Tag: Principle of Management free notes download

he fraud triangle is a framework commonly used in auditing to explain the reason behind an individual’s decision to commit fraud. The fraud triangle outlines three components that contribute to increasing the risk of fraud:

(1) Opportunity

(2) Incentive

(3) Rationalization

Opportunity

Opportunity refers to circumstances that allow fraud to occur. In the fraud triangle, it is the only component that a company exercises complete control over. Examples that provide opportunities for committing fraud include:

Poor tone at the top

Tone at the top refers to upper management and the board of directors’ commitment to being ethical, showing integrity, and being honest a poor tone at the top results in a company that is more susceptible to fraud.

Weak internal controls

Internal controls are processes and procedures implemented to ensure the integrity of accounting and financial information. Weak internal controls such as poor separation of duties, lack of supervision, and poor documentation of processes give rise to opportunities for fraud.

Inadequate accounting policies

Accounting policies refer to how items on the financial statements are recorded. Poor (inadequate) accounting policies may provide an opportunity for employees to manipulate numbers.

Incentive

Incentive, alternatively called pressure, refers to an employee’s mindset towards committing fraud. Examples of things that provide incentives for committing fraud include:

Investor and analyst expectations

The need to meet or exceed investor and analyst expectations to ensure stock prices are maintained or increased can create pressure to commit fraud.

Bonuses based on a financial metric

Common financial metrics used to assess the performance of an employee are revenues and net income. Bonuses that are based on a financial metric create pressure for employees to meet targets, which, in turn, may cause them to commit fraud to achieve the objective.

Personal incentives

Personal incentives may include wanting to earn more money, the need to pay personal bills, a gambling addiction, etc.

Rationalization

Rationalization refers to an individual’s justification for committing fraud. Examples of common rationalizations that fraud committers use include:

“Upper management is doing it as well”

A poor tone at the top may cause an individual to follow in the footsteps of those higher in the corporate hierarchy.

“They treated me wrong”

An individual may be spiteful towards their manager or employer and believe that committing fraud is a way of getting payback.

“There is no other solution”

An individual may believe that they might lose everything (for example, losing a job) unless they commit fraud.

Step 1: The pressure on the individual: The motivation behind the crime and can be either personal financial pressure, such as debt problems, or workplace debt problems, such as a shortfall in revenue. The pressure is seen by the individual as unsolvable by orthodox, legal, sanctioned routes and unshareable with others who may be able to offer assistance. A common example of a perceived unshareable financial problem is gambling debt. Maintenance of a lifestyle is another common example.

Step 2: The opportunity to commit fraud: The means by which the individual will defraud the organisation. In this stage the worker sees a clear course of action by which they can abuse their position to solve the perceived unshareable financial problem in a way that again, perceived by them is unlikely to be discovered. In many cases the ability to solve the problem in secret is key to the perception of a viable opportunity.

Step 3: The ability rationalises the crime: The final stage in the fraud triangle. This is a cognitive stage and requires the fraudster to be able to justify the crime in a way that is acceptable to his or her internal moral compass. Most fraudsters are first-time criminals and do not see themselves as criminals, but rather a victim of circumstance. Rationalisations are often based on external factors, such as a need to take care of a family, or a dishonest employer which is seen to minimise or mitigate the harm done by the crime.

Statements on Management Accounting (SMAs) are produced, issued, and implemented to reflect official positions of the Institute of Management Accountants (IMA), the largest and most prominent management accounting organization in the world. The IMA is an organization of accounting professionals that had a membership of approximately 70,000 members in 2005.

Management accountants are vital to the financial health of organizations. They make critical decisions, safeguard a company’s integrity, and plan for business sustainability. They might be CFOs and controllers, budget analysts and treasurers, or one of many other game changers on internal teams. Most of all, as the majority of the accounting and financial workforce, they help drive an organization’s strategy and value amid an unpredictable market.

