AAT Level 4 Internal Accounting Systems & Controls (INAC) Chapter 1 PDF

**[AAT Level 4 -- Internal Accounting Systems & Controls (INAC)]** **[Chapter 1 -- The Accounting Function]** **[The Accounting Function]** What is the main role of the accounting function of a business -- to provide a service to the other departments in the organisation, both receiving informati...

**[AAT Level 4 -- Internal Accounting Systems & Controls (INAC)]** **[Chapter 1 -- The Accounting Function]** **[The Accounting Function]** What is the main role of the accounting function of a business -- to provide a service to the other departments in the organisation, both receiving information from, and providing information to different functions within the organisation **[Examples of the services provided by the accounting function:]** - Financial accounting - Checking expenses - Petty cash claims - Internal audit - Calculation and payment of wages - Reference checks - Completion of forms and returns - Information provided to other departments to aid decision making **[Management Information]** Management information -- any information used by management to enable them to fulfil their role Internal information -- information received from departments within the organisation External information -- information received from sources outside of the organisation **[Organisational requirements]** There are no set requirements for management information, it varies from business to business (different businesses need different information to operate effectively) What determines the organisational management information requirements: - The size of the organisation - The organisations strategic goals - Legislation and regulation What is the purpose of management information -- to assist management in fulfilling their three main purposes What are managements three main purposes -- planning, control and decision making Accounting information is a source of management information which helps with these purposes **[Planning]** What does planning involve -- looking into the future to plan the operations of the organisation, using information from past, present and forecast. The planning stage includes the preparation of budgets **[Control]** What does control involve -- making comparisons (usually periodically) between the budget and the actual achievements of the organisation Control allows a business to see whether corrective action is necessary to pull their performance back on track Who is control most useful for -- departmental managers and decision makers **[Budgetary Control Reports]** Budgetary control report -- a report that is used to report on budgets, actual performance, commitments and variances against budgets In a budgetary control report, detailed expenses can be summarised into broader headings (such as travel, equipment etc) **[Decision Making]** Decision making -- managers making decisions on how to achieve the organisations goals, and what the strategic direction will be, as well as decisions about the day-to-day running of the business **[Types of decision]** - Long Term Decision -- a decision made by management that assists with the organisations strategic goals. These decisions are about the whole organisation, and will consider reaching goals within 5-10 years - Short Term Decision -- a decision made by management which will assist with the day-to-day running of the business Examples of long term decisions: - Which market to operate in - What products to sell Examples of short term decisions: - Which suppliers to use - What selling prices to charge Short term goals help towards reaching the longer-term goals **[Performance Indicators]** **[Profit Margins]** Gross Profit Margin = [Gross Profit] x 100 Revenue Operating Profit Margin = [Operating Profit] x 100 Revenue What can comparing changes gross and operating profit margins allow us to establish -- whether the changes in margins are direct or caused by overheads What is the main use of profit margins -- for setting selling prices that can cover costs **[Return on Capital Employed (ROCE)]** ROCE = [Operating Profit] x100 Capital Employed What can capital employed be substituted for -- TALCL, which is total assets, less current liabilities What does ROCE measure -- how much profit is generated for every pound of assets employed, which is essentially how efficiently the company uses its assets Different industries have different benchmark rates for ROCE Why is ROCE known as the primary ratio -- as it is the only ratio that compares profits to overall business size **[Current Ratio]** Current Ratio = [Current Assets] Current Liabilities How is this usually shown -- as a ratio (i.e. 2:1 or 3:1) What does the current ratio measure -- the liquidity of the organisation, by showing how many times the current liabilities are covered by current assets Different industries have different characteristics, so there is no 'normal' current ratio, however comparison with other companies in the same industry will be helpful **[Quick Ratio]** Quick Ratio = [Current Assets -- Inventory] Current Liabilities What is the quick ratio known as -- the acid test Why is the quick ratio seen as superior to the current ratio -- because it removes inventory, which may not be a liquid asset as it can take time to sell and convert to liquid cash **[Inventory Holding Period]** Inventory Holding Period = [Inventory] x 365 Cost of sales What does this show -- the number of days on average that inventory is held before it is sold What do you need to do if the opening and closing inventory figures are available -- use the average inventory