment, grading, behavioural incident methods and results oriented schemes. Some systems
use multi-source appraisal.

. Appraisal style
Managers may adopt different styles in the appraisal including telling, listening and problem
solving depending on the extent of involvement of the employee in the appraisal.

. Barriers to effective appraisal

Lockett identified a range of barriers to effective appraisal including confrontation, judgement, a
chat or seen as an annual event.

338 Business and technology (FBT/BT) BPP

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Further study guidance
a SSN ns Snr St SSS SS Sle SS

Question practice
Now try the following from the Further question practice bank [available in the digital edition of
the Workbook]:

| Ceeicecion = 2 | 2 mins

O86 9» |mxamsectiond . [2 |2 mins

QB7 | Exam Section A iin OCT tes rere |
ee eS a eh
O89 Exam Section A ae z = |
2 mins =
— ee eS Ee

Further reading
There is an article on the ACCA website entitled ‘Understanding the importance of appraisals’ that
is relevant to material in this chapter. You are strongly advised to read this article in full as part of
your preparation for the FBT exam.

17: Performance appraisal 339

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Activity answers
SS SS TRO ST TE I ESOT
sarees ssa SSS SSIS

Activity 1: Formal appraisal

Disadvantages to the individual of not having an appraisal system include:
© The individual is not aware of progress or shortcomings.
© The individual is unable to judge whether they would be considered for promotion.
* The individual is unable to identify or correct weaknesses by training.
* There is a lack of communication with the manager.

Activity 2: Appraisal techniques

Appraisal eae

Example —| : :. > _ 7 2 Appropriate techniq f

Teachers at a een can a brief eae at the || Overall assessment
end of each term to the parents of the school’s
pupils. Typical phrases include ‘a satisfactory
term’s work’, and ‘could do better’.
i = — = a -= {$$ ________ —

A firm of auditors assess the performance of A grading cue seedy onapee

their staff in four categories: technical ability, | assessment
relationships with clients, relationships with
other members of the audit team, and
professional attitude. On each of these
criteria staff are marked from A (= excellent) to
E c [ee |
eae ee eee = =e
a ne of insurance Wiles assessesee ean Seemed eer
performance of its staff by the number of
clients they have visited and the number of
policies sold.

Activity 3: Self appraisal

The employee is involved in their appraisal so oeeee mi fn it fartsto ee apy:

they are more likely to accept the results of | about their own performance.
the appraisal than if it had been performed |
without their Dae |

The Guinan hada pore Waeoeenins g, The enous may Roetee fee eS will lose
factors that may have led to failure to achieve | out on rewards or promotions if they are too
particular objectives. . honest about poorer aspects of their
Pesrorenas:

Activity 4: Follow up
The appraisal would merely be seen as a pleasant chat with little effect on future performance, as
circumstances change. Moreover, the individual might feel cheated.

340 Business and technology (FBT/BT) EAMING

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 Personal effectiveness
SE ESOL ES NE
IAT TE ABODE OST DTI BESED ODE DIU OLED ELY SAEED LILO A ELE IOESEEE UE IS CN NE ALN NE tT

and communication

Learning outcomes
On completion of this chapter you should be able to:

Syllabus
reference no.

Explain tne importance ei arecnvertimee management. E1 (a)

Reso ake sania ie PaaS timecreer: ce oe neinmaywoe E1 (b)

overcome.

Deseaee the role of information eaneleenn in improving SS Seal E1 (c)

effectiveness.

idenria the main ways insue pecs and teams can Be ineffective at E2 (a)
work,

sevoele how ealaeeeatleor team HERS AYRES can whe Paneonene! E2 (b)
poner:

Describe the eeiee: af a ‘competence Paneer. ES (a)

an how a Seyeaenee framework underpins See OE development E83 (b)

needs.

Explain foe per one re continuous spoon poet can E3 (c)

increase personal effectiveness at work.

Explain the purpose and benefits of coaching, mentoring and counselling £3 (d)
in promoting Pouce effectiveness.

beccrbe how a perm Pevelsouent abe should Ee formed: ES (e)

ae, monitored and reviewed by the individual.

ce situationseucnere conflict at work can arise. an (a)

; Describe howeommict canaffect Pee onal one Prganntoads E4 (b)

Slauteluls le

aoe ways in Wien conflict can be managed. EY (c)

Describe inethods ae panimunicaton used in the organisation and how E5 (a)

_they are used.

Explain how the type of information differs and the purposes for which itis E5 (b)
applied at different levels of the organisation: strategic, tactical and
operational.
 Syllabus
reference no.

List the ee of gees quality ecuador OQ

salts a sinus communication model sender, message, receiver, £5(@)
feedback, noise.

Explain formal and informal communication and their importance in the £56)
workplace.

Identify the consequences of ineffective communication. } ES (f)

Describe the attributes of BH SINS communication.

Describe the barriers to Gifective communication and identify praetien!

ops that meleeee taken to overcome Penis

identify the main patterns o

Bt communication.

Exam context
Many of these topics (eg barriers to communication, qualities of effective communication,
counselling) may be set as questions. There were several questions in the specimen exam relating
to this area.

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Chapter overview
OTS Ea ETE SLE TT EI LEN TS
I LT LIELAYLEP ENE TSTMNES SIL TOY II
SSSA, AIEEE

: Personal effectiveness and communication

4ce DOBLE ELE BRP EONS AS LILIES SLT PERL
'|
AIA ST
OES FLIES NECN TREE eS?

Personal Personal Conflict and

effectiveness development conflict resolution

Time management Competence frameworks How does conflict arise?

Coaching, mentoring Managing interpersonal conflicts

and counselling

Managing conflict
Personal development plans within the team

A win win approach

Communication Effective Informal

in the workplace communication communication

Types of communication Communication model The grapevine

Communication networks Effective communication The importance of informal

communications

eat
Barriers to effective communication Information

General faults in the Improving the Information in the organisation

communication process communications system

Qualities of good information

Culture Clearing up misunderstandings

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1 Personal effectiveness
There are different views of what is meant by personal effectiveness. The following are examples
of what is usually understood by personal effectiveness at work:
* Maximising the quality and quantity of your output
* Ability to communicate well with your colleagues
* Utilising your talents and skills and energy to achieve goals - both your own personal goals,
and those of your employer.
Personal effectiveness involves:
(a) Managing yourself. Being proactive about the tasks that need to be done at work, not waiting
for your line managers to tell you what to do.
(b) Prioritising and planning. These are discussed in more detail in the section on time
management below.
(c) Quality assurance - checking the quality of your own work
(d) Developing good working relations with your colleagues and your managers.
(e) Adopting an appropriate style to fit in with the culture of the organisation, and to give a
professional image.

Time management
PR SC SR RL TERI SECA NS Lied SSIS PR A aE EI CSTE NEESER NTR, NORE ANE EE ELLIOT IEA FEY EE IEE ENON EE ER ESE REAE EVEL DIORA LI OR CLAPLETE EEO OSE ER,

Time management: Time management is the process of allocating time to tasks in the most
|EH effective manner.
e

Importance of time management

The scarcest resource any of us has is time. No amount of investment can add more hours to the
day or weeks to the year. All we can do is take steps to make more effective use of the time which
is available to us. Planning how we spend our time is as normal to us as planning how we will
spend our income, and you should already have considerable experience of both.
To be worth their pay, every employee needs to add more value than they cost per hour. If you
do the same exercise for the whole team, you can see how expensive the time of your section
actually is, and why keeping colleagues waiting to start a meeting or training course is more
serious than just a breach of manners. It is important, therefore, that managers work as efficiently
as possible.

Principles of time management

The key principles of time management can be depicted as follows:
Figure 18.1: Principles of effective time management

| Goals |

|Organisation ii : = | Focus

alae 1S Principles of ithe iced

effective time
eles management Sig PY
| Action plans : ; a i Urgency |

| Priorities |

Goals: If you have no idea what it is you are supposed to accomplish, all the time in the world will
not be long enough to get it done. Nor is there any way of telling whether you have done it or not.

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 To be useful, goals need to be SMART:
* Specific
* Measurable
¢ Attainable
* Realistic
* Time-bound
Action plans - set out how you intend to achieve your goals.
Priorities - deciding which tasks are the most important: what is the most valuable use of your
time at that very moment?
Focus - working on one thing at a time until it is finished, where possible.
Urgency - some tasks are urgent - do those now!
Do not put off large, difficult or unpleasant tasks simply because they are large, difficult or
unpleasant.

Organising your work

Apart from working to plans, checklists and schedules, your work organisation might be improved
by the following.
(a) An ABCD method of in-tray management. Resolve to take one of the following approaches.
* Acton the item immediately
* Bin it, if you are sure it is worthless, irrelevant and unnecessary
* Create a definite plan for coming back to the item: get it on your schedule, timetable or ‘to do
list?
* Delegate it to someone else to handle
(6b) Organise your work in batches. Batches should contain jobs requiring the same activities,
files, equipment, and so on.
(c) Take advantage of your natural work patterns. Self-discipline is aided by developing regular
hours or days for certain tasks, like dealing with correspondence first thing, or filing at the
end of the day.

ISM NRE EY EE STOR NR ORICON RY BEDI SETS SEES GE UO EDN 2NEMESIS

BEIT NTT PA EIT RANE PAD NET ROR REY a RN EERE OE Nm NAN SRO ah NSM ELEY Taare ee age Senn nena meIRRU FN AREASER TS

PER alert
Performance objective PO5 of your Practical Experience Requirements requires you to be able
to manage yourself effectively. You can apply the knowledge that you learn from this section
on time management to help you demonstrate this competence.
sper NOLS
putnam PC SCE EIDE CI REESE SIENA I NTSC EN A LT SL EIS ASRS |a

Activity 1: Barriers to effective time management

What do you think are the barriers to good time management?

1.2 Role of IT in improving personal effectiveness

Advances in IT have pervaded the workplace over the last few decades, providing opportunities to
improve the personal effectiveness of all employees. This section highlights the most important
developments:

1.2.1 Mobile computing

Mobile computing has been enabled by:
* Developments in mobile devices, such as smart phones and tablet computers, hooked up to the
internet using high speed mobile internet connection.
* Cloud computing whereby applications and data stored in the cloud enable employees to
access their work applications remotely using mobile devices.

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 to work
Mobile computing has enabled greater flexibility in working patterns, such as being able
from home. It also enables businesses that are distributed geographic ally to communica te more
easily.