Purpose

The purpose of the MAC/FAR Committee in issuing SMAs is generally twofold:

(1) To express the official position of the IMA on accounting and business reporting issues raised by other standard-setting groups

(2) To provide broad guidance to IMA members and to the wider business community on management accounting concepts, policies, and practices. Regarding the first stated purpose, other standard-setting groups include those such as the FASB, the Governmental Accounting Standards Board, the International Accounting Standards Committee, and government agencies such as the Securities and Exchange Commission. Regarding the second purpose, the work of the MAC/FAR trustees is seen as an effective method of summarizing the wide range of activities that define management accounting.

Some accountants believe that SMAs should be accorded the same considerable authority as generally accepted accounting principles. As of 2005, such authority had not been granted. There is some support for this position. The Auditing Standards Board of the American Institute of Certified Public Accountants (AICPA) in the Statement of Accounting Standards (SAS) No. 5 (later revised as SAS No. 69 in 2005, with amendments in SAS No. 93) stated that principles that are “pronouncements of bodies composed of expert accountants,” and are issued only after “a due process procedure, including broad distribution,” are authoritative and are to be applied where relevant.

Individuals who work throughout the accounting profession have a significant responsibility to the general public. Financial accountants deliver information about companies that the public uses to make major financial decisions. There must be a level of trust and confidence in the ethical behavior of these accountants. Just like others in the business world, accountants are confronted endlessly with ethical dilemmas. A high standard of ethical behavior is expected of those employed in a profession. While ethical codes are helpful guidelines, the rationale to act ethically must originate from within oneself, from personal morals and values. There are steps that can provide an outline for examining ethical issues:

• Recognize the ethical issue at hand and those involved (employees, creditors, vendors, and community).
• Establish the facts of the situation (who, what, where, when, and how).
• Recognize the competing values related to the issue (confidentiality and conflict of interest).
• Determine alternative courses of action.
• Evaluate each course of action and how each relates to the values in step 3.
• Recognize the possible consequences of each course of action and how each affects those involved in step 1.
• Make a decision, and take a course of action.
• Evaluate the decision.

Ethical responsibility is the ability to recognize, interpret and act upon multiple principles and values according to the standards within a given field and/or context.

Lower-level ethical Responsibility

• Demonstrates an understanding of a range of principles, standards and values involved in making ethical decisions and the application of knowledge
• Engages in decision making according to the standards of practice and ethics of the field
• Communicates situations, information and outcomes to others accurately and based on ethical standards of the field
• Reflects upon one’s own actions and implications in situations and takes responsibility for actions while working with others and/or solving problems.

Upper-level ethical Responsibility

• Recognizes different perspectives and analyzes situations to provide best solutions under particular circumstances according to the standards of practice and ethics of the field
• Develops an ethical framework based on the field’s standards of practice and takes responsibilities for decision making and actions based on this framework in various and unpredictable contexts
• Participates in the formation of mission, vision and values in a field or organization
• Assesses the impact of different activities on the environment, society and the field and develops a sense of social responsibility while making judgments and decisions on these activities.

Workplace and Community Responsibility

Your own operations and those of your supply chain should adhere to high standards in the workplace, and in the surrounding community. Workers should be safe from occupational hazards, and should be afforded dignity and opportunities for advancement, and also should be paid a living wage. Your facilities, and those of your suppliers, should be mindful of local communities in terms of culture and customs, noise and visual blight, and concerns such as traffic, pollution and other interactions. Consider sponsoring community activities or contributing to local causes.

Committing to Environmental Responsibility

Ethical responsibility also entails protecting the environment, both locally and globally. Set goals for reducing your greenhouse gas footprint, avoid using toxic chemicals whenever possible, and learn where your materials come from and how they are produced. If you serve coffee, for example, does the coffee from clear-cut farms that destroyed precious rain forest lands, or was it grown sustainably in a manner that protects local forests, birds and wildlife? Consider the entire lifecycle of the products you sell: Can your products easily be recycled at the end of their useful life, or will they end up in a landfill?

