Risk Management

Some experts have said that a strong risk management process can decrease problems on a project by as much as 80 or 90 percent. In combination with solid project management practices, having a well-defined scope, incorporating input from the appropriate stakeholders, following a good change management process, and keeping open the lines of communication, a good risk management process is critical in cutting down on surprises, or unexpected project risks. Such a process can also help with problem resolution when changes occur, because now those changes are anticipated and actions have already been reviewed and approved, avoiding knee jerk reactions.

Defining "Risk"

Before one can embark on a risk management process, one must have a solid understanding of some key definitions. These events can be positive or negative, so that the word "risk" is inherently neutral. That said, most of the time and focus is spent handling negative project risks, or "threats," rather than positive project risks, or "opportunities."

Risk Management Process

• identification - prepare list of potential risk
• analysis - priorities potential risk
• report to management about the risk identified
• Design risk mangement system - prepare avoidance and contingency plan
• recommend designed system for implementation
• implement - put in place the accepted system
• evaluate - monitor the progress of the system
  

Strategic Risk - is the current and prospective impact on earnings or capital arising from adverse business decisions, improper implementation of decisions, or lack of responsiveness to industry changes. This risk is a function of the compatibility of an organization’s strategic goals, the business strategies developed to achieve those goals, the resources deployed against these goals, and the quality of implementation. The resources needed to carry out business strategies are both tangible and intangible. They include communication channels, operating systems, delivery networks, and managerial capacities and capabilities. The organization’s internal characteristics must be evaluated against the impact of economic, technological, competitive, regulatory, and other environmental changes.

Operational Risk - A form of risk that summarizes the risks a company or firm undertakes when it attempts to operate within a given field or industry. Operational risk is the risk that is not inherent in financial, systematic or market-wide risk. It is the risk remaining after determining financing and systematic risk, and includes risks resulting from breakdowns in internal procedures, people and systems. Operational risk can be summarized as human risk; it is the risk of business operations failing due to human error. Operational risk will change from industry to industry, and is an important consideration to make when looking at potential investment decisions. Industries with lower human interaction are likely to have lower operational risk.

MIND YOUR ETHICS!!!!!!

The words "ethics" and "morals" have a number of meanings. Webster gives four basic meanings of the word "ethics":
1. The discipline dealing with what is good and bad and with moral duty and obligation;
2. A set of moral principles or values
3. A theory or system of moral values
4. The principles of conduct governing and individual or group

"Ethics", in all forms, is concerned wiht right or wrong, good or bad. It is either a set of principles held by an individual or group or the "discipline" which studies those principles. The task of that discipline is the analysis and evaluation of human actions and practices. Example; according to some people or groups, assisted suicide is ethically acceptable. The discipline of ethics would examine what "assisted suicide" means (analysis) and what reasons can be given in support of or against such a practice (evaluation).

Why should an accountant get involved in this study of ethics (for those candidates sitting for ACCA P1)? Doesnt every accountant already have a set of moral beliefs that he or she already follows? certainly, but even so, there are several reason for studying ethics.

• First, some moral beliefs one hold may be inadequate because they are simple beliefs about complex issues. The study of ethics can help a person sort out these complex issues, by seeing what principles operate in those cases.

• Second, is some situations, because of conflicting ethical principles, it may be difficult to determine what to do. In this case, ethics can provide insights into how to adjudicate between conflicting principles and show why certain course of action are more desirable than others.

• Third, individuals may hold some inadequate beliefs or cling to inadequate values. subjecting those beliefs or values to ethical analysis may show their inadequacy. It could be that at one time you thought some things were wrong but now you think they are acceptable, or vice-versa. In short, after consideration you changed your mind about some of your ethical beliefs.

• Fourth, and very important, reason to study ethics is to understand whether and why our opinions are worth holding on to. Socrates is known for showing that the unexamined life it not worth living. As an accountant, what are your basic goals in life? Are they compatible with other values that you have? If you need to choose between keeping a job and violating your professional responsibilities, what should you do? When your responsibility to family conflicts with your responsibility to your job, how do you resolve this?

• Finally, is to identify the basic ethical principles that can be applied to action. When faced with trying to decide what to do in difficult situation, it is often helpful to have a checklist of basic questions or considerations that need to be raised and applied to the situation to help determine what the outcome should be. Therefore, in accounting, one learns the principles of accounting in order to apply them to specific situations, so one also need to learn the principles of ethics that govern human behaviour in orderto apply them when faced with difficult situations. In that way, we can at least be sure we have examined the issue adequately by employing all the ethical principles available.

The study of ethics can make us aware of the number and types of principles that can be used in determining what should be done in a situation involving ethical matters. Because ethical issues grow ever more complex in an ever more complex world, it behooves one to have a grasp of the underlying structure of ethical reasoning (Kohlberg model) to help navigate the ethical sea.