1.2.2 Communications platforms and social media

Communication platforms such as Microsoft Teams or Slack enable employees to collaborate
more easily and share information and knowledge. Features include:
* bulletin boards where messages can be posted
* video conferencing allowing one or more people in different locations to see and hear each
other, and share screens
* — file sharing facilities enabling collaboration.
* online meetings.

1.2.3. Online training facilities

Computer based training enables a more flexible and less expensive approach to training,
enabling employees to access the training and support that they need in their jobs at a time to
suit them.
Many universities and professional training companies such as BPP now offer live lectures online
using packages such as Adobe Connect or WebEx.

1.2.4 Office automation

Many tasks that were previously performed manually have been automated, leading to less
routine work for professionals. This enables staff to focus on higher level tasks that cannot be
automated.

Real life example

The work of bookkeepers has been transformed by the development of cloud based accounting
packages such as Xero and QuickBooks. These packages can import bank transactions from the
bank’s systems, saving the bookkeeper time in entering the transactions manually. Invoices from
suppliers can be scanned into the systems. The systems can prepare tax returns and submit these
to the tax authorities online. Being cloud based means that they can be accessed from any device
with an internet connection, enabling staff in different locations to enter accounting transactions,
and view accounting reports.

1.3 Ineffectiveness at work

Employees and teams can be ineffective in the following ways:
* Failing to communicate (eg problems, delays)
* Failing to meet deadlines
* Failing to comply with job specifications
* Failing to deliver the exact product needed
Ineffectiveness could lead to the following impacts on the performance of the organisation:
* Potential problems are not identified and so no countermeasures can be taken in time to
prevent the problem arising
* Problems are not dealt with as they arise
* -Deadlines are not met
* Customers are angry and go elsewhere

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 Personal development
Competence frameworks
ANS PENI BACNET SETS SE ERNE ncn somes ws - perce vame cote
sence ie cect - RNA SB NS RO NRE SA AE
oa NT DT

|Competence framework: A list of the knowledge, skills and competences that are expected for
a particular role within the organisation.
SS SS SSS SSS SSS SS SSS SSS SSS

An employee’s job description should include a competence framework and the employee should
be encouraged to keep up to date with developments in their field. This may involve regular
attendance at conferences and update courses as part of the employee’s professional
development. Having a defined set of competences that are necessary for a job should help an
organisation in the following ways.
* Assisting effective recruitment
* Asa tool for performance evaluation
* Identifying skills gaps and planning training and development activities

Real life example

The ACCA has developed a competency framework that shows the competences that ACCA
qualified accountants possess. The competences relate to the ethics and professionalism,
technical knowledge and practical experience requirements that are required to successfully
qualify as an ACCA member. It includes the PER objectives referred to throughout this workbook.
The competency framework can be found on the ACCA website.

Coaching, mentoring and counselling

Figure 18.2: Coaching, mentoring and counselling

Sin
Trainee may have
| access to experienced employee |

| A Coach | AMentor | / A Counsellor |

| Provides targeted | Provides long-term | | Helps the

| | bee
| guidance on how | | career support | | trainee to help |
| todoataskfor | | and development | themselves
| current role —

2.2.1 Coaching
Coaching is where a trainee is put under the guidance of an experienced employee. For coaching
to succeed the following steps are appropriate:
Step1 Establish learning targets.
Step 2 Plan systematic learning and development programme.
Step 3 Identify opportunities to broaden trainee’s knowledge and experience.
Step 4 Allow for trainee’s strengths and weaknesses.
Step 5 Exchange feedback with the trainee about their programme.

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2.2.2 Mentoring ‘

Mentoring requires a long-term relationship. It differs from coaching as:

* Amentor is not usually the individual’s immediate superior
- Mentoring covers a wider range of issues and concerns

2.2.3 Counselling
Counselling should be performed by a trained person on a professional basis, to resolve problems
. . . >

or issues in the workplace, eg:

* Motivation
* Management
* Relationships
Effective counselling is important because it:
* Motivates individuals
* Reduces conflict in the department
* Aids management’s understanding of issues
The result of these three elements is an increase in productivity and efficiency.
There are three key stages in counselling:
(a) Recognition and understanding
(b) Empowering/finding solutions
(c) Resourcing the solutions
The manager should help the employee to recognise and deal with issues rather than merely to
provide a solution.

2.3 Personal development plans

A personal development plan is an action plan for an individual that incorporates a set of
developmental opportunities including formal training. A systematic approach to personal
development planning might include the following steps:
Step 1 Select area for development.
Step 2 Set an objective (SMART).
Step 3. Determine how to move towards the objective.
Step 4 Formulate detailed action.
Step 5 Secure agreement to action plan.
Step 6 Implement action plan.

Activity 2: Personal development plans

What are the benefits of PDPs to the organisation?

“i
Essential reading

See Chapter 18 Section 1 of the Essential reading for more detail about personal development.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

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 3 Conflict and conflict resolution
3.1 How does conflict arise?
Conflict is the clash of opposing ‘forces’, including the personalities, interests, opinions or beliefs
e individuals and groups. Conflict often arises within and between teams because of a number of
actors.
(a) Power and resources are limited (and sometimes scarce) in the organisation. Individuals and
groups compete for them, fearing that the more someone else has, the less there is to go
around.
(b) Individuals and teams have their own goals, interests and priorities — which may be
incompatible.
(c) There may be differences and incompatibilities of personality between individuals, resulting
in ‘clashes’.
(d) There may be differences and incompatibilities of work methods, timescales and working
style, so that individuals or teams frustrate each other with apparent lack of co-ordination
(especially if one person’s task depends on the other’s).
Difference and competition by themselves do not lead directly to conflict. Conflict can even be a
positive force if harnessed correctly. Constructive conflict can be useful in the following situations:
* Where assumptions made by the team need to be challenged
* To challenge overly optimistic beliefs in the team’s competence
In order to take advantage of the benefits of constructive conflict, managers need to encourage
people to speak frankly. Constructive conflict needs to be managed to ensure it does not
escalate into destructive conflict.
However, they can escalate or deteriorate into destructive conflict if:
(a) There is poor or limited communication: assumptions go unchallenged, misunderstandings
go unclarified, and feelings are left undealt with.
(b) There is poor co-ordination: working relationships are not managed or structured, and so are
subject to interpersonal problems or unchecked competition.
(c) There are status barriers: problems in the relationship are glossed over by the superior
asserting authority (do it because | said so’), or hidden by the subordinate feeling powerless
or threatened (‘it’s more than my job’s worth to say anything’).
(d) Work demands put pressure on individuals and teams: competition may escalate, feelings
may become less manageable under stress, and there may be little time allowed for
interpersonal problem-solving.

Activity 3: Conflict

Suggest how conflict may be (a) positive or constructive and (b) negative or destructive.

3.2 Managing interpersonal conflicts

Conflicts and sources of dissatisfaction can be managed informally in several ways.
(a) Communicate
The first step in any conflict or difficulty should be direct, informal discussion with the person
concerned.
(i) Where there is a personality or style clash, this gets the problem out in the open and
gives an opportunity to clear up any misunderstandings and misperceptions.
(ii) Problems of incompatible working styles or excessive work demands are matters which
can be taken, informally, to your supervisor: they will best be able to help you develop
solutions to the problem.

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 (iii) If your dissatisfaction is with someone in authority over you, or about your own status,
you may have to discuss the matter with someone higher up in the organisation: this is
probably best handled using more formal channels.
(b) Negotiate
Where interests or styles are genuinely incompatible, or work demands are unmanageable,
you may need to work together to explore a range of options that will at least partially satisfy
both parties. You may have to make a concession in order to gain a concession: this is called
compromise. However, the best approach is to attempt to find a mutually satisfying solution:
a win-win.
(c) Separate
If personality clash is the main source of conflict, you may have to arrange (or request) a way
of dealing with the other person as little as possible. It may be within your power to simply
walk away from potential conflicts, rather than allow yourself to participate. If the problems
persist, you may need to initiate formal conflict resolution proceedings: to have a third party
mediate — or to physically separate you in different areas, duties or departments.

3.3 Managing conflict in the team

Management responses to the handling of conflict (not all of which are effective).

| Denial/withdrawal ‘Sweeping it under the carpet’. If the conflict is very trivial, it may
| indeed blow over without an issue being made of it, but if the
causes are not identified, the conflict may grow to unmanageable
proportions.

|Suppression ‘Smoothing over’, to preserve working relationships despite minor

| conflicts.

|Dominance | The application of power or influence to settle the conflict. The |

|disadvantage of this is that it creates all the lingering resentment
_ and hostility of ‘win-lose’ situations.

Compromise Bargaining, negotiating, conciliating. To some extent, this will be

inevitable in any organisation made up of different individuals.
| However, individuals tend to exaggerate their positions to allow for
| compromise, and compromise itself is seen to weaken the value of
| the decision, perhaps reducing commitment.

_ Integration/collaboration | Emphasis must be put on the task, individuals must accept the
|
| need to modify their views for its sake, and group effort must be
seen to be superior to individual effort. |
|

_ Encourage co-operative Common goals may be set for all teams/departments. This would |
|
_ behaviour encourage co-operation and joint problem-solving. ||
sill

spect aneeer ome SOBEL EAI SASSN ETETEESE NSESOLID AREER DEPRES SORES NEREIT ICSE RN STEREO
EEE COMES.

PER an
i

Performance objective PO2, covering stakeholder relationship management, mentions as an

example demonstrating how you are able to discuss work problems or issues with colleagues
or clients to improve or maintain relationships. If you have experienced any problems or
eeconflicts while working with someone, you might attempt some of the methods discussed
_ above.
LI TE STL LTT OES AT TE ETN IPSS TSAI Cea nn
memenaas PATINA DEON

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eyER
+ce
iz Activity 4: Conflict resolution

Consider the following situations:

(1) Two managers who share a secretary have documents to be typed.
(2) One worker finds out that another worker who does the same job is paid a higher wage.

(3) A company’s electricians find out that a group of engineers have been receiving training in
electrical work.
(4) Department A stops for lunch at 12:30pm while Department B stops at lpm. Occasionally the
canteen runs out of puddings for Department B workers.
(5) The Northern Region and Southern Region sales teams are continually trying to better each
other's results, and the capacity of production to cope with the increase in sales is becoming
overstretched.
Required
Consider how conflict could arise, what form it would take and how it might be resolved in each of
the situations.