Determining Social Responsibility

A key part of ethical responsible business is finding ways to minimize any negative social impacts along the entire supply chain of your operations. This may mean sourcing materials to avoid goods associated with egregious harm, such as diamonds mined by brutal warlords, clothing made in unsafe sweatshops or soccer balls stitched by 10-year old children. You can work with suppliers that take a conscientious approach to procuring goods; buying goods that have third-party certifications (or avoid products identified as questionable), or by visiting supply facilities directly to assure yourself that they are operating in a responsible fashion.

Managing Ethics Programs in the Workplace

Organizations can manage ethics in their workplaces by establishing an ethics management program. Brian Schrag, Executive Secretary of the Association for Practical and Professional Ethics, clarifies. “Typically, ethics programs convey corporate values, often using codes and policies to guide decisions and behavior, and can include extensive training and evaluating, depending on the organization. They provide guidance in ethical dilemmas.” Rarely are two programs alike.

Developing Codes of Ethics

According to Wallace, “A credo generally describes the highest values to which the company aspires to operate. It contains the `thou shalts.’ A code of ethics specifies the ethical rules of operation. It’s the `thou shalt nots.” In the latter 1980s, The Conference Board, a leading business membership organization, found that 76% of corporations surveyed had codes of ethics.

Some business ethicists disagree that codes have any value. Usually they explain that too much focus is put on the codes themselves, and that codes themselves are not influential in managing ethics in the workplace. Many ethicists note that it’s the developing and continuing dialogue around the code’s values that is most important.

Developing Codes of Conduct

If your organization is quite large, e.g., includes several large programs or departments, you may want to develop an overall corporate code of ethics and then a separate code to guide each of your programs or departments. Codes should not be developed out of the Human Resource or Legal departments alone, as is too often done. Codes are insufficient if intended only to ensure that policies are legal. All staff must see the ethics program being driven by top management.

Assessing and Cultivating Ethical Culture

Culture is comprised of the values, norms, folkways and behaviors of an organization. Ethics is about moral values, or values regarding right and wrong. Therefore, cultural assessments can be extremely valuable when assessing the moral values in an organization.

Ethics Training

The ethics program is essentially useless unless all staff members are trained about what it is, how it works and their roles in it. The nature of the system may invite suspicion if not handled openly and honestly. In addition, no matter how fair and up-to-date is a set of policies, the legal system will often interpret employee behavior (rather than written policies) as de facto policy. Therefore, all staff must be aware of and act in full accordance with policies and procedures (this is true, whether policies and procedures are for ethics programs or personnel management). This full accordance requires training about policies and procedures.

Measurement uncertainty is the expression of the statistical dispersion of the values attributed to a measured quantity. All measurements are subject to uncertainty and a measurement result is complete only when it is accompanied by a statement of the associated uncertainty, such as the standard deviation. By international agreement, this uncertainty has a probabilistic basis and reflects incomplete knowledge of the quantity value. It is a non-negative parameter.

The measurement uncertainty is often taken as the standard deviation of a state-of-knowledge probability distribution over the possible values that could be attributed to a measured quantity. Relative uncertainty is the measurement uncertainty relative to the magnitude of a particular single choice for the value for the measured quantity, when this choice is nonzero. This particular single choice is usually called the measured value, which may be optimal in some well-defined sense (e.g., a mean, median, or mode). Thus, the relative measurement uncertainty is the measurement uncertainty divided by the absolute value of the measured value, when the measured value is not zero.

Measurement uncertainty is a quantitative indication of the quality of measurement results, without which they could not be compared between themselves, with specified reference values or to a standard. Uncertainty evaluation is essential to guarantee the metrological traceability of measurement results and to ensure that they are accurate and reliable. In addition, measurement uncertainty must be considered whenever a decision has to be taken based on measurement results, such as in accept/reject or pass/fail processes.

Estimating measurement uncertainty can be a difficult task. Especially, since most measurement uncertainty guides do not give you a process or procedure.

Specify the Measurement Process and Equation

Before you dive in and begin calculating uncertainty, it is best to have a plan. The first part of your plan should be to identify the measurement process or system that you wish to evaluate.