Kohlberg’s levels of human moral development

Kohlberg developed a cognitive moral development (CMD) theory to explain the reasoning process behind moral judgements.
The Theory:
-Each level is subdivided into two stages – giving six stages in total.
-Individuals tend to move from Level 1 to Level 3 as they get older
-basis for ethical behavior, has six identifiable developmental constructive stages - each more adequate at responding to moral dilemmas than the last.

Kohlberg’s theory of CMD attempts to show the reasoning processes used by individuals, and how those processes changed as the individual matured from a child to an adult.
In other words, CMD relates to the different levels of reasoning that an individual can apply to ethical issues and problems.

Kohlberg believed...and was able to demonstrate through studies...that people progressed in their moral reasoning (i.e., in their bases for ethical behavior) through a series of stages. He believed that there were six identifiable stages which could be more generally classified into three levels

Kohlberg identified three levels of morale development, with 2 sub-stages within each level – giving six stages in total:-
Level one: The individual is focused on self-interest, external rewards and punishment.
Level two: The individual tends to do what is expected of them by others
Level three: The individual starts to develop autonomous decision making which is based on internal perspectives of right/wrong ethics, etc. rather than based on any external influences.

Level 1 : Pre-conventional
Stage 1:-Obedience and Punishment.
-The earliest stage of moral development is especially common in young children, but adults are capable of expressing this type of reasoning. At this stage, children see rules as fixed and absolute. Obeying the rules is important because it is a means to avoid punishment. I.e unethical decision taken because employee believes either they will be rewarded or the company will not punish them.
Stage 2 :- Instrumental purpose and exchange
-Concrete individual interests. Is aware of others' interests.
-At this stage, children account for individual points of view and judge actions based on how they serve individual needs. In the Heinz dilemma, children argued that the best course of action was whichever best-served Heinz’s needs. Reciprocity is possible, but only if it serves one's own interests. I.e,one employee ‘covers’ for the absence of a colleague – on the understanding that the colleague will cover for them if necessary. Employee therefore only carrying out the action because it benefits them.

Level 2 : Conventional
Stage 3 :Interpersonal accord and conformity
-This stage is focused on living up to social expectations and roles. There is an emphasis on conformity, being "nice," and consideration of how choices influence relationships.
-Lives up to others' expectations in order to be seen to be good and then has self-regard as being good. Actions are defined by what is expected of individuals by their peers and those close to them.
-I.e;an employee justifies using the company telephone and email for personal use because all other employees already do this.
Stage 4 : Social accord and system maintenance
-This stage of moral development, people begin to consider society as a whole when making judgments. The focus is on maintaining law and order by following the rules, doing one’s duty, and respecting authority.
-Fulfils social duties in order to keep the social system going. I.e; a manager raises working conditions of employees above the statutory minimum to the standard expected by pressure groups, consumers and other groups in society.

Level 3 :Post-conventional
Stage 5: Social contract and individual rights
-At this stage, people begin to account for the differing values, opinions, and beliefs of other people. Rules of law are important for maintaining a society, but members of the society should agree upon these standards.
-Upholds relative rules in the interest of impartiality and welfare for all.
-Right and wrong are determined by reference to basic rights, values and contracts of society I.e,a food manufacturer makes full disclosure of the ingredients in its products, although there is no statutory requirement and pressure groups have not requested the information.
Stage 6: Universal ethical principles
-Kolhberg’s final level of moral reasoning is based upon universal ethical principles and abstract reasoning. At this stage, people follow these internalized principles of justice, even if they conflict with laws and rules.
-Follows self-chosen ethical principles, even when they conflict with the laws. I.e, a purchasing manager stops buying products that have been tested on animals as the testing does not respect the animal’s right to be free from suffering.

Criticism of Kohlberg theory of moral stage

• emphasizes justice to the exclusion of other values. As a consequence of this, it may not adequately address the arguments of people who value other moral aspects of actions.

• does moral reasoning necessarily lead to moral behavior? Kohlberg's theory is concerned with moral thinking, but there is a big difference between knowing what we ought to do versus our actual actions.

• it has gender bias – the fieldwork for the theory was drawn from interviews with young American males. Gilligan C. argued that it did not adequately describe the concern of woman.

• does Kohlberg's theory overemphasize Western philosophy? Individualistic cultures emphasize personal rights while collectivistic cultures stress the importance of society and community. Eastern cultures may have different moral outlooks that Kohlberg's theory does not account for.