value. If both are not given, you need to use closing inventory Inventory holding period varies greatly depending on the industry **[Alternate Approach -- Inventory Holding Period]** What is the alternate approach to showing inventory holding period -- showing it as the number of times per year that the inventory is turned over Number of times inventory is turned over per year = [Cost of sales] Average Inventory **[Receivables Collection Period]** Receivables Collection Period = [Trade Receivables] x 365 Sales Revenue What do you need to do if the opening and closing receivables figures are available -- use the average receivables value. If both are not given, you need to use closing receivables Technically, the sales revenue figure should only include credit sales, but this information may not be available What does this ratio show -- the average number of days customers take to pay Receivables collection period varies greatly depending on the industry What can we compare receivables collection period to - the company's credit terms **[Payables Payment Period]** Payables Payment Period = [Trade Payables] x 365 Cost of sales What do you need to do if the opening and closing payables figures are available -- use the average payables value. If both are not given, you need to use closing payables Technically the cost of sales figure should only be credit purchases, but as with credit sales, this information is not always available What does this ratio show -- the average number of days the business takes to pay their suppliers Payables payment period varies greatly depending on the company What can we compare payables payment period to - The credit terms extended to the company - The receivable days (to ensure that we are not paying payables significantly earlier than we are receiving receivables) **[Gearing]** Gearing = [Non-current Liabilities] x 100 Equity + Non-current Liabilities What does this ratio show = the percentage of debt to the total financing What does high gearing mean: - There will be less profit available to distribute to shareholders, as the profit will be reduced by high interest charges on lending - Lenders will be less likely to want to lend the company more money **[The Characteristics, Sources and Categories of Information]** Management information needs to be ACCURATE **[ACCURATE Mnemonic]** Accurate Complete Cost-effective Understandable Reliable Accessible Timely Easy to use Accurate -- information which is as accurate as is required by the user Complete -- information which is whole and not missing any important information Cost-effective -- ensuring that the benefits outweigh the cost of providing the information, sometimes we may be able to get more accurate information, but it may cost more such that it is not cost-effective Understandable -- information which is well presented, and includes language that is understandable for the user Reliable -- often determined by the source of the information, and determines whether we can fully trust that the information provided is correct Accessible -- the user should be able to access the information in the required level of detail Timely -- information must be provided in a timely manner for decisions to be made, using up-to-date information Easy-to-use -- information which presented in a simple format, allowing for understanding by non-financial users **[Data vs Information]** Data -- raw, unprocessed facts Information -- data which has been processed such that it is now meaningful for decision making **[Primary vs Secondary Data]** Primary data -- information which is collected specifically for your own purpose Secondary data -- information which is not collected specifically for your purpose, but for someone else or for another reason Benefits of primary data over secondary data: - It is more accurate and specific for our needs Benefits of secondary data over primary data: - It is cheaper to obtain - It is timelier for large volumes of data which may be difficult to collect (such as information collected by the government) **[Internal vs External Information]** Internal Information -- information gathered within an organisation External Information -- information gathered from outside an organisation **[Management Accounting & The Financial Function ]** There are three types of accounting that we are concerned with: - Financial Accounting - Cost Accounting - Management Accounting Financial Accounting -- the recording, summarising and presentation of financial information When is financial accounting required -- for preparation of statutory accounts, and to enable control of payables and receivables Financial accounting provides information to both internal and external stakeholders Cost Accounting -- the recording and preparation of information on the costs incurred within an organisation When is cost accounting required -- when setting sales prices, determining what products to produce, or for cost control Management accounting -- the production of financial reports to assist managers with their planning, control and decision making roles What can management accounting involve -- preparing budgets (planning), performance review/appraisal (control) and decision making **[Information Received by the Finance Department]** What information could HR send to finance: - Details of new employees - Employee working hours, salary - Employee overtime and benefits, including the rate at which they are paid What is this information used for by finance - to prepare the payroll, produce labour cost budgets and determine what labour hours are available What information