Identify and Characterize the Uncertainty Sources

Now that you have determined the measurement process that you are going to evaluate, you need to identify the factors that influence uncertainty in measurement results.

This process is not typically easy and can be very frustrating. So, stay calm, be patient, and keep researching. You may be surprised by how many influences can affect your measurement results.

Quantify the Magnitude of Uncertainty Components

Before calculating measurement uncertainty, you must first determine the magnitude of each contributing factor. To accomplish this, you may need to perform some data reduction and analysis.

How to Quantify Uncertainty

To quantify uncertainty, you need to follow the four steps below:

• Collect Information and Data
• Evaluate and Select the Right Data
• Analyze the Data
• Quantify Uncertainty Components

Capital budgeting is a multi-step process businesses use to determine how worthwhile a project or investment will be. A company might use capital budgeting to figure out if it should expand its warehouse facilities, invest in new equipment, or spend money on specialized employee training.

Capital budgeting process consists of five steps:

1. Identify and evaluate potential opportunities

The process begins by exploring available opportunities. For any given initiative, a company will probably have multiple options to consider. For example, if a company is seeking to expand its warehousing facilities, it might choose between adding on to its current building or purchasing a larger space in a new location. As such, each option must be evaluated to see what makes the most financial and logistical sense. Once the most feasible opportunity is identified, a company should determine the right time to pursue it, keeping in mind factors such as business need and upfront costs.

2. Estimate operating and implementation costs

The next step involves estimating how much it will cost to bring the project to fruition. This process may require both internal and external research. If a company is looking to upgrade its computer equipment, for instance, it might ask its IT department how much it would cost to buy new memory for its existing machines while simultaneously pricing out the cost of new computers from an outside source. The company should then attempt to further narrow down the cost of implementing whichever option it chooses.

3. Estimate cash flow or benefit

Now we determine how much cash flow the project in question is expected to generate. One way to arrive at this figure is to review data on similar projects that have proved successful in the past. If the project won’t directly generate cash flow, such as the upgrading of computer equipment for more efficient operations, the company must do its best to assign an estimated cost savings or benefit to see if the initiative makes sense financially.

4. Assess risk

This step involves estimating the risk associated with the project, including the amount of money the company stands to lose if the project fails or can’t produce its previously anticipated results. Once a degree of risk is determined, the company can evaluate it against its estimated cash flow or benefit to see if it makes sense to pursue implementation.

5. Implement

If a company chooses to move forward with a project, it will need an implementation plan. The plan should include a means of paying for the project at hand, a method for tracking costs, and a process for recording cash flows or benefits the project generates. The implementation plan should also include a timeline with key project milestones, including an end date if applicable.

The capital budgeting process consists of three main steps:

(i) Deciding on the amount of capital expenditure needed.

(ii) Ascertaining the availa­bility of capital.

(iii) Deciding on how to allo­cate the available capital among alternative in­vestment proposals.

Search for Investment Opportunities:

As already stated, the first step in the capital budgeting process is a survey of the need for capital in the enterprise. Usually, at the beginning of each period, top management invites proposals for in­vestment projects from the different operating units of the organisation.

This may form a part of the annual budget exercise or of general development plans stretching over a few years. In either case, these numerous suggestions coming from the lower echelons of the decision-making ladder are inte­grated by the management into a comprehensive list of investment opportunities open before the company.

These are the three main points that need to be looked into in any sensible system of capital bud­geting.

The problem of deciding on the required amount of capital is referred to as the problem of demand for capital. Since the capital expenditures are un­dertaken with a view to netting in additional prof­its, this step involves a survey of investment oppor­tunities and a process of screening them from the point of view of prospective profitability.

The second step referred to above is essentially the process of determining the supply of capital. This involves ascertaining how much capital can be raised by the firm internally and from external sources.

The third step is the crucial one of determining which proposed projects among the competing ones are to be undertaken. Our main task will be to elaborate on each of these three steps in the capital budgeting pro­cess.