Others related isssue related to this theory (Not examinable for ACCA P1, but just a background knowledge only oh ya!)
In Europe, a woman was near death from a special kind of cancer.There was one drug that the doctors thought might save her. It was a form of radium that a druggist in the same town had recently discovered. The drug was expensive to make, but the druggist was charging ten times what the drug cost him to make. He paid $200 for the radium and charged $2,000 for a small dose of the drug.
The sick woman's husband, Heinz, went to everyone he knew to borrow the money, but he could only get together about $ 1,000 which is half of what it cost. He told the druggist that his wife was dying and asked him to sell it cheaper or let him pay later. But the druggist said: "No, I discovered the drug and I'm going to make money from it." So Heinz got desperate and broke into the man's store to steal the drug-for his wife. Should the husband have done that?
Kohlberg was not interested so much in the answer to the question of whether Heinz was wrong or right, but in the reasoning for the participants decision. The responses were then classified into various stages of reasoning.

Sources:
- Wikipedia
- Kohlberg : "Moral stages and moralization: The cognitive-developmental approach".
- Kaplan Publishing.
- Hedl, John, Glazer, Chan,: "Improving the Moral Reasoning of Allied Health Students" (article part)

Board committees -Roles and responsibilities

For this round,i will touch on board committees.As far as I concern, this topics what the examiner are focusing on. Hence, it will be excellent if you able to understand and apply those understanding in the exam. First, There is Remuneration committee, followed by Nomination committee, and finally Risk committee.
Lets start on:
Remuneration Committee
The role of remuneration committee is to have an appropriate reward policy that attracts and motivates directors to achieve the long-term interests of shareholders.In order to be effective, the committee needs both to determine the organisation general policy on the remuneration of executive directors and specific remuneration packages for each directors.
The UK Combined Code requires the committee to be staffed by independent non-executive directors (NED, to ensure directors dont set their own remuneration levels.
Some of the responsibilities of the remuneration committee are:

• Review the framework for the remuneration and terms and conditions of employement of the chairman of the board and of executives directors.
• Monitor the level and structure of the remuneration of senior managers.
• Set detailed remuneration of the executive directors and chairman including compensation payment.
• To ensure that executive directors are fairly rewarded for their contribution on the performance of the company.
  
• Transparency to shareholders that remuneration of the executive directors is set by individuals with no personal interest in the outcome of the committee decisions.

Then,we have the Remuneration packages. Packages will need to attract, retain and motivate directors of sufficient quality and at the same time taking into account shareholders interests.
Typical component in a remuneration packages might be..

• Basic salary - in accordance with the terms of the directors contract of employment, and not related to the performance of the company, but determined by experience of the director.
• Bonus - Directors may be paid by cash bonus for excellent performance.
• Share options - Right to purchase shares at specified exercise price in a specific period time in the future. Share options give directors the incentive to manage the company that share price increase, the share options are believed to allign the manager or directors goals with shareholder, thus at the same time overcomes the agency problems since the directors becomes the owner.However, such share must be approved by shareholders and it should be rewarding but not excessive. In addition, the company should ensure that the shares are not offered at a discount and options should not be excersiable,under three years.
• Pensions - The UK Combined Code states only basic salary should be pensionable. The Code emphasises that the committee consider the pension consequences and associated costs to the company of basic salary increases.
• Other benefit i.e, Benefit in kind - The committee consider the benefit and the cost the company of the complete package. Ideally, the package offered to directors should be an extension applied to employees. The committee should provide benefits that expection with the position of executive directors or would increase their royalty i.e company car, health insurance.

Remuneration Disclosures.
The UK Directors Remuneration Report Regulations 2002 requires:

• Director submit a remuneration report to members at AGM each year,
• Report provide full details of directors remuneration,
• Duration of contrats with directors,
• the report is clear, transparent, and understandable to shareholders

Other disclosures that might be a good practice is notice periods and termination payments of the directors contract and external remuneration consultants employed by the remuneration committee on advicing remuneration should be provided.

Nomination Committee
The main task of the Nomination Committee is to propose candidates for election to the Board of Directors, including the chairman. The Nomination Committee must take into consideration the various rules on independence of the Board in relation to the Company, its senior management and major shareholders, in accordance with the requirements of the Corporate governance codes.
Meetings and Reports:
The Committee will hold regular meetings at least two times each year generally in conjunction with regularly scheduled meetings of the Board of Directors, and such special meetings as the Chair of the Committee or the Chairman of the Board may direct. The Committee will maintain written minutes of its meetings, which minutes will be filed with the minutes of the meetings of the Board of Directors. At each regularly scheduled meeting of the Board of Directors, the Chair of the Committee shall provide the Board of Directors with a report of the Committee’s activities and proceedings.
The main responsibilites and duties of the nomination committee are :

• Formulating, recommending to the Board and overseeing the implementation and administration of the Company's corporate governance structure and framework.
• Review regularly the structure, size of the board and make recommendation to the board.
• Give full consideration to succession planning for directors.
• Reviewing the Company’s Corporate Governance Principles at least annually and recommending changes, as necessary, to the Board.
• Periodically administering and reviewing with the Board an evaluation of the processes and performance of the Board in order to identify areas of concern or potential issues relating to Board and performance effectiveness also to assess and evaluate the overall effectiveness of individual directors.
• Make recommendations to the board concerning the standing for re-appointment of directors.
• To reduce domination in executive selection by the CEO/Chairman.