could the sales department send to finance: - Notice of when a sale has been made - Total sales volumes How does finance use this information -- they raise sales invoices whenever a sale has been made, and chase for payment when it falls due. This also helps with calculating total sales figures which can be used to determine closing inventory of finished goods What information could the production department send to finance: - Amount of raw materials used - Number of labour hours worked - Volume of units produced How does finance use this information -- they establish costings, which can be compared to budgets. They can also establish closing inventory of raw materials **[Responsibility Centres]** What is a responsibility centre -- a part of a business for which information can be obtained, and performance can be measured, where a manager is responsible for planning, control and decision making in that responsibility centre The different types of responsibility centres: - Cost centre - Revenue centre - Profit centre - Investment centre Cost centre -- a department or location for which only costs can be identified Revenue centre -- a department or location for which only revenues can be identified Profit centre -- a department or location for which both costs and revenues can be identified, so it is possible to establish the profit generated Investment centre -- a department or location for which costs, revenues and investments can be identified, such that the department runs the centre as a business of its own Managers will be held responsible for the performance of their centre, but not beyond their powers (i.e. a manager of a cost centre cannot be held accountable for declining sales) **[Contribution to business objectives]** Accounting, payroll and other financial functions provide financial information to all functions within an organisation What are the three main areas that this information helps the organisation achieve: - Running smoothly and efficiently - Compliance with legislation and regulation - Manages its working capital and cash position effectively **[Efficiency]** Cost accounting information supplied timely and accurately will help with efficient use of an organisations' resources Benefits of efficient resource usage - Increased productivity - Reduced costs - Increased profitability - Improved customer experience **[Legislation]** Why is it important for a business to comply with legal and regulatory framework -- to avoid penalties, and to protect the organisations reputation The finance function provides information to ensure that the business complies with this legislation **[Management of Cash]** What is cash management also known as -- solvency **[Working Capital]** What is working capital -- the day-to-day financing of an organisation which is used to keep the business running smoothly What does working capital include: - Inventory (stock) - Receivables (debtors) - Payables (creditors) - Bank & cash **[Managing Working Capital]** What policies can we use to manage our working capital position: - Credit periods offered to customers - Credit control (chasing customers for payment) - Levels of inventory held - Payments to suppliers and credit periods taken - Overdrafts - Investments **[Smooth Running of the Business]** How does inventory management contribute towards smooth running -- ensuring that inventory is effectively managed ensures that the business does not run out of materials (for production), or finished goods (in case of an order) How does planning contribute towards smooth running -- planning the number of products to be made ensures that the business makes the best use of its resources How do procedures contribute towards smooth running -- establishing procedures for authorisation with responsibility assigned gives staff clear instructions on who they need to go to for authorisation How does costing contribute towards smooth running -- It ensures that costs are covered by the selling price, enabling the business to be profitable. **[Overview of the Payroll Function]** Payroll -- the department responsible for calculation of employees' wages, and ensuring payments to employees and HMRC **[Gross Pay & Deductions]** Gross Pay -- the initial wage calculation, before any deductions have been made **[Deductions]** Compulsory Deductions: - Income Tax (PAYE) - National Insurance Contributions (NICs) Voluntary Deductions: - Trade union fees - Pension contributions - Saving schemes Payment of income tax and national insurance (including employee and employer contributions) is paid to HMRC periodically Net Pay -- the net sum after all deductions, which will be paid to each employee How can employees be paid: - Cash - Cheque - Bank Transfer **[Payroll Accounting Procedures]** What information does payroll provide to the accounting function -- details of gross pay and deductions to ensure that the payroll cost is recorded in the accounts correctly Payroll receives information from many functions of the business (e.g. HR will give them information of new employees) **[AAT Level 4 -- Internal Accounting Systems & Controls (INAC)]** **[Chapter 2 -- Organisational Structure & Stakeholders]** **[Types of Organisations]** **[What are the two broad categories of organisations:]** - Public sector organisations - Private sector organisations Public Sector Organisations -- organisations that are controlled or run directly by the state, and mainly provide a service to the community **[Examples of public sector organisations:]** - Education - NHS - Tax Administration Services - Policing - Defence Private Sector Organisations -- organisations that are privately owned, either by an individual, or multiple individuals, and can vary from sole trade organisations to multinational corporations What types of business structures can be private sector organisations: - Sole traders - Partnerships (including LLP's) - Private Limited Company (Ltd) - Public Limited Company (Plc) Where do public sector organisations receive their funding from -- the central government As a result of this, public sector organisations need to keep very tight control of their allocated budget Where do private sector organisations receive their funding from -- the owners/shareholders, or through loans taken from the bank (or equity markets) **[Not-for-profit Organisations]** Not-for-profit organisation -- an organisation formed with the intention of providing a benefit than making a profit (such as a charity) **[Cooperative]** Cooperative -- a business owned by its workers who share the profits **[Organisational Structure]** The size of an organisation will influence its structure, as some larger organisations have several departments, whereas smaller organisations may only have a couple What does organisational structure determine - Communication lines - Chains of command - Responsibilities - Teams Organisational chart -- a chart that can be drawn up for an organisation to highlight the links between individuals and departments, and enable the understanding of how the organisation fits together **[Centralised Control & Decentralised Control]** Centralised Control -- where key decisions are concentrated in one place, and are made by top levels of management, with little authority passed down through the organisation **[Advantages of Centralised Control ]** - Increased levels of control and co-ordination - Experienced people with an overview of the company make the decisions - Ensures that policies are consistent throughout the company - Ensures quick decisions can be made without consultation - Procedures (such as purchasing) can be standardised throughout the company, leading to economies of scale **[Disadvantages of Centralised Control]** - Centralisation reduces the level of input from day-to-day experts into the firms decision making. - Risks demoralising branch managers who may feel mistrusted or powerless to make their own decisions - Bureaucratic and led from the top Decentralised Control -- where key decisions are distributed and delegated away from top management to lower levels in the organisations' hierarchy **[Advantages of Decentralised Control]** - Reduces the stress and burdens on senior management - Empowers local managers, encouraging them to be more innovative and motivated - Subordinates may have better knowledge of local conditions for decision making - Middle management will be aiming to take over higher positions, so decision making will prepare them for this role - Faster decision making, as there is no need to get authority from higher management before making decisions, which can be beneficial in a rapidly changing environment **[Disadvantages of Decentralised Control]** - Reduces the levels of uniformity in the organisation which may unsettle customers who expect consistency throughout divisions - Head office will be able to see the big picture when making decisions, so decisions made by higher levels of management may be more profitable than low level management - Duplication of roles across the organisation **[Scalar Chain & Span of Control]** Scalar Chain -- refers to the chain of command from the top of the organisation to the bottom, and is defined as the number of layers of management from the top of to the bottom of the organisation There are two different types of organisational scalar chain models: - Tall organisation - Flat organisation **[Tall Organisations]** Tall Organisation -- an organisation that has a large number of layers in the hierarchy **[Features of a tall organisation]** - Has more managers with a narrow span of control - Can suffer from having too many managers - Expensive to run - Decisions can take a long time to reach the bottom of the organisation - Good opportunities for promotion due to the number of layers in the hierarchy - Managers do not have to spend as much time managing staff due to the narrow span of control Example of a tall organisation -- the banking industry, which needs many levels of management to adhere to all the banking regulations **[Tall Organisation Diagram]** **[Flat Organisation]** Flat Organisation -- an organisation that has a small number of layers in the hierarchy Features of a flat organisation - Relatively few managers, each with a wide span of control - Quick decision making, as there are only a few layers of management - More susceptible to fraud or error Example of flat organisation -- the pharmaceutical industry **[Flat Organisation Diagram]**  **[Span of Control]** Span of control -- the number of subordinates that each manager has under their control (e.g. if a manager has 3 subordinates, the span of control is 3) Wide span of control -- where managers have a lot of subordinates under their control Narrow span of control -- where managers have only a few subordinates under their control **[What Influences Span of Control (and how)]** - The ability of the individual as a manager -- the more experienced the manager is at controlling staff, then the more subordinates they can manage - The geographic location of the subordinates -- if subordinates are dispersed across a large area, then meetings would have to be conducted virtually (or travel would be required), meaning that it is harder for the manager to