3.4 A win-win approach

One useful model of conflict resolution is the win-win model. This states that there are three basic
ways in which a conflict or problem can be worked out.
* Win-lose - on party gets what they want at the expense of the other party (eg Dept A gets a
new piece of equipment while Dept B keeps the old one)
* Lose-lose - neither party gets a new piece of equipment because the organisation cannot
afford to buy one for each department and it would be unfair to buy for one and not the other
* Win-win - working towards a solution that means both departments get closer to what they
want. For example give the new equipment to Dept A because they need it more, but upgrade
the old equipment before giving it to Dept B. Dept B would not feel like a ‘loser’ if they have
been consulted.

WM
Essential reading

See Chapter 18 Section 2 of the Essential reading for more detail on managing conflict.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

Activity 5: Win-win

Three scenarios:
(1) Two of your team members are arguing over who gets the desk by the window: they both
want it.
(2) You and a colleague both need access to the same file at the same time. You both need it to
compile reports for your managers, for the following morning. It is now 3pm, and each of you
will need it for two hours to do the work.
(3) Manager A is insisting on buying new computers for her department before the budgetary
period ends. Manager B cannot understand why, since the old computers are quite
adequate. She will moreover be severely inconvenienced by such a move, since her own
systems will have to be upgraded as well in order to remain compatible with department A
(the two departments constantly share data files). Manager B protests, and conflict erupts.

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 Required
Suggesta
(a) win-lose
(b) compromise; and
(c) win-win solution for each of the scenarios.

Communication in the workplace

4.1 Types of communication
Communication should be a two way process and is required for planning, co-ordination and
control. In an organisation communication can take any of the following forms:

Generate new ideas. Give Face to face/meetings | People can ‘bounce ideas’ off
|

immediate feedback Spread | one another.

information eM
a
erence commitment iad Team Bieme A team Foes. is more
||Meose cmon of eee | | Personal than a noticeboard.

Reach large Herbs Coes _ Aconference gives members

spread over a wide area _achance to discuss and
' understand what the
p cnr is CTS
[Pg oe Lee eee ead a eae elliot) fe desert oS BCs bag ree eae) oe
Formal and eontdentcls Interview | Interviews are costly in terms
communication _of managerial time but are
| || | necessary for confidential
| communication.

_ Face to face communication Tolenncnen |The fees is more

without travel time impersonal than an interview
| but should save time.
| |

mrencmit oanenen Spee Gnictccbes sat A fouesoea can ones a

| to a large number of people variety of information to any
or all SIN CMTS,
} { |=
ee.
} { | }

| Evchaale | rcO an }
@O
|ei = A letter is a feanis method of
| communication/confidential _ providing a written record.
| written record
|
|
| paca ae we: oF ae Email Seder: messagessiieed not
| in several sites/countries _ interrupt the recipient’s flow
| |
_of work.
Explain complex facts and aepore
|
| |rn eae allons ieee to
arguments study the material in their |
|
own time.
eee an

Communication within the formal organisation structure may be of the following types:
(a) Vertical — through the hierarchy (upwards and downwards)
(b) Horizontal — across the same level

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4.2 Communication networks
Leavitt (1951) conducted experiments with written communications and five people, and examined
the effectiveness of four communication networks and described these as:
(a) The ‘Y’
Co-ordinated by the figure where the Y forks into two
* Quick to solve problems
Figure 18.3: The ‘Y’

(b) Wheel
Central figure has all information to co-ordinate the task
* Communicates only through central figure
* Solves problems the quickest
* Lowest job satisfaction
Figure 18.4: The Wheel

(c) Circle
* No obvious leader
¢ Each person only communicates with the person next to them
¢ Slowest to make decisions and solve problems
¢ Highest job satisfaction
Figure 18.5: The circle

:
(d) A ‘chain’
*
*
Each end cannot communicate with the other end.
Each person only communicates with the person next to them.
Figure 18.6: The chain

5 Effective communication
5.1 Simple communication model
A simple communication model is shown in figure 18.7.

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Figure HTS A communication model

| Feedback |
Nemes =e ‘

ay,
f
ee ee te ee= 5 eek
ae ares} " lied j
Transmission " nder- "
= maa sss "
t DAUGATme PH Encoding
Encocing HE") of SO
message a tion =>
— : ae Decodin g standing | |
Se \ Sieh ee

.
\ Receiver !
we
.
Seances
eS ES a
on ee el 1 i
ae

pom,"

Noise
a

The meanings of the key tems in the model are as follows:

Encoding of c The code or ‘language’ of a message may be verbal (spoken or written) |

MESVOge or it may be non-verbal, in pictures, diagrams, numbers or body
language. :

Miechum Sor the There are a number of channels rm tenia such as a |

message conversation, a letter, a noticeboard or via computer. The choice of |
medium used in communication depends on a number of factors, such as
UEGEMNCY. aah complexity. sensitivity and cost.

Feectack !
The sender of a message needs feedback on the receiver's reaction. This
S$ partly to test the receiver’s understanding of it and partly to gauge the
receiver's reaction.

Distortion The meaning of a message can be lost at the coding and decoding
stages. Usuailly the problem is one of language and the medium used; it |
is very easy to give the wrang aeyraSston ina maine email message.
=

Noise abe tions and interference in the environment in which communication

= taking place may be physical noise (passing traffic), technical noise (a
bad telephone line),social noise (differences in the personalities of the
parties) or psychological noise (anger, frustration, tiredness).

Effective communication
>Sood NO COM ioati aM iS
is
—~n

(aq) Directed to appropriate people. This may be defined by the reporting structure of the
organisation,but it may also-he a matter of discretion, trust, and so on.
) Relevant to their needs. Information should be non-excessive in volume (causing overload);
fooused on relevant togics; communicated in a format, style and language that they can
uncierstand.
) Accurate and complete (within the recipient's needs). Information should be ‘accurate’ in the
SAnNse oF Tooke ally correct’, but need not be minutely detailed: in business contexts,
SWMMaies and approximations are often used.
2) Timely. Information must be made available within the time period when it will be relevant (as
input to a decision, say).
@) Herida. information should be suited in style and structure to the needs of the parties and
Stuation, Assertive, persuasive, suppertive and informative communication styles hdve
GiFferant applications.

7 3 ne we
we ae as Sey >) ear &T)
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 (f) Effective in conveying meaning. Style, format, language and media all contribute to the other
person's understanding or lack of understanding. If the other person doesn’t understand the
message, or misinterprets it, communication has not been effective.
(g) Cost effective. In business organisations, all the above must be achieved, as far as possible,
at reasonable cost.

Informal communication
The formal pattern of communication in an organisation is always supplemented by an informal
one, which is sometimes referred to as the grapevine. People like to gossip about rumours and
events.

6.1 The grapevine

The grapevine has a number of characteristics.
(a) The grapevine acts quickly.
(b) The working of the grapevine is selective: information is not divulged randomly.
(c) The grapevine usually operates at the place of work and not outside it.
(d) Oddly, the grapevine is most active when the formal communication network is active: the
grapevine does not fill a gap created by an ineffective formal communication system.

6.2 The importance of informal communications

Managers, rather than staff, might rely on the grapevine, as opposed to formal communication
channels, because of the qualities informal communication possesses.
(a) It is more current than the formal system.
(b) It is relevant to the informal organisation (where many decisions are actually determined).
(c) It relates to internal politics, which may not be reflected in formal communications anyway.
(d) It can bypass excessively secretive management.

Barriers to effective communication

7 General faults in the communication process

* Distortion or omission of information by the sender
¢ Misunderstanding due to lack of clarity or technical jargon
- Non-verbal signs (gesture, posture, facial expression) contradicting the verbal message, so
that its meaning is in doubt
* ‘Overload‘ - a person being given too much information to digest in the time available
* People hearing only what they want to hear in a message
* Differences in social, racial or educational background, compounded by age and personality
differences, creating barriers to understanding and co-operation

7.2 Culture
Secrecy. Information might be given on a need-to-know basis, rather than be considered as a
potential resource for everyone to use.
Can’t handle bad news. The culture of some organisations may prevent the communication of
certain messages. Organisations with a ‘can-do’ philosophy may not want to hear that certain
tasks are impossible.

7.3 Improving the communications system

Establish better communication links
* Standing instructions should be recorded in easily accessible manuals which are kept fully up
to date.

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 » Management decisions should be sent to all people affected by them, preferably in writing.
* Regular staff meetings or formal consultations with trade union representatives should be
held.
* A house journal should be issued regularly.
- Appraisal interviews should be held between a manager and their subordinates to discuss the
job performance and career prospects of the subordinates.
* Technology should be utilised, for example ensuring organisational knowledge and information
is captured and stored, and is easily searchable.
Use the informal organisation to supplement this increased freedom of communication.

7.4 Clearing up misunderstandings

Confirmation: issuing a message in more than one form (eg by word of mouth at a meeting,
confirmed later in minutes) can help.
Reporting by exception should operate to prevent information overload on managers.
Train managers who do not express themselves clearly and concisely. Necessary jargon should
be taught in some degree to people new to the organisation or unfamiliar with the terminology of
the specialists.
Communication between managers and direct reports will be improved when interpersonal trust
exists. Exactly how this is achieved will depend on the management style of the manager, the
attitudes and personality of the individuals involved, and other environmental variables. Peters
and Waterman advocate ‘management by walking around’ (MBWA), and informality in
superior/subordinate relationships as a means of establishing closer links.

Activity 6: Communication

Is the following statement true or false?

‘A clearly expressed verbal message will always be understood’.

je] information
pasenaacnnen a aT

Data: The raw material for data processing. Data consists of numbers, letters and symbols
and relates to facts, events and transactions.
Information: Processed data, which is useful to managers and decision makers. It includes the
results of data analysis and summarising.
fis ohSell. 3s ont Sey a tear PE SAE SS
SEE
PSE NE GPT SES SBE EI ECS AOS PCS OC AS
SS SS SR EON SUMAN

8.1 Information in the organisation

A modern organisation requires a wide range of systems to hold, process and analyse
information. We will now examine the various information systems used to serve organisational
information requirements. Organisations require different types of information system to provide
different levels of information in a range of functional areas.

|Strategic |To help senior managers with long-term planning. Their main function
_ is to ensure changes in the external environment are matched by the
| _ organisation’s capabilities.
4
|
Management/tactical |To help middle managers monitor and contro |
|
_ things are working well or not. Some management-level systems |
_ support non-routine decision-making, such as ‘what if?’ analyses. |

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 Sustem level
Operational To help operational managers track the organisation’s day-to-day
operational activities. These systems enable routine queries to be
answered, on ie edsye to be pipaeasee els tracked.