In carrying out such responsibilities, the Committee shall have the power and authority to retain such consultants, outside counsel and other advisors as the Committee may deem appropriate and shall have the sole authority to approve the fees and other terms of engagement.

Risk Committee
Sadgrove suggests the following functions for the risk committee:

• Develop risk awareness among staff
• Ensure compliance with risk policies
• Control risk in their own department
• Review audit findings and implement controls
• Make risk related recommendation to the board.

The main responsibilities and duties of the risk committees are:

• Advice the full board on risk management
• Emphasise and demostrates benefit of a risk-based approach to internal control
• The Committee will review the work performed by the internal auditors and provide comments on that work to the Audit Committee, as appropriate
• The Committee will review the risk management procedures of the Group and report to the Audit Committee of the Board on the results of their review
• Review the system of internal control under the 5 headings :- - Control environment, Risk assessment, infromation system, Control procedure, Monitoring.
• Providing disclosure on the internal controls in the annual reports and accounts
• The Committee shall recommend to the Audit Committee of the Board the overall risk management strategy of the Group (including the criteria to assess risk) and oversee the implementation and effective operation of that strategy, its policies and procedures.
• If appropriate, review credit risk, liquidity risk and operational risk exposures with regard to full board risk appetite.
  

Agency Theory, Combined Code, Corporate Social Responsibility.

Since the seminal work of Jensen and Meckling in proposing a theory of the firm based upon conflicts of interest between various contracting parties – namely shareholders, corporate managers and debt holders – a vast literature has developed in explaining both the nature of these conflicts, and means by which they may be resolved. In P1 paper,it examines the nature of the agency relationship which exists between managers and shareholders and the agency costs which arise from them.
Agency Costs
Jensen and Meckling define the agency relationship as a contract under which one party (the principal) engages another party (the agent) to perform some service on their behalf. As part of this, the principal will delegate some decision-making authority to the agent.These agency problems arise because of the impossibility of perfectly contracting for every possible action of an agent whose decisions affect both his own welfare and the welfare of the principal.
Managers bear the entire cost of failing to pursue their own goals, but capture
only a fraction of the benefits.
Agency costs are can be seen as the value loss to shareholders, arising from divergences of interests between shareholders and corporate managers. Jensen and Meckling defined agency costs as the sum of

• monitoring costs,
• bonding costs, and
• residual loss.

Monitoring costs
Monitoring costs are expenditures paid by the principal to measure, observe and control an agent’s behaviour.They may include the cost of audits, writing executive compensation contracts and ultimately the cost of firing managers. Initially these costs are paid by the principal, but Fama and Jensen argue that they will ultimately be borne by an agent as their compensation will be adjusted to cover these costs.
Bonding costs
Given that agents ultimately bear monitoring costs, they are likely to set up structures that
will see them act in shareholder’s best interests, or compensate them accordingly if they
don’t. The cost of establishing and adhering to these systems are known as bonding costs.
They may include the cost of additional information disclosures to shareholders, but management will obviously have the benefit of preparing these themselves.
Residual loss
Despite monitoring and bonding, the interest of managers and shareholders are still unlikely to be fully aligned. Therefore, there are still agency losses arising from conflicts of interest. These are known as residual loss.They arise because the cost of fully enforcing principal-agent contracts would far outweigh the benefits derived from doing so.

Combined Code
Last blog we've discussed on the surface of Sarbanes Oxley, this time, lets look into what Combined Code brings towards Corporate Governance:-

1) Does the Code support better board performance over time?
Agree, the proposition that the Code supports better board performance over time. However, investors can only assess boards by measuring theperformance of the company in delivering growth in earnings and dividends and a satisfactory return on capital employed. This needs to be done over at least a complete business cycle if it is to be meaningful. Shareholders have found the introduction of board evaluations to be helpful, particularly when a board has
chosen to set out its conclusions in some detail.