supervise these subordinates, so they would manage less subordinates at once - The level of supervision needed -- if high levels of supervision are needed, then each manager will only be able to manage a couple of subordinates at any one time, however, if the staff require less supervision, a manager may be able to manage more of them at once. - The type of product being made -- products which are easy to make or deliver will require less supervision (hence a wider span of control) than products which are complex to make What span of control do tall organisations typically have -- narrow span of control What span of control do flat organisations typically have -- wide span of control **[Advantages of Wide Span of Control]** - Fewer layers of management to pass a message through, so the message will reach more employees faster - It costs less money to run a wider span of control because the business does not need to employ as many managers - Managers delegate more, as there are more subordinates, which reduces the tendency to over-supervise **[Advantages of Narrow Span of Control]** - Managers can communicate quickly with the employees under them because there are fewer subordinates - Controlling staff is easier as less time is taken up with routine problems and supervision - Feedback of ideas from the workers will be more effective as small groups encourage more participation - Less management skill required (as there are less subordinates) **[Organisational Culture]** There are many theorists who have described and explained the different cultures present within organisations **[The Charles Handy Theory of Four Organisational Culture Styles]** What are the four styles that he defined: - Power Culture - Role Culture - Task Culture - Person Culture Power Culture -- a culture that concentrates power among a small group (or a central figure), with control radiating from the centre. Power cultures only need a few rules and little bureaucracy Role Culture -- authorities are delegated within a highly defined culture, where power derives from personal position. These cultures have strict and consistent systems and are very predictable. Task Culture -- a culture where teams are formed to solve particular problems. This culture uses a small team approach, where people are skilled in their own level of expertise, and power is derived from the team with the expertise to execute a task Person Culture -- formed where all individuals believe themselves to be superior to the organisation. This can be difficult to operate, since teams require like minded individuals, rather than sole focused individuals This information is useful to have in mind, but is unlikely to come up on this exam (comes from ACCA) Organisational structure shows reporting lines, and who is accountable to whom, creating a chain of command. These organisational charts can be used to establish lines of communication Who is typically at the top of the hierarchy -- Head office Alternate roles that may be at the top of the hierarchy - Board of directors - Managing director **[\ Stakeholders]** Internal Stakeholder -- an individual or group which affects, or can be affected by, the organisations actions **[Categories of internal stakeholder]** - Members of the board - Executive directors - Senior managers - Employees External Stakeholder -- an individual or group who are neither internal nor directly connected with the organisation, but are affected by/can affect the organisation **[Categories of external stakeholders]** - Government - Community The impact of stakeholders on an organisation depends on their levels of power and interest What is another name for external stakeholders -- secondary stakeholders **[Reasons for stakeholder groups being interested in the business]** **Shareholders, partners or proprietors -- they have interest due to their financial investment, and will be aiming to receive a return on their investment** **Directors/Managers -- they have interest due to the progression of their careers, growing remuneration packages and reputation** **Employees and Trade Unions -- they also have interest due to the progression of their careers, growing remuneration and reputation** **Customers -- they have interest in the continuity of goods being supplied to them** **Suppliers -- they have interest in the continuity of custom, as well as prompt payment, and the sales of the items that they supply** **Lenders -- they have interest in the return on their investment (for the money that is lent). They are also interested since their funds are at risk if the company goes bankrupt** **Government -- they have interest in the welfare of employees, reasonable employment, and tax revenue** **The Local Community - they have interest in the national infrastructure used by the business, and the welfare of employees** **The Natural Environment -- interested in the environment shared by all** **[What are the three financial statements]** - **Statement of profit or loss** - **Statement of financial position** - **Statement of cash flows** **[AAT Level 4 -- Internal Accounting Systems & Controls (INAC)]** **[Chapter 3 - Sustainability]** **[Importance of an ethical approach to sustainability]** Professional accountants have public interest duties to protect society as a whole **[What privileges do accountants get from society]** - Higher pay than average - Better job security than average Why do accountants get these privileges -- because they possess skills which the average person does not, and for this reason, people are reliant on the work that they do For this reason, we owe it back to