An example of the above model is the finance subsystem:

* The operational level would deal with cash receipts and payments, bank reconciliations and so
forth.
* The tactical level would deal with cash flow forecasts and working capital management.
* Strategic level financial issues are likely to be integrated with the organisation’s commercial
strategy, but may relate to the most appropriate source of finance (eg long-term debt, or
equity).

8.2 The qualities of good information

The qualities of good information are outlined below — in mnemonic form. If you think you have
seen this before, note that the second A here stands for ‘Authoritative’, an increasingly important
concern given the huge proliferation of information sources available today.

Accurate Figures should add up, the degree of rounding should be appropriate,
there should be no typos, items should be allocated to the correct
category and assumptions should be stated for uncertain information (no
pianos ceeUiaeu).

Corre Information should rede Asan that ittneeds to poe for RLS
| external data if CLEVEINE or Pett gelteMS information.

Cost-beneficial It nara as Gost more to obtain the inven than the benefit cence
from having it. Providers of information should be given efficient means of
collecting and analysing it. Presentation should be such that users do not
waste time mono out what it means.

tenlite The needs of the user eyeald be Sone in sie: for instance senior
manager: ie ee summaries, junior ones tel Gels detail.
{
ate Information that is not needed fora Becicicn dhoula be Aaa no mentee
how ‘AMES aay it Dk be.

Auirontanees ifee source of the inrovmnenian enol Be a melee one (not, for metance:
| Joe Bloggs Predictions Page’ on the internet unless Joe Bloggs is known to
be a reliable source for that tle of information.

The teen aati te aucitocle Bhan itis anededl

ceaetetiion erouid re pean: proconiod: not ercceeall long, and sent

using the right medium and communication channel (email, telephone,
| hard-copy report, etc).

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Chapter summary
gSSAGARENT NLL
EELLER LASNSTINT LATEELS
8 SEL ALTA STEER SLM ROMLIN LEE TEES LITELE LED IIS LT CG
is

_ Personal effectiveness and ee

| e ° e 4

\! .
_ LESSENS ALFONSO AREA TS RTO IS LEE OES OS TN IS a

Personal Personal Conflict and ;

effectiveness development conflict resolution

Time management Competence frameworks How does conflict arise?

Importance of time « Lists knowledge, skills and + Limited power and resources
management competences for role * Incompatible goals
Principles of time management ¢ Assists recruitment, * Personality clashes
— Goals performance evaluation, + Incompatible work methods
— Action plans development planning
— Priorities
— Focus Managing interpersonal conflicts -
— Urgency Coaching, mentoring and * Communicate
Organising your work counselling + Negotiate
— Act immediately, or * Coaching * Separate
— Bin it, or * Mentoring
— Create a plan, or * Counselling |
— Delegate Managing conflict within the
Role of IT in improving personal team
effectiveness Personal development plans * Denial
Ineffectiveness at work ¢ Action plan incorporating * Suppression
development opportunities * Dominance
* Compromise
+ Integration
+ Encourage cooperative
behaviour

A win win approach

* Win-lose
: * Lose—lose
: * Win-win

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id
 Communication Effective Informal
in the workplace communication communication

|
Types of communication Communication model The grapevine
Face to face meetings * Encoding * Gossip about rumours and
Team briefing * Medium events
Conference * Feedback * Acts quickly
Interview * Distortion
Telephone * Noise
Noticeboard The importance of informal
Letter communications
Email Effective communication * Current
Report ¢ Directed to appropriate people * Decisions determined by
* Relevant to their needs informal organisation
+ Accurate and complete * Relates to internal politics
Communication networks * Timely « Can bypass excessively
Leavitt « Flexible secretive management
— The 'y' + Effective in conveying meaning
— Wheel ¢ Cost effective
— Circle
— Chain

Barriers to effective communication Information

General faults in the Improving the communications Information in the organisation

communication process sustem * Strategic
Distortion ¢ Establish better * Tactical
° Misunderstanding communication links * Operational
Non-verbal signs contradicting + Use the informal organisation
verbal message
Overload Qualities of good information
Hearing only what they want Clearing up misunderstandings ¢ Accurate
to hear ¢ Confirmation * Complete
Differences in background * Report by exception * Cost beneficial
(Distorted messages never * Train managers to * User targeted
overcome personal differences) communicate clearly and * Relevant
concisely « Authoritative
! + Management by walking * Timely
Culture around « Easy to use
Culture of secrecy
Can't handle bad news culture

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18: Personal effectiveness and communication 359
 Knowledge diagnostic
PARLE
ANT ETOP -
LEED xen OY re
LE SNS HEATERS SPIT =ES AEE — CE LIVES SC TIE ERE OTE PLE ST TESOL

. Time management
Time management is concerned with ‘the process of allocating time to tasks in the most effective
manner.’ Time management may be one way of working better and includes having SMART
objectives and using the (Act, Bin, Create, Delegate) model.

. Role of information technology

Information technology has significantly changed the way in which we work. It has increased
output in many parts of the organisation. There are also many more means of communication
with, and accessing the information systems, for example: mobile computing, communications
platforms, online training and office automation.

. Coaching, mentoring and counselling

A coach provides specific targeted personal guidance. A mentor is more of a sounding board for
longer term career and personal development. A counsellor helps individuals to work out solutions
to problems themselves.

. Personal development plans

A personal development plan is a plan to develop personal skills and to meet personal objectives.
These may be achieved through a range of methods including training, job design, coaching,
mentoring or counselling.

. Conflict
Conflict can be caused by differences in factors such as working styles and personalities or by
competition for limited resources. Methods of overcoming conflict for the individual include
communication, while to a team it may be necessary to use methods of negotiation to resolve the
conflict.

. Communication networks
Messages need to encoded, sent and received to be decoded by the recipient. Feedback should
be provided. Many types of ‘noise’ can get in the way of effective communication.

. Effective communication

Effective communication is effective in conveying meaning, directed to the appropriate people,

relevant to their needs and accurate and complete.

. Barriers to effective communication

Faults in the communication process such as misunderstanding of the messages or culture of
secrecy can be barriers to effective communication. Organisations should establish better
communication links and identify ways to clear up misunderstandings such as training managers
to communicate concisely and clearly.

. Information
Organisations need information at all levels. Different types of information are required at the
strategic, tactical and operational levels. The qualities of good information can be remembered
using the ‘accurate’ mnemonic.

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Further study guidance
Ea
e SS PS

Question practice
Now try the following from the Further question practice bank [available in the digital edition of
the workbook]:

Number feel Approximate

time
| : Ese Bertionn 7 2 an 2 ae . Sie

ExamSectionA 1 tmin
on Section A ir 2 T2 tis : |

: Ean Section A 2 ; - | 2 ale _

__BamSeefona
Exam Section A
22 Bi2 mins |
Own research
Visit the ACCA web site. Find the information about the ACCA competency framework. Find the
Practical Experience Requirement documents and review these to see what types of skills an
effective accountant will possess.

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Activity answers
— we ssESRI MEN AES PIRATES SA NAST EIS ASEAN ETAT
TNE TSN ESSN

Activity 1: Barriers to effective time management

The following are some possible barriers to good time management.
* Stress caused by excessive workload
* Failing to plan your time
* Not being clear about which are the most important tasks
* Being distracted (eg by social media, phones etc)

Activity 2: Personal development plans

Benefits of PDPs to the organisation:
* Motivation
* Basis for planning
* Retention
* Career structure
« Providing opportunities

Activity 3: Conflict
Conflict is constructive, when its effect is to:
(1) Introduce different solutions to problems
(2) Define power relationships more clearly
(8) Encourage creativity, the testing of ideas
(4) Focus attention on individual contributions
(5) Bring emotions out into the open
(6) Release of hostile feelings that have been, or may be, repressed otherwise
Conflict is destructive when its effect is to:
(1) Distract attention from the task
(2) Polarise views and ‘dislocate’ the group
(3) Subvert objectives in favour of secondary goals
(4) Encourage defensive or ‘spoiling’ behaviour
(5) Force the group to disintegrate
(6) Stimulate emotional, win-lose conflicts, ie hostility

Activity 4: Conflict resolution

Conflicts and resolutions:
(1) Both might need work done at the same time. Compromise and co-ordinated planning can
help them manage their secretary’s time.
(2) Differential pay might result in conflict with management — even an accusation of
discrimination. There may be good reasons for the difference (eg length of service). To
prevent conflict such information should be kept confidential. Where it is public, it should be
seen to be not arbitrary.
(3) The electricians are worried about their jobs, and may take industrial action. Yet if the
engineer’s training is unrelated to the electricians’ work, management can allay fears by
giving information. The electricians cannot be given a veto over management decisions: a
‘win-lose’ situation is inevitable, but both sides can negotiate.

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(4) The kitchen should plan its meals better — or people from both departments can be asked in
advance whether they want puddings.
(5) Competition between sales regions is healthy, as it increases sales. The conflict lies between
sales regions and the production department. In the long term, an increase in production
capacity is the only solution. Where this is not possible, proper co-ordination methods should
be instituted.

Activity 5: Win-win
(a) Win lose:

(1) One team member gets the window desk, and the other does not. (Result: broken
relationships within the team.)
(2) One of you gets the file and the other doesn’t.
(3) Manager A gets the computers, and Manager B has to upgrade her systems.
(b) Compromise:
(1) The team members get the window desk on alternate days or weeks. (Result: half
satisfied needs.)

(2) One of you gets the file now, and the other gets it later (although this has an element of
win-lose, since the other has to work late or take it home).

(3) Manager A will get some new computers, but keep the same old ones for continued data
sharing with Department B. Department B will also need to get some new computers, as
a back-up measure.
(c) Win-win:
(1) What do they want the window desk for? One may want the view, the other better
lighting conditions. This offers options to be explored: how else could the lighting be
improved, so that both team members get what they really want? (Resuit: at least, the
positive intention to respect everyone's wishes equally, with benefits for team
communication and creative problem-solving.)
(2) You photocopy the file and both take it, or one of you consults your boss and gets an
extension of the deadline (since getting the job done in time is the real aim — not just
getting the file). These kind of solutions are more likely to emerge if the parties believe
they can both get what they want.

(3) What does Manager A want the computers for, or to avoid? Quite possibly, she needs to
use up her budget allocation for buying equipment before the end of the budgetary
period: if not, she fears she will lose that budget allocation. However, that may not be the
case, or there may be other equipment that could be more usefully purchased — in which
case, there is no losing party.