2) Is the “comply or explain” approach working effectively?
“Comply or explain” normally works well. However, there can be a presumption by companies that investors should accept an “explanation” and investors are known to be reluctant to accept any explanation when there is a breach of a key principle of their guidelines. The pressure points are often around remuneration and director independence and in these instances boards need to consider how best to deal with the legitimate concerns of shareholders. There is little doubt that among smaller companies these issues are more difficult to deal with due to limited resources at
company and investor level. Companies have increased significantly the amount of engagement with shareholders on directors’ remuneration. For AIC (Association of Investment Companies),
it does not believe that the comply or explain approach is working effectively. However, this is not the fault of the Combined Code itself. ( in exam, based on scenario given either effective or not)

3) Do disclosures on the Combined Code in annual reports provide useful information to shareholders at proportionate cost to companies?
The disclosures are helpful and in most cases essential if shareholders are to be fully informed as to how the directors have carried out their responsibilities. However, the combination of growing corporate governance disclosures and the new accounting requirements means that annual reports are becoming so long that shareholders canstruggle to identify the important elements.
(See BPP manual approaches to corporate governance on the discussion of benefits of combined code and drawback in the form of voluntary code)

Aguilera, R.V. (2005). ‘Corporate Governance and Director Accountability: an Institutional Comparative Perspective’, British Journal of Management, Vol. 16: S39-S53.

Corporate Social Responsibility (CSR)
-Concerned with the ways in which an organisation exceeds the minimum obligation to stakeholders specified through regulation and corporate governance.

Organisation responsibilities.
Our discussion is theoretically based on the Corporate Social Responsibility (CSR) pyramid of Carroll (1991).
Economic - economic responsibilities of a business organisation management are to be produce goods and services of value to society so that the firm may repay its creditors and sharesholders.(must do).It is important to maintain a strong competitive position.

Legal - legal responsibilities are defined by the government laws that management is expected to obey.(have to do).It is important to comply with various federal, state, and local regulations and also It is important to provide goods and services that at least meet minimal legal requirements.

Ethical - ethical responsibilities of an organisation management are to follow the generally held beliefs in a society(should do). It is important to perform in a manner consistent with expectations of societal mores and ethical norms.It is important that good corporate
citizenship be defined as doing what is expected morally or ethically.Ethical responsibilities in
this sense are often ill-defined or continually under public debate as to their legitimacy,
and thus are frequently difficult for business to deal with.

Philanthropic - philanthropic responsibilities are the purely voluntary obligation a corporation assumes. i.e provide day care centers, donation.It is important that managers and employees participate in voluntary and charitable activities within their local communities.It is important to assist voluntarily those projects that enhance a community’s "quality of life."

The distinguishing feature between philanthropy and ethical responsibilities is that the
former are not expected in an ethical or moral sense. Communities desire firms to
contribute their money, facilities, and employee time to humanitarian programs or
purposes, but they do not regard the firms as unethical if they do not provide the desired
level. Therefore, philanthropy is more discretionary or voluntary on the part of
businesses even though there is always the societal expectation that businesses
provide it.

Finally, business is expected to be a good corporate citizen*. This is captured in the philanthropic responsibility, wherein business is expected to contribute financial and human
resources to the community and to improve the quality of life.

*Corporate citizenship - business strategy that shapes the values based on the company mission and choices made each day by its executives, managers and employees as they engage with society. 3 core principles define the essence of corporate citizenship & company should apply them in a manner appropriate to its distinct needs :- minimising harm, maximising benefit and being accountable and responsive to stakeholders. (Boston Center for corporate Citizenship)

Examples of CSR : Merck donates medicine to prevent river blindness, Body Shop states no animal testing and donates money for people without homes.
Steps to ensure successful of CSR:
1) To comply codes or principles created by

• Government or multilateral agency such as the UN Global Compact Principles.
• External groups - .i.e CERES Principles
• Own company corporate business principles

2) Human Resource management - Proper performance appraisal and reward structure i.e executive pay is linked to environmental performance.

3)Social auditing - Hiring independent auditors to assess the impacts of a corporation on society which focuses on corporate performance, environmental performance, social performance.

4) Creating Higher/Senior executives for role of a Chief Ethical Officer.

5) Embedded such CSR in Mission statement.

Reference: Carroll, The pyramid of corporate social responsibility: towards the moral management of organizational stakeholders Business Horizons, July-August, p39.

R. W. Ackerman and R.A. Bauer, Corporate Social Responsiveness (Publishing Co, 1976).

Sarbanes- Oxley Act 2002

For this time,i would like to touch on Governance and responsibility,for that..bELow explains the Sarbanes-Oxley Act as example of a rule based approach to corporate governance. This topics includes in the Study guide part (A) 6(e).This is concern on the US part which is similiar to Cadbury's Combine Code in UK.

The Sarbanes-Oxley Act of 2002, sponsored by US Senator Paul Sarbanes and US Representative Michael Oxley, represents the biggest change to federal securities laws in a long time. It came as a result of the large corporate financial scandals involving Enron, WorldCom, Global Crossing and Arthur Andersen. Effective in 2006, all publicly-traded companies are required to submit an annual report of the effectiveness of their internal accounting controls to the SEC.Provisions of the Sarbanes Oxley Act (SOX) detail criminal and civil penalties for noncompliance, certification of internal auditing, and increased financial disclosure. It affects public U.S. companies and non-U.S. companies with a U.S. presence. SOX is all about corporate governance and financial disclosure.