society to do work to the best of our ability, such that the work that we do can be relied upon by the public, and used to make financial decisions What does the accountants responsibility to act in the public interest include -- supporting sustainability and sustainable development, whilst considering the risks to society as a whole of not acting sustainably **[Sustainability (Key Definition)]** Sustainability -- an organisations responsibility to meet the needs of the present, without compromising the ability of future generations to meet their own needs **[Sustainable Development]** Sustainable development -- an organisation should develop its operations in a way so that it co-exists with society, rather than competes with it, in order that both have a future Organisations should put long-term future over short-term gains **[Corporate Social Responsibility (CSR)]** Corporate social responsibility -- the belief that companies are accountable for the social and ethical effects of their actions. CSR is the obligations that a company feels it has to the whole community, people, and organisations connected to it As accountants, we have a key role to play in running a business, so they must uphold these values **[Risks of Not Acting Sustainably]** - Using up scarce resources which causes price rises - Government intervention or legislation to protect the use of scarce resources - Fewer products being available in the future as they rely on resources that are no longer available - Damage to the environment, which is irreversible **[Responsibilities of Finance Professionals in Upholding the Principles of Sustainability]** Duties of Finance Professionals Triple Bottom Line Bottom line -- the profit that a company makes When promoting sustainability, a business should look at the triple bottom line, rather than just profit (single bottom line) **[What does the Triple Bottom Line involve]** - The Financial Aspect - The Social Aspect - The Environmental Aspect Triple bottom line accounting involves looking at all three of these aspects in all areas of work that we complete **[The Financial Aspect]** The financial aspect -- this involves ensuring that the business is a commercially viable organisation What does the financial aspect often look at -- ensuring that the company is profitable, ensuring that we have good relationships with customers and suppliers, and that we are always trying to make the company more efficient **[The Social Aspect]** The social aspect -- this involves being fair and beneficial to your employees and local communities What does the social aspect often involve -- considering the impacts on staff when making decisions **[The Environmental Aspect]** The environmental aspect -- this involves focussing on creating less pollution as an organisation, and reducing energy consumption What does the social aspect often focus on -- the long term management of resources, and energy efficient practices **[Responsibilities of Finance Professionals]** **[The 6 Key Responsibilities for Finance Professionals]** - Creating and promoting an ethics-based culture - Championing the need for sustainability - Evaluating and quantifying reputational and other ethical risks - Take social, environmental and financial factors into account - Promoting sustainable practices - Raising awareness of social responsibility **[How do finance professionals support these responsibilities:]** Creating and promoting an ethics-based culture -- management will need to support ethical practice, and discourage unethical practices **[What sort of behaviour should not be tolerated:]** - Money Laundering - Bribery - Terrorist financing - Fraud - Theft - Non-compliance with laws and regulations - Bullying - Short-term decision making Championing the need for sustainability -- finance professionals should retain their objectivity and ensure that promoting sustainability is consistent with their organisations' own policies and procedures Evaluating and quantifying reputational risk and other ethical risks -- if finance professionals see practice that could affect the reputation of the organisation, they need to report it to make management aware of the implications Take social, environmental and financial factors into account -- finance professionals need to consider the triple bottom line when making decisions, and they should demonstrate their commitment to CSR by looking at all factors involved Promoting sustainable practices -- finance professionals should promote sustainable practice, as well as promoting policies to develop ethical practice and stop illegal practice **[Examples of sustainable practices:]** - Products and services that minimise wastage - Treating customers fairly - Encouraging recycling - Providing safe and fair working environments for employees - Promoting the use of local employees - Treating suppliers fairly in terms of payment time - Sourcing goods locally - Environmental good practice (such as turning off lights and minimising pollution) Raising awareness of social responsibility -- finance professionals should be seen to be acting sustainably such that colleagues will follow suit, causing the whole organisation to act more sustainably **[Effect On Businesses]** **[Benefits of a sustainability strategy]** - Reduces energy costs - Adopting a well thought out sustainability strategy can give them a competitive edge over their competitors - Improves brand reputation and public relations - Increases customer and staff loyalty - Helps manage risk - Improves internal and external relationships Is sustainable practice and reporting mandatory -- not