Activity 6: Communication
False. ‘Clear expression’ is a matter of opinion and perception, or in terms of the communications
model, of coding and decoding. We must also consider the effect of noise, such as cultural
differences.

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364% Business and technology (FBT/BT) Y BPP
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 Ethical considerations
temieinm
a a EOL EL ESA LAIDa—

Learning outcomes
On completion of this chapter you should be able to:

Syllabus reference no.

Define business ethics and explain the importance of Fy (a)

ethics to the TS Se and to the individual.

Bees ats SARE she lend paneiies on FI (b) etchant ie yl ke":

the IFAC (IESBA) code of ethics, using examples.
(a) Integrity
(b). Objectivity
(c) Professional competence
@) Colninesalateii

‘bseniee Beotectene: ee tel SOHIAS Atgieel Flat)

behaviour using examples.
(a) Openness
(b) Trust
(c) Honesty
(d) Respect
(e) Empowerment
) Accountability |

Explainhe SEMA o acting i

inFone puele interest. F1 (d)

Poesanice the purpose of diemeverel and See ene F2 (a)

codes of ethics and codes of conduct, IFAC (IESBA), ACCA
EWS.

Describe how professional bodies and regulators promote —_F2 (b)

ethical awareness and prevent or punish illegal or
unethical behaviour.

Identify the factors that distinguish a profession from Fe (c)

other types of eSoueeu i.

Econ the role of the Peo ctntantt in Aone ethical F2 (d)

behaviour.

Recognise when and to whom illegal or unethical conduct __ F2 (e)

by anyone within or connected to the organisation should
be reported.
 Syllabus reference no.

Define corporate codes of ethics. F3 (a)

Describe the typical contents of a corporate code of mon (s),

ethics.

Explain the benefits of a corporate code of ethics to the F3 (c)

organisation and its employees.

Describe situations where ethical conflicts can arise. FL (a)

Identify the main threats to ethical behaviour. FL (b)

Outline situations at work where ethical dilemmas may be — F4 (c)

faced.

List the main safeguards against ethical threats and F4 (d)

dilemmas.

Exam context
Ethical issues featured heavily in the specimen exam, with six questions covering content from this
chapter.

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Chapter overview
3

|
| What are | _ Organisational Regulatory and professional bodies
ethics? ethics |

Approaches to ethics Influences on an Professional bodies Disciplinary procedures

organisation's ethics

| Promoting ethical Meaning of profession

Ethical approaches awareness

Role of accountant
Corporate codes of
ethics

| ACCA code | DeEthical

of ethics threats

Fundamental Principles Nature of threats

Personal and Categories of safeguard

professional qualities

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 1 What are ethics? ‘
Ethics are a set of moral principles that guide behaviour and our perceptions of right and wrong.
They can be distinguished in principle from the legal obligations, and other rules and regulations
which must be adhered to. They apply to organisations as well as individuals.

(& Activity 1: Businesses’ obligations

Tren eR 2OL ARE tN so ERO TEN Saat PERN EE
—
semen eeeemneete emanate enimeaamnmmiamemmmmmanas
Lees Se
Businesses have an obligation to behave in accordance with the law, in accordance with relevant
regulations and in an ethical manner.

Required
Complete the following table to give examples of the three types of obligation and the
consequences of non-compliance.

Law

| Regulations

Ethics

1.1 Approaches to ethics

Two approaches to ethics that are found in Western cultures are ‘consequences’ and ‘duty’:
(a) A ‘consequences’ approach judges actions by reference to their outcomes. For example,
utilitarianism suggests that actions should be undertaken “for the greater good of the greater
number’. However, this can overlook the need to protect minorities and lead to a view that
‘the end justifies the means’.
(i) Egoism - the belief that an act is ethically justified if decision makers freely decide to
pursue their own short-term desires or long term interests. It has been argued that
egoism produces a desired outcome for society (enlightened self-interest).
(ii) Pluralism - accepts that different views may exist on morality but suggests that a
consensus can be reached in certain circumstances.
(b) A ‘duty’ approach is not concerned with consequences but with acting according to absolute
ethicalprinciples such as ‘treat others as you would like to be treated yourself’.
These approaches can conflict at times, for example if job reductions are required to secure an
organisation’s future.

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(F Activity 2: Ethical issue
PAE ERIE DARMSTADTBINAFLAC A MCREE

Consider the following types of organisation

(1) A multinational manufacturing company
(2) A mining company
(3) A cosmetics manufacturer
(4) An arms manufacturer

Required
Give examples of ethical issues that each type of organisation might face and what ways they
might address or avoid these issues.

- Ways of addressing
a _ them =
Multinational manufacturing
| company

ee ee —--— ——S = - —

Mining company

Cosmetics manufacturer

Arms manufacturer

Essential Tegaing
(SSPPa CSREES Ht at tomtessroKrth Ser ee H ARPT EOE TRIN EP CAREY SSPE COENEN IA te APACS AOA ERR A RED NRE FE AN Se MR

See mete 1 Section 1 of the Essential reading for more detail on the ethical background.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

Organisational ethics
2.1 Influences on an organisation’s ethics
There are many influences on the ethics practiced within organisations. These may include:
(a) Personal ethics of staff
(b) Organisation culture
(c) The example set by senior management - ‘tone from the top’
(d) Organisational statements on ethics or values
(e) Professional ethics from relevant bodies such as ACCA

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 Organisational culture can be promoted by the leaders of the organisation by setting an example
in the following areas:
* Openness - being full and complete in the provision and disclosure of information
* Trust - relying on the judgments and information provided by others, and being trustworthy in
turn
* Honesty - telling the truth, and being prepared to give information on which others can
depend
* Respect- treating others with dignity and adopting a professional manner
- Empowerment - ensuring that those who are entrusted with responsibilities have the authority
to carry out their tasks
* Accountability - taking full responsibility for outcomes

2.2 Ethical approaches

Organisations can take two approaches to ethical issues:
(a) Compliance based approach - ie ethics consists of ensuring that the letter of the law and
any relevant regulations are observed. This approach tends to be driven and codified by
lawyers.
(b) Integrity based approach. The law and regulations are treated as a starting point, but ethics
are also seen as part of organisational culture. The approach will be driven by management
as well as lawyers.
Having procedures to offer protection to whistleblowers is an important component of an
integrity based approach. Whistle blowing is the disclosure to the authorities/public by an
employee of an illegal or unethical practice carried out by the organisation. Such disclosure can
lead to financial loss for the whistle blower as he/she may lose his/her job. This is why in the UK
some protection is now provided under legislation to whistle-blowers.

Real life example

Paul Moore, dubbed ‘the City whistle’ blower, was the senior risk manager at British bank HBOS.
He became concerned about the bank’s sales culture, and believed that the bank was taking
excessive risks by making loans to individuals and companies who did not have the ability to
repay those loans. His complaints were not welcomed by the board of HBOS and he was
dismissed in 2004. Moore’s concerns were validated in 2008 when the bank faced mounting bad
debts, and had to be rescued by another bank.

2.3 Corporate codes of ethics

Corporate codes of ethics are developed by many organisations in order to communicate values
to stakeholders. As well as stating the core principles governing how their commercial objectives
are to be pursued, such codes might include statements specifically in relation to:
* Customers, whose purchases may be influenced by ethical considerations
* Shareholders, whose investment decisions may be influenced by ethical factors
* Employees, who need to know what is expected of them
* Suppliers, who need to understand the expectations of their customers, and who also should
be treated ethically
* Lobby groups, who may have an interest in organisational practices
* Local communities, which may need reassurance that the organisation will act as a ‘good
citizen’

2.3.1 Benefits of a corporate code

* It communicates the ethical standards required to all employees, which should encourage a
consistent level of behaviour.
* It reduces the risks associated with unethical behaviour (eg legal fines).
* Itis good for the reputation of the company.

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 Regulatory and professional bodies
3.1 Professional bodies
* Most accountants belong to professional bodies such as ACCA, which ensures they have the
right knowledge and skills, and are issued guidance on areas such as ethics.
* The International Federation of Accountants (IFAC) is the international body that represents
accountants globally. It has over 175 member organisations including the ACCA. IFAC aims to
ensure that accountants around the world work to consistent standards of professionalism
and issues guidance to its members including a code of ethics, which is discussed below in
Section 4.
* The profession requires members to conduct themselves and provide services to the public
according to certain standards. By upholding these standards, the profession’s reputation and
standing is protected.

3.2 Promoting ethical awareness

Professional bodies issue ‘Codes of Conduct’ or ‘Codes of Ethics’, which members are expected
to adhere to. They may be developed using:
(a) Arules based approach = prescriptive, creating specific rules for members to follow in as
many situations as possible.
(b) A framework based approach = values and qualities, describing fundamental values and
qualities that members should aspire to, but not laying out prescriptive rules.
In addition to issuing ethical codes, professional bodies usually:
* Include ethics within the curriculum for their exams (eg ACCA students are required to
complete the ACCA ethics module before being accepted for membership)
* Provide training on ethics to existing members

Activity 3: Rules based versus framework based codes

What are the respective advantages of the rules-based and framework-based approaches to
professional ethical codes?

3.3 Disciplinary procedures

Professional bodies have disciplinary procedures in place to act as a deterrent to unethical or
illegal behaviour, and to protect the public interest.
The ACCA’s Disciplinary Committee deals with matters referred to it following allegations made
against ACCA members, firms and students. Sanctions available to it include the following:
* No further action
* Warning or reprimand
- « Fines
* Exclusion from membership (or from student registers), either on a temporary or permanent
basis.

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3.4 Meaning of profession )

A profession is an occupation that requires extensive training and the study and mastery of
specialised knowledge, and usually has a professional association, ethical code and process of
certification or licensing.
The accounting bodies are the professional associations of the accountancy profession and
provide the following role:
* Determine entry requirements - in the case of ACCA membership, entry requirements include
passing the exams, the ethics module and satisfying the practical experience requirements.
* Regulation of members - accounting firms are subject to monitoring by their professional
bodies. This includes monitoring visits to ensure that the firms are complying with regulations
and that their work is of a high standard.
* Provide continuing professional development (CPD)
+ Set accounting standards (or support standard setting bodies such as the IASB).