Question may arise What is the Sarbanes-Oxley Act comprised of?
The Sarbanes-Oxley Act itself is organized into eleven sections, but sections 302, 404, 401, 409, 802 and 906 are the most important in terms of compliance. Section 404 seems to cause the most difficulties for compliance. More specifically, Sarbanes-Oxley established new accountability standards for corporate boards and auditors, established a Public Company Accounting Oversight Board (PCAOB) under the Security and Exchange Commission (SEC), and specified civil and criminal penalties for noncompliance.
Second,What does Sarbanes-Oxley compliance require?
All applicable companies must establish a financial accounting framework that can generate financial reports that are readily verifiable with traceable source data. This source data must remain intact and cannot undergo undocumented revisions. In addition, any revisions to financial or accounting software must be fully documented as to what was changed, why, by whom and when.
Third,What are the penalties for noncompliance with Sarbanes-Oxley?
Besides lawsuits and negative publicity, a corporate officer who does not comply or submits an inaccurate certification is subject to a fine up to $1 million and ten years in prison, even if done mistakenly. If a wrong certification was submitted purposely, the fine can be up to $5 million and twenty years in prison.

Summary of SOX:
Thousands of companies face the task of ensuring their accounting operations are in compliance with the Sarbanes Oxley Act. Auditing departments typically first have a comprehensive external audit by a Sarbanes-Oxley compliance specialist performed to identify areas of risk. Next, specialized software is installed that provides the "electronic paper trails" necessary to ensure Sarbanes-Oxley compliance.

The summary highlights of the most important Sarbanes-Oxley sections for compliance are listed below. Note that certification and specific public actions are now required by companies to remain in SOX compliance.

nOw on to the section:

1) SOX Section 302 - Corporate Responsibility for Financial Reports
a) CEO and CFO must review all financial reports.
b) Financial report does not contain any misrepresentations.
c) Information in the financial report is "fairly presented".
d) CEO and CFO are responsible for the internal accounting controls.
e) CEO and CFO must report any deficiencies in internal accounting controls, or any fraud involving the management of the audit committee.
f) CEO and CFO must indicate any material changes in internal accounting controls.

2) SOX Section 404: Management Assessment of Internal Controls
All annual financial reports must include an Internal Control Report stating that management is responsible for an "adequate" internal control structure, and an assessment by management of the effectiveness of the control structure. Any shortcomings in these controls must also be reported. In addition, registered external auditors must attest to the accuracy of the company management’s assertion that internal accounting controls are in place, operational and effective.

3) SOX Section 902 - Attempts & Conspiracies to Commit Fraud Offenses
It is a crime for any person to corruptly alter, destroy, mutilate, or conceal any document with the intent to impair the object's integrity or availability for use in an official proceeding.

For the entire report in PDF format, see Sarbanes-Oxley Act of 2002 Report.
the full SOX:

TITLE I — PUBLIC COMPANY ACCOUNTING OVERSIGHT BOARD
Sec. 101. Establishment; administrative provisions.
Sec. 102. Registration with the Board.
Sec. 103. Auditing, quality control, and independence standards and rules.
Sec. 104. Inspections of registered public accounting firms.
Sec. 105. Investigations and disciplinary proceedings.
Sec. 106. Foreign public accounting firms.
Sec. 107. Commission oversight of the Board.
Sec. 108. Accounting standards.
Sec. 109. Funding.

TITLE II — AUDITOR INDEPENDENCE
Sec. 201. Services outside the scope of practice of auditors.
Sec. 202. Preapproval requirements.
Sec. 203. Audit partner rotation.
Sec. 204. Auditor reports to audit committees.
Sec. 205. Conforming amendments.
Sec. 206. Conflicts of interest.
Sec. 207. Study of mandatory rotation of registered public accounting firms.
Sec. 208. Commission authority.
Sec. 209. Considerations by appropriate State regulatory authorities.

TITLE III — CORPORATE RESPONSIBILITY
Sec. 301. Public company audit committees.
Sec. 302. Corporate responsibility for financial reports.
Sec. 303. Improper influence on conduct of audits.
Sec. 304. Forfeiture of certain bonuses and profits.
Sec. 305. Officer and director bars and penalties.
Sec. 306. Insider trades during pension fund blackout periods.
Sec. 307. Rules of professional responsibility for attorneys.
Sec. 308. Fair funds for investors.

TITLE IV — ENHANCED FINANCIAL DISCLOSURES
Sec. 401. Disclosures in periodic reports.
Sec. 402. Enhanced conflict of interest provisions.
Sec. 403. Disclosures of transactions involving management and principal stockholders.
Sec. 404. Management assessment of internal controls.
Sec. 405. Exemption.
Sec. 406. Code of ethics for senior financial officers.
Sec. 407. Disclosure of audit committee financial expert.
Sec. 408. Enhanced review of periodic disclosures by issuers.
Sec. 409. Real time issuer disclosures.