Investment analysis is a comprehensive term. As a result, it includes a wide variety of calculations and assessments that analyze market trends, investments and financial industries. Meanwhile, analysts may use a variety of metrics including past returns, yield potential, price movement and more to help them make better investment decisions.

Types of Investment Analysis

With all the data and financial information available, there are a variety of methods analysts and investors use. However, investment analysis can be divided into a few different categories.

Bottom-Up

Bottom-up analysis assesses individual stocks by using their merits. For example, these merits include pricing power, management competence and valuation. However, this investment analysis method doesn’t focus on market or economic cycles to determine asset allocations. Instead, this method looks at the best companies and stocks regardless of the state of the economy and market.

In other words, bottom-up analysis has a more microeconomic or small-scale perspective and approach instead of looking at the economy at large.

Top-Down

Top-Down analysis examines the economic, market and industry trends before making a more specific investment decision. For instance, say an analyst evaluates different industries and found that technologies outperformed financials. Consequently, they may decide to allocate their portfolio with greater weight in financials than technologies. They will then seek out the best-performing companies within the financial sector.

In comparison to a bottom-up analysis, an investor may find compelling reasons to purchase a single technology stock and invest a significant amount of capital in the stock. The investor may do this even if the overall outlook on the industry is poor.

Technical Analysis

Technical analysis focuses on finding patterns of stock price movements that’s discovered through analysis of a security’s prices and volume of share trades. While fundamental analysis focuses on the intrinsic value of a stock, the technical analysis evaluates the strength or weakness of a security by reviewing a variety of analytical charting tools, trading signals, and price movements.

Fundamental Analysis

Fundamental analysis focuses around the idea that at any given time a company’s shares have an intrinsic or enterprise value, which the market will acknowledge eventually. To identify this value, the investor must observe the corporation’s financial performance. However, fundamental analysts also assess the state of that firm’s industry and overall economic health.

Fundamental analysts use metrics including earnings-per-share (EPS), dividend yield, price-earnings (P/E) ratio, and return on equity to determine the corporation’s value. This method also focuses on a company’s assets, liabilities, and expenses.

Analysts will closely examine the firm’s reports which are filed with the Securities and Exchange Commission. These reports may include the 10-K and 10-Q, as well as sell-side analysts’ reports on the company.

Fundamental Analysis Details

Now that you understand the big picture of how fundamental analysts determine a company’s value, let’s take a deeper dive into some of the metrics that make up this examination. Keep in mind, some investors may solely rely on each individual metric to make an investment decision.

Price-Earnings Ratio (P/E)

A price-earnings ratio shows the correlation between the price of one share of a stock and the earnings-per-share that the company reports over a period. This period is generally one year. It illustrates the amount of money each investor is putting into the firm for every dollar of earnings the company posts.

You can calculate the P/E ratio by dividing the stock’s market value per share. Often, investors will compare one stock’s P/E to other stock’s P/E in the same industry to determine the value of the stocks. Usually, investors consider lower P/E ratios favorable.

Earnings Per Share

Earnings per share indicates how efficiently revenues filters down to investors. To calculate a company’s earnings-per-share investors should take earnings remaining for shareholders divided by the number of outstanding shares. If a company has high earnings per share, investors may identify them as a profitable firm.

Book Value

Investors may use the price-to-book ratio to identify high-growth companies that are undervalued. While the book value of a company is the total number of assets minus total liabilities, you can calculate the P/B by taking the market price of a company’s stock and dividing by the book value of equity. If a company has a low P/B ratio, it’s viewed as undervalued.

Dividend Yield

The dividend yield is the relationship between a company’s dividend payments and stock price. To calculate the dividend yield you will divide the annual dividend by the current stock price. You can then compare one company’s dividend yield to another. Investors may select companies with higher dividend yields if they are seeking to invest in companies with high dividend payments.

Return on Equity (ROE)

Essentially, the return on equity (ROE) reveals the company’s efficiency at turning shareholder investments into profits. ROE takes the net income from a firms’ income statement and the shareholders’ equity from its balance sheet. Therefore, if a company liquidates its assets to pay off debt, ROE is the amount that’s left over for shareholders.