3.5 Role of accountant

Where accountants work in public practice, it is most likely that the firm will have its own
corporate codes that are based on the code of ethics issued by one of the professional bodies.
Where accountants work in business, they are required to follow the ethical code of their own
professional body, but there is no requirement for their employer organisation to follow such
codes. As a professional, the accountant should use their position to promote ethical behaviour
to the extent that their position allows them: This might include the following:
* For accountants in senior management decisions, they should not be party to decisions that
are unethical, and should persuade the other members of the management team to resist such
practices.
* Challenge unethical behaviour
* Considerreporting unethical behaviour to more senior managers or to regulatory of legal
authorities if after challenge, the perpetrators refuse to cease the unethical activities
(whistleblowing).
* Training colleagues, particularly subordinates, in the importance of ethics.
* Promoting the development of a corporate code of ethics if one does not already exist.

ACCA code of ethics

4.1 Fundamental principles
A code of ethics for accountants was issued by the International Federation of Accountants
(IFAC) (now administered by the International Ethics Standards Board for Accountants (IESBA).
This has been incorporated by ACCA into its own Code of Ethics and Conduct.
The Fundamental Principles of the code are:
* Integrity — acting with truthfulness and honesty
* Objectivity — reaching conclusions without undue influence or bias
* Professional competence and due care — maintaining a high level of skill and knowledge
* Confidentiality — not sharing confidential information, unless terrorism or money laundering is
suspected, for example
* Professional behaviour — behaving in way that does not bring the institute into disrepute.

4.2 Personal and professional qualities

To meet these principles, students and members of ACCA need to develop a mix of personal and
professional qualities.
Personal qualities include:
(a) Reliability — all work must meet professional standards
(b) Responsibility — taking ownership for your work

372 Business and technology (FBT/BT) Paes

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 (c) Timeliness — delays can be costly and disruptive
(d) Courtesy — to colleagues and clients
(e) Respect — to develop constructive relationships
Professional qualities include:
(a) Independence — not only being independent, but appearing to be independent
(b) Scepticism — questioning information and data
(c) Accountability — for judgements and decisions
(d) Social responsibility — to your employer and the public

Activity 4: Fundamental principles

Jayne, Will and Lesley work as auditors for a client called TV Co and Jayne is the senior auditor.
TV Co manufactures large expensive televisions. The director of TV Co offers Jayne one of the
newest, most expensive televisions as a thank you gift for doing the audit.

Required
If Jayne accepts the television, which one of the fundamental principles may be threatened?
O. Professional competence
O Confidentiality
O Objectivity
O. Reliability

Ethical threats

5.1 Nature of threats

The ACCA’s Code of Ethics and Conduct outlines the threats to an accountants independence
that could arise in a variety of situations. These are:
(a) Self-interest threat
Occurs when a firm or a member of the assurance team has some financial or other interest
in an assurance client.
For example, providing a loan to a client
(b) Self-review threat
Occurs when a previous judgement needs to be re-evaluated by members responsible for
that judgement.
For example, providing a valuation for a client’s pension liability and subsequently auditing
the liability
(c) Advocacy threat
Occurs when members promote a position or opinion to the point that subsequent objectivity
may be compromised.
For example, acting as an advocate on behalf of an assurance client in litigation or disputes
with third parties
(d) Familiarity threat
Occurs when, because of a close relationship, members become too sympathetic to the
interests of others.
For example, long association with a client/boss leading to over-familiarity with
client/management such that professional judgement could be compromised
(e) Intimidation threat
Occurs when members are deterred from acting objectively by threats, actual or perceived.

BPP 19: Ethical considerations 373

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 For example, being pressured to reduce the extent of work performed in order to reduce fees.
These threats can arise from many situations which accountants could find themselves facing.
The following represent some instances of these threats in operation but, by no means, Is an
exhaustive list.
* Pressure from an overbearing colleague or from family or friends
* Members asked to act contrary to technical and/or professional standards
* Divided loyalties between colleagues and professional standards
* Publication of misleading information
* Members having to do work beyond their degree of expertise or experience they possess
* Personal relationships with other employees or clients
* Gifts and hospitality being offered

5.2 Safeguards
There are various safeguards that can be put in place by an organisation or through the
professional bodies to mitigate the threat of the above to our independence.
Figure 19.1; Ethical safeguards

Three categories of safeguard

crested byne eee In the work Created by

| legislationsorpeeguigtion eal environment pH the individual

{ \ ; f )
° eros eaininea | | ¢ Ethics and conduct programmes | | ° Campbans with |
| experience requirements | | « Recruitment procedures | | CPD requirements
| ¢ Continuing professional | | * Strong internal controls | | « Using an |
development (CPD) ¢ Disciplinary processes | | We aesuisleds MEtOr
peauioments | * Leadership that stresses Ue atta Conran
| * Corporate governance Lact importance of ethical behaviour | | with legal advisors
| codes / | and professional
. | ¢ Quality control procedures _
| ¢ Professional standards i | a ; | | bodies
: | | e Training and education Re eee see ee,
|¢ Professional or regulatory a p d
| monitoring and | | ° dies ures to empower |
Se) ee ea eee eM
CS) C|:se@thical concerns to senior levels |
| without fear of retribution
(whistleblowing)
| ¢ Consultation with another
| appropriate professional
accountant

r—_—
| PER alert
|
PER performance objective PO1 requires you to apply professional ethics, values and
; eS The material covered in this ee will help you achieve this.
eee eee Se es= Ee ee
a Me eB le Le

LE}
Essential reading

See Chapter 19 Section 2 of the Essential reading for more detail on ethical threats.
The Essential reading is available as an Appendix of the digital edition of the Workbook.

374% Business and technology (FBT/BT) BPP

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Chapter summary
@pV CSAL SEIN SDRAM PPA EOS PSST SITET

:)
i Ethical con siderations |
ty cece TRE ORE RADNER SETAE DERN EDT

_ What are _ Organisational Regulatory and professional bodies

ethics? | ethics

|
Approaches to ethics Influences on an Professional bodies Disciplinary procedures
Consequences organisation's ethics Ensure members have « In public interest
— Egoism ¢ Personal ethics of staff right knowledge and + ACCA Disciplinary
— Pluralism * Culture skills Committee
Duty approach ¢ Example of Senior IFAC ensures
management
l
consistent standards
Organisational globally Meaning of profession
statements on ethics ° Conduct of members * Occupation that
Professional ethics requires extensive
training
Promoting ethical Specialised knowledge
Ethical approaches awareness Professional body
° Compliance based Codes of conduct Ethical code
approach — Rules based Process of certification
Integrity based approach
approach — Framework based
approach Role of accountant

Include ethics in + Not be party to

Corporate codes of unethical decisions
curriculum
ethics Challenge unethical
Training
* Communicate values behaviour
to stakeholders Whistleblowing
* Core principles Training colleagues
¢ Benefits of code Promote development
of corporate code

ACCA code of ethics Ethical

threats

Fundamental Principles Personal and Nature of threats

Based on IESBA code: professional qualities Self-interest
— Integrity ¢ Personal qualities: Self-review
— Objectivity — Reliability Advocacy
— Professional — Responsibility Familiarity
competence and — Timeliness ° Intimidation
due care — Courtesy
— Confidentiality — Respect
Categories of safeguard
— Professional * Professional qualities
behaviour — Independence « Created by profession,
— Scepticism legislation or
— Accountability regulation
— Social responsibility In the work
environment
Created by the
individual

BPP 19: Ethical considerations 375

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 Knowledge diagnostic
— A FAIRLIE SST TE NITE TEES CEE 2S a n PEPER ANOINTED -
WEES SAEED ABOLITION ee
NEDBA IESE LN EAT IRR TTB ONS
A FELL ee
IOT ‘
AL LITSN ISLE seine AROS
SLA ED SATIN es SLOSS ESO ALTER,
IAL

. What are ethics?

Ethics have been defined as a set of moral principles which determine our perception of right and
wrong. These are distinct from the legal rules that we have to comply with.

. Organisational ethics
Organisations will have an approach to ethics, in the same way that the individuals that make up
the organisation do. The ethical approach adopted by an organisation may be compliance,
integrity or whistle-blowing based and will be influenced by a range of factors.

. Professional bodies
Professional bodies including accountancy bodies such as the ACCA issue codes of practice
adopting a rules-based approach or a framework approach. They promote ethics by including
ethics in exam curricula and provide ethical training. This is reinforced by a disciplinary system.

. IFAC code of ethics

The fundamental principles of the IFAC code of ethics are:
* Integrity
* Objectivity
* Professional competence
* Confidentiality
* Professional behaviour

. Ethical threats
Various types of threats exist to application of the fundamental principles in practice:
¢ Self-interest threat
* Self-review threat
* Advocacy threat
* Familiarity threat
* Intimidation threat

376 Business and technology (FBT/BT) BPP

EEBRNING
Further study guidance

Question practice
Now try the following from the Further question practice bank [available in the digital edition of
the Workbook]:

Level

Q101 | Exam SrctloniA | | 2 vd ies 2 mins

| Exam sections é To se none e Pane j

Q103 Exam cecien BF 3) “sneer [5 fame ' |

Soe eee Were

on nt ee f2mins 7”

Further reading
There is an article on the ACCA website entitled “A question of ethics” that is relevant to material
in this chapter. You are strongly advised to read this article in full as part of your preparation for
the FBT exam.

19: Ethical considerations 377

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Activity answers
TA A A eS sees See eSSSSSNe

Activity 1: Businesses’ obligations

Obligation and consequences of non-compliance:
&

Example of obligations : ‘Consequencesof non-

compliance

Law | Health & Safety, Anti- Fines (and in extreme cases

discrimination rules, imprisonment), reputational
CSS elie iste damage

Regulations | Financial service Conponie. Fines, reputational damage

_ must adhere to multiple
regulations re advertising,
| internal procedures etc. Some
_ industries are subject to
regulation of price and
service standards, eg
telecoms, water, electricity.
Th
Variable - potentially
pois.|
Ethics Treatment of staff, customers
Environment impact reputational damage, loss of
staff loyalty.

Activity 2: Ethical issues

Ethical issues:

a Ethical issues : - 5 Ways of addressing

them —

Multinational manufacturing | Use of child labour in certain Rules for business partners,
company locations provision of education
_ Expectation of bribing Corporate codes making
officials in some countries clear to all country managers
that ge is not acceptable

Mining company Environmental damage paecine of environmental

prea

Goce monucetiee joaae pate on eG Not using eee ae

funding of alternatives
i

Arms manufacturer Sale of arms to repressive | Restriction of sales to certain

Fregimes or intocivilwar areas governments

Activity 3: Rules based versus framework based codes

Advantages of rules-based and framework-based es)

a ue cannot cover all possible situations

fe
Consistent application is
is easier |Members can exercise professional juagement
ee ae SS ee I = =

378 Business and technology (FBT/BT) BPP

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 Advantages of rules-based approach |a Advantages ‘of framework-based
"approach
It is easier to spot conduct outside the rules Easier to adapt in complex or fast changing
environments

Can be harder to circumvent

Activity 4: Fundamental principles

The correct answer is: Objectivity
Look at the question and the options again. Did you notice that the question asked for a
fundamental principle and that only options A, B and C were fundamental principles? Option D is
a personal quality. This means that option D could be ruled out straight away. You need to
develop this skill at reading questions and options by practising lots of questions.