TITLE V — ANALYST CONFLICTS OF INTEREST
Sec. 501. Treatment of securities analysts by registered securities associations and national securities exchanges.

TITLE VI — COMMISSION RESOURCES AND AUTHORITY
Sec. 601. Authorization of appropriations.
Sec. 602. Appearance and practice before the Commission.
Sec. 603. Federal court authority to impose penny stock bars.
Sec. 604. Qualifications of associated persons of brokers and dealers.

TITLE VII — STUDIES AND REPORTS
Sec. 701. GAO study and report regarding consolidation of public accounting firms.
Sec. 702. Commission study and report regarding credit rating agencies.
Sec. 703. Study and report on violators and violations
Sec. 704. Study of enforcement actions.
Sec. 705. Study of investment banks.

TITLE VIII — CORPORATE AND CRIMINAL FRAUD ACCOUNTABILITY
Sec. 801. Short title.
Sec. 802. Criminal penalties for altering documents.
Sec. 803. Debts nondischargeable if incurred in violation of securities fraud laws.
Sec. 804. Statute of limitations for securities fraud.
Sec. 805. Review of Federal Sentencing Guidelines for obstruction of justice and extensive criminal fraud.
Sec. 806. Protection for employees of publicly traded companies who provide evidence of fraud.
Sec. 807. Criminal penalties for defrauding shareholders of publicly traded companies.

TITLE IX — WHITE-COLLAR CRIME PENALTY ENHANCEMENTS
Sec. 901. Short title.
Sec. 902. Attempts and conspiracies to commit criminal fraud offenses.
Sec. 903. Criminal penalties for mail and wire fraud.
Sec. 904. Criminal penalties for violations of the Employee Retirement Income Security Act of 1974.
Sec. 905. Amendment to sentencing guidelines relating to certain white-collar offenses.
Sec. 906. Corporate responsibility for financial reports.

TITLE X — CORPORATE TAX RETURNS
Sec. 1001. Sense of the Senate regarding the signing of corporate tax returns by chief executive officers.

TITLE XI — CORPORATE FRAUD AND ACCOUNTABILITY
Sec. 1101. Short title.
Sec. 1102. Tampering with a record or otherwise impeding an official proceeding.
Sec. 1103. Temporary freeze authority for the Securities and Exchange Commission.
Sec. 1104. Amendment to the Federal Sentencing Guidelines.
Sec. 1105. Authority of the Commission to prohibit persons from serving as officers or directors.
Sec. 1106. Increased criminal penalties under Securities Exchange Act of 1934.
Sec. 1107. Retaliation against informants.

Information on this site is for educational purposes only and is not intended to substitute for, or replace information or advice given by a licensed professional, manufacturer or distributor representative, consultant or other qualified product or service information source. tQ TO SOX Copyright © 2006 tQ To Info Guide to the Sarbanes-Oxley Act of 2002

sOME OF THE recommended books are: student guide to SOX.

Ethics on Deontological and Teleological.

This Topics taken from the syllabus guide on part E which is under the Professional values and ethics.Let me start off with the area on sub-part C which focuses on describing and distinguish between deontological and teleological/consequentialist approaches to ethics.

a) Deontological ethics.
- maintain that the moral rightness or wrongness of an action depends on its intrinsic qualities, and on the nature of its consequences. Deontological ethics typically is thought to involve two important elements: prerogatives and constraints.
Prerogatives deny that agents must always seek to perform actions with optimum consequences. Constraints place limits on what actions agents may undertake in an effort to bring about their own or the impartial good.

Deontological ethics holds that at least some acts are morally wrong in themselves [e.g., lying, breaking a promise, punishing the innocent, murder (which is bad ;p) ]. It often finds expression in slogans such as “Duty for duty's sake.” Deontological theories are often formulated in such a way that the rightness of an action consists in its conformity to a moral rule or command, such as “Do not bear false witness.”
According to Immanuel Kant which is the most influential philosophers in the history of Western philosophy, says that the sole feature that gives an action moral worth is not the outcome that is achieved by the action, but the motive that is behind the action.

A deontologist might argue that, nonetheless, your duty is to ensure that you do not lie. A theory which regarded the prohibition of lying as agent-neutral, however, would object that surely if one lie is bad, twenty would be much worse. Since you could minimize overall badness by allowing one lie, you ought to lie regardless of the fact that it is you who are lying.
Of the five formulations of the categorical imperative Kant developed, the two most well-known are

• Always act in such a way that you can also will that the maxim of your action should become a universal law.

• Act so that you treat humanity, both in your own person and in that of another, always as an end and never merely as a means but always at the same time as and end.