currently, however it may be in the future **[Sustainability Initiatives]** **[The three headings for how businesses can act sustainably:]** - Environmental - Economic - Social **[Environmental]** **[The Three R's of environmental sustainability:]** - Recycle - Reuse - Reduce How can recycling be implemented -- by purchasing supplies that are made from recycled materials, or by making the product that we are producing recyclable Recycling can also help reduce waste disposal costs How can reusing be implemented -- by transferring resources that are no longer needed in one department to another for reuse What can we reduce to improve our environmental sustainability -- power usage, paper usage, water usage etc **[Economic]** Economic sustainability -- strategies and plans that make it possible to use available resources to their best advantage The idea is to promote the use of those resources in a way that is both efficient and responsible, and likely to provide long-term benefits What does economic sustainability consider (and why) - Pricing policies -- to ensure that all products are priced at a sustainable level - Investment -- for business growth - Reputation **[Social]** Social sustainability -- considering how a business manages its Corporate Social Responsibility (CSR) CSR -- the extent to which a company makes a positive impact on the community and environment in which it operates **[The Accountants Role]** How can finance and its staff help support the business on its sustainability strategy: - Get involved with the design, operation, and monitoring of purchasing policies, standards and management systems for suppliers - Supporting relations with customers, suppliers and shareholders to ensure readily accessible and reliable information - Identifying voluntary environmental or social codes, and integrating them into the business - Providing relevant and reliable information in accessible, meaningful and comparable ways, to enable decision making - Providing effective support for businesses affected by environmental issues **[AAT Level 4 -- Internal Accounting Systems & Controls (INAC)]** **[Chapter 4 -- Ethical Values]** **[Ethics]** What is ethics fundamentally about -- the difference between right and wrong, and more specifically, how one acts with regards to one's personal, business and professional relationships with others Ethics can often be used interchangeably with morality What is the difference between ethics and morals -- ethics does not provide rules like morals, but ethics can be used as a means to determine moral values **[AAT Ethical Guidelines]** What is the AAT's fundamental ethical principles called -- AAT Code of Professional Ethics The decisions you make in the everyday course of your professional lives has real ethical implications **[Therefore, what does this code do:]** - Sets out the required standards of professional behaviour with guidance to help you achieve them - Helps you protect the public interest - Helps you maintain the AAT's good reputation **[Characteristics of the AAT Code of Professional Ethics:]** - Sets out fundamental principles which members must follow - Provides a conceptual framework which members must apply to enable them to evaluate threats to compliance with the fundamental principles, and to respond appropriately - Provides guidance and illustrations on how to apply the conceptual framework in practice, both generally, and in specific problem situations Is the conceptual framework rules based -- no, it is not rules based, it is just a guide which members must apply to their scenarios **[The Fundamental Principles]** - Integrity - Objectivity - Professional Competence and Due Care - Confidentiality - Professional Behaviour **[Fundamental Principles -- Definitions:]** Integrity -- a member shall be straightforward and honest in all professional and business relationships Objectivity -- a member shall not allow bias, conflict of interest, or undue influence of others to override professional or business judgements Professional competence and due care -- a member has a continuing duty to maintain professional knowledge and skill at the level required to ensure that a client or employer receives competent professional service based on current developments in practice, legislation and techniques. A member shall act diligently and in accordance with applicable technical and professional standards when providing professional services Confidentiality -- a member shall, in accordance with law, respect the confidentiality of information acquired as a result of professional and business relationships, and not disclose any such information to third parties without proper and specific authority, unless there is a legal or professional right or duty to disclosed. Confidential information acquired as a result of professional or business relationships shall not be used for the personal advantage of the member or third parties Professional behaviour -- a member shall comply with relevant laws and regulations and avoid any action that brings our profession into disrepute **[The AAT's Guidelines -- 3 Reasons for an accountant behaving ethically:]** - Compliance with law and regulation - Maintain the reputation and standing of the AAT - Protection of public interest **[The AAT's Guidelines -- The Objectives of the Accountancy Profession:]** - The mastering of particular skills and techniques acquired through learning and education, maintained through continuing professional development (CPD) - Development of an ethical approach to work, as well as to employers and clients - Acknowledgement of duties