BPP 19: Ethical considerations 379

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380 Business and technology (FBT/BT)
LEA
BPP
 Skills checkpoint 5
Approaching ethics
questions

Chapter overview

Approach to
objective test Learning a %
questions the models 3: ©
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3

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questions
o
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% Approaching
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9nd presentation"

Exam relevance
The fact that nine marks out of 100 in the specimen paper related to ethics demonstrates the
importance of this topic. Ethics continues to be important throughout the ACCA syllabus and is
included in all ACCA papers. It is therefore a good idea to master the basics of ethics, as they are
covered in the BT/FBT syllabus.
The examiner has reported that questions relating to independence and threats to independence
have had low pass rates in both sections of the exam. In Section B, questions involving the five
fundamental principles in the IESBA code (and therefore the ACCA code) and organisational
values that promote ethical behaviour have also had low pass rates, including non-scenario
questions, such as questions that ask candidates to match descriptions to words and phrases.
Possible explanations for poor performance in these questions are as follows:
(a) Candidates are not clear about the exact meaning of the principles and values. These are
explained further below.
(b) Candidates do not always correctly identify which party’s ethics are being discussed. It
could be a company, the company’s supplier, an employee etc. So always make sure you
know whose ethics are under discussion.
(c) Most situations involve more than one ethical principle or value, (or a threat to more than one
principle or value). It can be a challenge to determine which principles or values are the most
relevant, particularly where the question might ask you to choose, eg two values, but you can
identify more than two that are relevant. Some prioritisation is therefore needed.

Meaning of the principles and values

The following is an explanation of the ethical principles, with a brief discussion of why they are
important, and some examples.

IESBA code of ethics - ethical principles

Integrity — the definition of integrity in the Cambridge English dictionary is ‘the quality of being
honest and having strong moral principles that you refuse to change’. An example of integrity
might be refusing to prepare a fraudulent tax return for a client, or an audit partner refusing to
sign a clean audit report for a client if the audit partner does not believe that the accounts show a
true and fair view.
Objectivity — means being unbiased in situations that require judgement. If an accountant is
asked to help value a business for example, the accountant should try to advise what really is a
fair value for the business. In this example, objectivity could be compromised if the seller of the
business told the accountant that they would receive a bonus if a good price were achieved on
the sale of the business.
Professional competence — this means having the right skills to provide services to clients.
Accountants that are already qualified should keep their knowledge up to date and should not
take on work that they do not feel they have the skills or knowledge to perform.
Confidentiality — all information that accountants see in their business activities should be
treated in confidence. There are situations, however, where an accountant has a duty to disclose
information to authorities — for example if the accountant suspects the client of being involved in
money laundering.

Organisational values that promote good ethical behaviour

Openness means avoiding secrecy, or trying to hide things from stakeholders, for example, if the
directors of a company know that the future prospects for the company are not good, they
should not hide this fact from the shareholders.
Trust — you trust somebody if you can rely on what they say. You might trust them to do
something, meaning that you can leave them to do that task without constant supervision.
Honesty means telling the truth, and not hiding information
Respect — treating others with respect, dealing with them in a dignified manner.
Empowerment involves giving authority to subordinates. In many companies, it is recognised that
junior staff should be empowered to make certain decisions themselves, without having to gain
approval from their managers.
Accountability means taking responsibility for your actions or for the consequences of those
actions.

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 Approach to ethics questions
In both sections of the exam, ethics questions will be tested using Objective Testing, so this
approach applies to both:
STEP 1 Read the requirement. What do you have to do? Typically in ethics questions, you have to identify a
particular ethical principle of value, or an ethical threat or breach. Don’t read the options at this stage.
STEP 2 Read through the scenario. Think about the following as you read through the scenario:
* Whose ethics are under discussion? (The company, an employee, a supplier?)
* What should they do (or what should they have done) to take an ethical approach?
STEP 3 Read the options in the question:
* Hopefully, some of the options can be eliminated straight away
* Choose from the remaining options on the basis of those that seem most relevant or appropriate. This
may require judgement. If in doubt, guess, but hopefully that won’t be necessary.

Exam success skills

e

The following question is an example of the sort of question you could see in your exam.
For this question, we will also focus on the following exam success skills:
* Managing information. With the amount of information provided in the scenario. Begin by
reading the requirements so that you know what you are looking for in the scenario.
* Correct interpretation of requirements. Make sure that you note what you have to do
carefully.
* Good time management. On average you should be spending 1.2 minutes per mark, so 2.4
minutes on a two-mark question. Some questions will not have scenarios so you will be able to
save time on these, meaning you can afford to spend a little more than 2.4 minutes on the
more difficult questions. However, if you don’t know the answer, move on and come back to the
question at the end, or guess. You will not have the luxury of being able to agonise over which
is the correct answer.

Skill activity
The Board of TUV Ltd are considering their organisational values in order to promote ethical
behaviour. The Chair recounts a recent problem where they found that a waste disposal
contractor was dumping their waste instead of recycling it according to their contract. The Board
debates whether they are ethically liable for sorting out the problem, particularly as the
contractor has ceased to trade.
Later in the meeting, a director reveals that his wife has been elected to the board of a minor
supplier. He says the supplier will offer substantial discounts if more goods are ordered from her
firm.
(a) Which TWO ethical concepts are at issue in the case of the waste disposal situation?
© Openness
© Honestly
© Accountability
O Integrity
O Objectivity
(b) What conflict of interest may arise in the case of the supplier?
© Self-review threat
O. Self-interest threat
O- Familiarity threat
O Intimidation threat

20: Approaching ethics questions 383

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 Approach in action
STEP 1 Read the requirements
In part (a) of the question we are asked which ethical two ethical concepts are relevant. In part (b), what
conflict of interest may arise. Don’t read the options at this point, because they are designed to “distract
you.
STEP 2 Read through the scenario
Think about the following:
* Whose ethics are of interest? In part (a) it is the ethical values of the company that are being discussed.
In part (b) it is the director, whose wife has been elected to the board of a supplier.
* What should they do? In part (a), a contractor has been dumping waste. Normally the company might
report the contractor to the authorities, or take legal action against the company, to make them stop
doing this. That option is not available now, as the contractor has ceased to trade. Legally the company
may have no obligation to do anything. However, the company may feel that they are partly responsible
for the waste being dumped, as they hired the contractor to take the waste away. !|n part (b) the
director should take actions to ensure his independence is not compromised, which would involve
disclosing his connection with the supplier, and not voting on any matters relating to it
STEP 3 Read the options.
Starting with part (a):
* Openness probably can’t be eliminated yet, as it could be argued that by admitting to their indirect
responsibility for the dumping, the company is being open.
* Honesty - again this can’t be rule out, as it can be argued that it would not be honest to do nothing.
¢ Accountability - this cannot be ruled out, as it is definitely one of the principles that is at stake.
* Integrity - similar to honesty, but more relevant as it has a broader meaning. Integrity is more likely to be
correct than honestly as it has broader meaning (it might not be dishonest to actually do nothing about
the waste, but it definitely would not show much integrity).
¢ Objectivity - does not appear relevant in this case. No judgement is asked for.
We are left with three options that have not been eliminated for part (a) - openness, accountability and
integrity. Which of these appear most relevant in this case? This is a judgement call, but it should seem
obvious that accountability is the key quality as it is about the company taking responsibility for the waste
that was dumped by its subcontractor. So we now have to choose between openness and integrity.
Openness is not as directly applicable here as integrity, so on that basis, the correct answer is integrity and
accountability.
As for part (b):
* Self-review threat is not relevant here - a self-review threat exists where you are reviewing work you
performed yourself.
* Intimidation is also not relevant, as there is no suggestion that the director has been intimidated by his
wife!
So, we are left with two potential options for part (b), Self-interest and familiarity. Self-interest appears
more relevant than familiarity, as the director’s independence could be compromised by his self-interest, in
wanting to help his wife’s career, rather than because the director is too familiar with the supplier’s staff.
On that basis, the self-interest threat is the correct answer.

384 Business and technology (FBT/BT)

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Exam success skills diagnostic
Every time you complete a few questions, use the diagnostic below to assess how effectively you
demonstrated the exam success skills in answering the questions. The table has been completed
below for the above activity to give you an idea of how to complete the diagnostic.

Managing information Did you read the requirements first?

| Reading the requirement before you read the scenario ensures
_ that when you read the scenario, you are focussed on what
_ information ver are Sel bie for.
aa} =

Correct interpretation of in ie sueeten sae there sree foe bee little ins in
requirements _ interpreting what is required, but do ensure you read alll
| |Pecuime mens carefully.
ees i ne, aa SP a ea eee
Eficient Pomecal analysis _Notgenerally eieloligelelts to BT/FBTquestions.
a ae_pee es es (eee aake 5
Good time management after answering a group of10 estes: did you manage to al
"them within the time allowed Wee
2 minutes gan USF

“Most fapondnteaction points to spre to your nextauestion

Read the SS eorraly before Yeeicllne, the scenario in the SES:

Summary
Being able to answer scenario based questions which require application of your knowledge is
important in the BT/FBT exam. Key skills to focus on throughout your studies will therefore include:
* As you read a scenario, ask yourself what the problem with the current situation is.
¢« What should be done about it?
* Read the options in the question and eliminate those that are clearly not correct.
* Look at the remaining options and choose which would be most likely based on your analysis
of the scenario above.