• Act as though you were through your maxims a law-making member of a kingdom of ends.

Some other theorists include by John Locke and John Rawls. Locke held that individual persons have rights that are part of the natural law of the world, and that actions (including the death penalty, which he advocated) can be judged as right or wrong based on whether they respect these rights. John Rawls held that individual persons have a duty to act according to the laws that they would propose if they were unaware of their present socioeconomic status.

b) Teleological/consequentialist.
-The word "teleology" is derived from the Greek word "tells" that means "ends".Actions are judged to be morally good if they achieve a good goal or outcome. Teleological ethics are utilitarian in that they seek to arrive at ethical decisions on the basis of a projected outcome that would bring about the most good for the greatest number of people. "…an act is right if and only if it or the rule under which it falls produces, will probably produce, or is intended to produce at least as a great a balance of good over evil as any available alternative" The teleological approach abandons any claim to moral certainty. An example of teleological ethics is John Stuart Mill an influential liberal thinker.- In a teleological ethic, morally good decisions are means of achieving happiness. So moral goods are instruments to achieve nonmoral goods.

Dewey (1859-1952) is essentially a teleological ethicist, but he introduces much more flexibility into the traditional teleological concepts of means and ends. In doing so, he reveals some of the complications that in my view make impossible any hedonistic calculus.
Dewey accepts the basic utilitarian model of ethics: choosing a goal and then the means to achieve it. But he rejects the idea that the goal is something fixed: pleasure or happiness. Dewey insists that pleasure is only one of many goals we seek, including health, wealth, power, learning, justice, entertainment, friendship. Further, our goals change from time to time. As our goals change, of course the means also change.

- With ever-changing goals and ever-changing means leading to a flux of incompatible impulses that somehow leads to action (perhaps an axe murder ???), it is impossible to imagine what an ethical discussion could ever be about. Dewey is right to say that in fact our goals change and that with no revelation to guide us we cannot define happiness or pleasure as an absolute the way utilitarianism does. But if he is right, his point serves as a deconstruction of teleological ethics and leaves little distance between teleological ethics and existential ethics.

Teleological theories are very much like consequentialist theories (indeed, consequentialist theories are often referred to as teleological). They are similar in that in both it is some notion of the good that is centrally important, and other ethical notions derive their meaning and/or importance from the good.
There are two main differences that distinguish a teleological theory, however. The good in a teleological theory is almost always a good of some stable feature human character, i.e., a virtue. What is important in a teleological theory is not how the world is, but what sort of person and what sort of life is most valuable.
-The second main difference with consequentialism is that the point of a teleological theory is not to produce imperatives. There is no theory of right in a teleological theory; an ethical life is not understood as one in which one fulfills one’s obligations and does not violate any constraints, but in terms of a genuinely fulfilled life. A teleological theory is aattttrraaccttiivvee rather than imperative: it provides an account of what virtues, wants, desires, and satisfactions there are in a genuinely fulfilled life. Leading an ethical life is thus the person’s own self-interest, properly understood. To be sure there will be certain actions that one ought to perform in an appropriately valuable life, but they are of secondary or derivative importance.

The Difference between Deontological and teleological are :
1) Deontological theories deal mainly with the inherent righteousness of a behavior. Teleological theories stress the amount of good or bad embodied in the consequence of the behaviors. [Hunt and Vitell, 1988].

2) The deontology school of thought focuses on the preservation of individual rights and on the intentions associated with a particular behavior rather than on consequences. [Ferrell and Fraedrich, 1991]. Deontological views include the Golden Rule, "Act in the way you would expect others to act toward you" and also Kant's categorical imperative, 'Act in such a way that the action taken under the circumstances could be a universal law or rule of behavior."Deontologists feel that individuals have certain undeniable rights which include: freedom of conscience, freedom of consent, freedom of privacy, freedom of speech and due process. [Ferrell and Fraedrich, 1991].

Teleology focuses on the consequences of the actions or behaviors of the individual. [Singhapakdi and Vitell, 1991] Moral philosophers often look at teleology as consequentialism because they assess the moral worth of a behavior by looking at its consequences. To define teleology in the business sense, egoism is used. Egoists believe they should make decisions that maximize their own self-interest, which is defined differently by each individual. According to each individual egoist, self-interest can be defined in many ways, one may want pleasure, wealth, power, fame, a good physical well-being or something else. Existing weaknesses of ethical egoism prevent one from taking a stand against even blatant business practices or resolving conflicts of egoistic interests among two individuals.

This Articles are some of the information that you required to have knowledge on, however,not all of the above words,paragraph you should know..At least you have the idea,and meaning of it, then,the rest in just understanding of the question in the exam.For me,i could not memorised bits by bits of the words above,just read and make your own understanding,unless desperated which is the last resort :)

Next articles still under the ethics topics but on the Relativism and absolutism.