Risk mitigation refers to the process of planning and developing methods and options to reduce threats or risks to project objectives. A project team might implement risk mitigation strategies to identify, monitor and evaluate risks and consequences inherent to completing a specific project, such as new product creation. Risk mitigation also includes the actions put into place to deal with issues and effects of those issues regarding a project.

Strategies:

1. Risk Acceptance: Risk acceptance comes down to “risking it.” It’s coming to terms that the risk exists and there is nothing you will do to mitigate or change it. Instead, it understands the probability of it happening and accepting the consequences that may occur. This is the best strategy when risk is small or unlikely to happen. It makes sense to adopt risk when the cost of mitigating or avoiding it will be higher than merely accepting it and leaving it to chance.
2. Risk Avoidance: If a risk from starting a project, launching a product, moving your business, etc. is too large to accept, it may be better to avoid it. In this case, risk avoidance means not performing that activity that causes the risk. Managing risk in this way is most like how people address personal risks. While some people are more risk-loving and others are more risk-averse, everyone has a tipping point at which things become just too risky and not worth attempting.
3. Risk Mitigation: When risks are evaluated, some risks are better not to avoid or accept. In this instance, risk mitigation is explored. Risk mitigation refers to the processes and methods of controlling risk. When you identify risk and its probability, you can allocate resources for management.
4. Risk Reduction: Businesses can assign a level at which risk is acceptable, which is called the residual risk level. Risk reduction is the most common strategy because there is usually a way to at least reduce risk. It involves taking countermeasures to decrease the impact of consequences. For example, one form of risk reduction is risk transfer, like that of buying insurance.
5. Risk Transfer: As mentioned, risk transfer involves moving the risk to another third party or entity. Risk transfers can be outsourced, moved to an insurance agency, or given to a new entity as is what happens when leasing property. Risk transfers don’t always result in lower costs. Instead, a risk transfer is the best option when it can be used to reduce future damage. So, insurance can cost money, but it may end up being more cost-effective than having the risk occur and being solely responsible for reparations.

Risk Evaluation

Identification: First and foremost, you must identify and define the types of risks that your business faces. There are both internal and external risks. When identifying risks, consider if they are preventable, such as operational risks, or not avoidable like natural disasters.

Impact assessment: Once you have identified risk, you can estimate their impact. This involves defining the probability that a risk will occur and its respective result or consequence.

Develop strategies: Finally, you can determine the necessary strategy for those risks that are likely to happen with medium or high probability. While you may still want to monitor low risks, they are less of a priority when it comes to taking the next step and making a plan.

The method of calculating break-even point of a single product company has been discussed in the break-even point analysis article. A multi-product company means a company that sells two or more products. The procedure of computing break-even point of a multi-product company is a little more complicated than that of a single product company.

The determination of the break-even point in CVP analysis is easy once the variable and fixed components of costs have been determined.

A problem arises when the company sells more than one type of product. Break-even analysis may be performed for each type of product if fixed costs are determined separately for each product.

However, fixed costs are normally incurred for all the products hence a need to compute for the composite or multi-product break-even point.

In computing for the multi-product break-even point, the weighted average unit contribution margin and weighted average contribution margin ratio are used.

BEP in units  = Total fixed costs / Weighted average CM per unit

BEP in dollars = Total fixed costs / Weighted average CM ratio

The weighted average selling price is worked out as follows:

(Sale price of product A × Sales percentage of product A) + (Sale price of product B × Sale percentage of product B) + (Sale price of product C × Sales percentage of product C) + …….

and the weighted average variable expenses are worked out as follows:

(Variable expenses of product A × Sales percentage of product A) + (Variable expenses of product B × Variable expenses of product B) + (Variable expenses of product C × Sales percentage of product C) + …….

When weighted average variable expenses per unit are subtracted from the weighted average selling price per unit, we get weighted average contribution margin per unit. Therefore, the above formula can also be written as follows:

Breakeven Point = Total fixed expenses / Weighted average contribution margin per Unit