20: Approaching ethics questions 385

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386 Notes
“ BPP
LEARNING
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Index
389 Business and technology (FBT/BT) » BPP
PEARNING
A
3 Business cycle, 64
360 degree appraisal, 334 Business risk, 212

C
=
A
ACCA code of ethics, 372 Centralisation, 109
Access control, 191 Chair, 154
Accountability, 232, 232, 370 Chief executive officer, 154
Accounting function, 166 Cloud accounting, 195
Accounting systems, 173 Cloud computing, 195
Ad clicker, 190 Coaching, 347

Adjourning, 280 Committees, 134

Administration, 128 Communication, 352
Administrative controls, 194 Communication networks, 353
Advocacy threat, 373 Company registration body, 167
Agency problem, 152 Company secretary, 154
Agent, 152 Competence frameworks, 347

Aggregate supply, 60 Complements, 82

Al, Compliance testing, 188

Anthony's hierarchy, 111 Compromise, 350

Apollo, 132 Computerised accounting systems, 173

Artefacts, 131 Conflict resolution, 349

Artificial intelligence, 195, 462 Consequences, 368

Assessment centres, 260 Consumer Prices Index (CPI), 66

Athena, 132 Consumer protection, 44

Attitudes, 274 Contingency Controls, 194

Audit committee, 156, 188, 469 Contingency theories, 243

Audit technologies, 464 Contract law, 44

Audit trail, 194 Control environment, 184, 185

Authorisation, 468 Control procedures, 184, 185, 460

Authority, 231 Control total,

Automation, 195, 462 Corporate codes of ethics, 370

Corporate governance, 152
B
Corporate social responsibility, 157
Back-up controls, 193
Counselling, 348
Balance of payments, 71
Criminal property, 471
Barriers to effective appraisal, 335
Cross elasticity of demand, 91
Behavioural incident methods: , 332
Customer appraisal, 334
Beliefs and values, 131
Customer due diligence, 215, 470
Bennis, 244
Customs, 131
Big data, 195, 463
Cyber risk, 190, 190
Blockchain, 196
Cyber security, 190, 191
Board of directors, 154
Cyber-attacks, 190, 190
Boundary firewalls, 191
Boundaryless organisations, 110

BPP Index 390

LEARNING
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D Employment law, 39
Empowerment, 370
Data, 356
Data analytics, 195, 463, 464 Encoding, 354

Data processing controls, 193

Encourage co-operative behaviour, 350

Data protection, 41 Entrepreneurial, 105

Data security, 43 Environment, 20

Data validation, 193 Environmental factors, 25

Data verification, 193 Equal opportunities, 262

Database, 174 Equilibrium national income, 64

Decentralisation, 109 Equilibrium price, 86

Deflationary gap, 64 Estcec

Delayering, 24 Ethical stance, 158

Delegation, 232 Ethical threats, 373

Demand, 81 Ethics, 368

Demand curves, 82 Evaluation of the internal audit function, 189

Demographic factors, 22 External audit, 189, 469

Denial/withdrawal, 350 External auditor, 214

Difference between internal and external audit, External reports, 169

189
's
Dionysus, 132
F W Taylor, 235
Directors’ responsibilities, 214
Familiarity threat, 373
Disaster recovery plans, 193
Fiedler, 243
Disaster recoveryplans, 194
File hijacker, 190
Discrimination, 262
Finance, 129
Dishonesty, 211
Financial accounting, 167
Dispersed leadership, 244
Fintech, 194, 195
Distortion, 354
Firm infrastructure, 29
Distributed Denial of Service (DDoS) attack, 190
Fiscal policy, 61
Distributed ledger, 196
Flat structures, 110
Diversity, 263
Formal groups, 275
Divisional structures, 108
Forming, 279
Divisionalisation, 108
Fraud, 210
Dominance, 350
Frauddetection, 213
Dorming, 280
Fraud officer, 469
Downsizing, 24
Fraud prevention, 213
Drucker, 237
Fraud risk assessment factors, 212
Duty, 368
Full-employment national income, 64
Functional organisation, 106
Economic growth, 63, 69 Fundamental Principles, 372
Effective communication, 354
cS
Egoism, 368
GDP, 69
Elasticity, 88
Giffen goods, 90
Elton Mayo, 236

BPP
391 Business and technology (FBT/BT) LEARNING
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 Grading: , 332 Interviews, 257
Gross domestic product, 69 Intimidation threat, 373
Group bonus schemes, 299 IT system controls, 191
Group selection methods, 260 IT systems security, 191
Guided assessment: , 332 .

H Job descriptions, 256

Hacker, 212 Job enlargement, 296
Hacking, 190 Job enrichment, 296
Handy, 132 Job rotation, 296
Harassment, 262 John Adair, 243
Health and safety law, 40
K
Heifetz, 244
Keylogging, 190
Henri Fayol, 235
Kolb’s learning cycle, 316
Herzberg’s two-factor theory, 296
Hofstede, 132 L
Hollow organisation, 111 LAN, 462
Honesty, 370 Layering, 215
Honey and Mumford, 316 Leadership, 230, 239
Human Relations school, 236 Leadership theory, 234
Human resource management, 28 Learning organisation, 317
Hygiene factors, 296 Learning process, 316
Legal framework, 39
i
Local area network, 462
Imperfect competition, 79
Implications of fraud for the organisation, 213 M
Inbound logistics, 28 Macro-economics, 59

Income elasticity of demand, 90 Malware, 191

Individuals, 274 Managing conflict, 350
Induction training, 320 Market, 79
Inflation, 65 Marketing, 126

Informal communication, 355 Marketing and sales, 28

Informal groups, 275 Marketing mix, 127

Informal organisation, 102 Maslow’s hierarchy of needs, 295
Information, 356 Matrix organisation, 107

Inherent limitations of internal control systems, | McGregor Theory X and Theory Y, 297
184 Medium, 354
Input controls, 193 Mentoring, 348

Integrated reports, 1/0 Middle line, 104

Integration/collaboration, 350 Mintzberg organigram, 103

Integrity Controls, 193 Mintzberg: the manager’s role, 238

_ Internal audit, 187, 469 Misrepresentation, 210
Internal checks, 186, 460 MLRO, 216, 471, 471

Internal control system, 184 Modular organisations, 110

Internet gateways, 191 Monetary policy, 63

BPP Index 392

LEARNING
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Money laundering, 214, 469 Perfect competition, 79

Money laundering offences, 215, 471 Performance appraisal, 331

Money Laundering Reporting Officer, 216, 471 Performance management, 330

Monopolistic competition, 79 Performance-related pay, 299
Monopoly, 80 Performing, 280
Motivation, 211, 294 Person culture, 132

Motivators, 296 Person specifications, 256

Mourning, 280 Personal development, 347
Multiplier, 60 Personal development plans, 348
Personal effectiveness, 344
N
Personal qualities, 372
National Crime Agency, 216, 471
Personality, 274
National culture, 132
Personnel risk, 212
National income, 63
PESTEL analysis, 21
Natural environment, 25
Pharming, 190
NCA, 216, 471
Phishing, 190
Need for internal audit, 188
Physical access controls, 192
Noise, 354
Physical controls, 468
Non-executive directors, 155
Pluralism, 368
Norming, 279
Political factors, 21
O Post-list,
OECD Principles, 153 Power, 233
Oligopoly, 80 Power culture, 132
Openness, 370 Power distance, 133
Operating core, 104 Pragmatists, 316
Operational audits, 187 Pre-list, 460
Operational management, 111 Preconditions, 211
Operations, 28 Predictive analytics, 464
Opportunity, 211 Price elasticity of demand, 88
Organisation, 4+ Price skimming, 127
Organisational culture, 131 Primary activities, 28
Organisational risks, 212 Principal, 152
Organisational structure, 103 Proceeds of crime, 215
Organisational structures, 105 Proceeds of Crime Act 2002, 471
Outbound logistics, 28 Process of money laundering, 214
Outsourcing, 24 Process theories of motivation, 297
Overall assessment: , 332 Procurement, 28

Pp Production, 125
Professional bodies, 371
Participation, 298
Professional qualities, 373
Passwords, 194, 462
Proficiency and attainment testing, 259
Patch management, 191
Profit sharing schemes, 299
Penetrating pricing, 127
Perception, 274
Psychometric testing, 259

393 Business and technology (FBT/BT)

» BPP
LEARNING
MEDIA
Public oversight boards, 169 Social media, 463
Purchasing, 125 SPAMSOAP, 186
Purchasing mix, 125 Span of control, 112

Q Spreadsheet, 174
Stagflation, 64
Qualities of good information, 357
Statement of cash flows, 169
R Statement of financial position, 169
Ransomware, 190 Statement of profit and loss, 169
Recruitment, 254 Stock Exchange Commission, 169
References, 260 Storming, 279
Regulatory and professional bodies, 371 Strategic, 356
Removal of funds or assets, 210 Strategic apex, 104
Remuneration committee, 156 Strategic management, 111
Research and development, 125 Strategic risks, 212
Respect, 370 Style theories, 237
Responsibility, 232 Substantive testing, 188
Responsibility for detecting and preventing Substitute goods, 82
fraud, 214
Supply, 84
Results orientated schem, 332
Supply curve, 84
Retail Prices Index (RPI), 66
Support activities, 28
Rewards and motivation, 298
Support staff, 104
Rituals, 131
Suppression, 350
Robert Anthony, 111
Suspicious Activity Report, 471
Rodger’s seven-point plan, 256
Sustainability, 25
Role culture, 132
Sustainability reports, 170
S SWOT analysis, 26

Safeguards, 374 Symbols, 131

SAR, 471 Systems audits, 188

Sarbanes-Oxley, 153 +

Scalar chain, 112 Tactical, 356

Screenshot manager, 190 Tactical management, 111
SEC, 169 Tall and flat organisations, 112
Secure configuration, 191 Task culture, 132
Security controls, 193 Team building, 280
Segregation of duties, 468 Teams, 276
Selection, 254 Technology, 24
Self-appraisal, 333 Technology development, 28
Self-interest threat, 373 Technostructure, 104
Self-review threat, 373 Teeming and lading, 210
Service, 28 Termination of employment, 39
Service operations, 126 The Ashridge Management College model, 240
SMART, 345 The International Accounting Standards Board,
Social, 22 168

BPP Index 39%

LEARNING
MEDIA
The International Federation of Accountants,
168
The value chain, 27, 28
Theorists, 316
Time management, 344
Training and development, 317
Trait theory, 239
Transactions audits, 188
Treasury management, 129
Trust, 370
Tuckman, 2/9

U
UK Corporate Governance Code, 188
Unemployment, 67
Upward appraisal, 334

V
Value network, 29
Veblen goods, 90
Victimisation, 262
Virtual organisations, 111
Virus, 462
Virus protection, 191
Vroom’s expectancy theory, 297

WwW
WAN, 462
Webcam manager, 190
Whistleblowers, 370
Wide area network, 462
Win-win, 351
Window-dressing, 210

Z
Zeus, 132

BPP
395 Business and technology (FBT/BT) LEARNING
MEDIA
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