to society as a whole, in addition to duties to the employer or client - An outlook which is essentially objective, obtained by being fair minded and free from conflicts of interest - Rendering services to the highest standards of conduct and performance - Achieving acceptance by the public that members provide accountancy services in accordance with those high standards and requirements Following these objectives help the AAT member to behave in an ethical manner **[Business Situations]** Working in a finance role can create some specific ethical issues that we need to deal with **[Fraud]** Fraud -- deliberately depriving somebody of something that is theirs by way of deliberate deceit The Two Most Common Frauds in Business - Misappropriation of assets - Intentional misrepresentation of the financial statements Fraud is illegal, and those found guilty could face legal proceedings and imprisonment **[Financial Statements]** What is the requirement for information presented in financial statements -- it must be presented fully, honestly and clearly, and the true nature of the transactions must be shown and properly prepared in accordance with accepted accounting practice A member must ensure that they have sufficient technical knowledge to prepare financial statements **[Confidential Information]** Why do accountants need to withhold confidentiality -- as they have a wide range of information which is not in the public domain, so this information must be protected as it is commercially sensitive We must follow ethical guidelines to ensure we don't disclose information that we do not have authority to disclose **[Conflict of interest]** One of the key parts of being objective is to ensure that you are -- independent How must AAT members be independent -- in both mind and appearance Independence and objectivity may be difficult if we have a conflict of interest, so we need to make sure that our business has policies and procedures in place to minimise conflicts of interest, and threats to independence **[Threats to Independence (including definitions)]** - Gifts -- accepting gifts and hospitality from those who you are working for - Financial interest -- if you have interest in how the client is performing (i.e. you hold shares in the client) - Familiarity -- having a client that you have been preparing financial statements for, for many years, or working for someone who you are closely connected to - Conflict of interest -- working for clients who are in competition with one another - Intimidation -- there may be pressure from an external or internal party which affects decisions **[Confidentiality]** What is the general rule regarding confidentiality for accountants -- unless written permission is obtained from the client, members must not disclose information about clients' affairs **[When is confidential information allowed to be disclosed:]** - When disclosure is permitted by law, and is authorised by the client or employer - When disclosure is required by law - Where there is a professional duty or right to disclose, which is in the public interest, and not prohibited by law **[Protecting Confidentiality]** What steps may be taken in an organisation to protect confidentiality: - Clearing desks, and not leaving information on view - Shredding paperwork - Passwords - Locked cabinets - Having a separate meeting room - Having clearly defined policies and procedures - Staff training on importance of maintaining confidentiality **[Dealing With Ethical Issues]** What is a self-interest threat -- a threat that arises where as an accountant, you have an interest in the client or transaction that you are working on, which may cause you to not act properly What is a self-review threat -- a threat that arises when you are reviewing your own work What are the problems with reviewing your own work: - You may not review it properly as you think you have already done it correctly - If you find a mistake you do not admit to it and try to cover it up What is a familiarity threat -- a threat that arises where you do work for someone who you are closely connected to, through family or a business relationship What are the problems that may arise due to familiarity: - You can be too trusting of the responses given - You might not spend enough time applying professional scepticism to the information given What is an intimidation threat -- a threat that arises when you are pressured into doing something, or acting in a way that is not consistent with ethical principles What is an advocacy threat -- a threat that arises when you speak up on behalf of someone else, and you are seen to be promoting them or their business. When this happens, people would not believe that you would ever say anything negative about the client, so wouldn't trust your opinion **[Maintaining a Professional Distance]** What does an accountants duty to maintain a professional distance refer to -- the accountant must keep an appropriate distance between their work and personal life at all times, known as being independent It is not enough for a member providing assurance services to be independent, they must also be seen to be independent (in mind and appearance) Independent in mind -- the member being objective and ensuring that work they conduct is free from bias or prejudice Independent in appearance -- the member must avoid situations where a reasonable and informed observer could question your ability to be objective, or to apply professional scepticism **[Gifts and Hospitality]** Accepting gifts or hospitality from work colleagues, clients, or any party connected to your firm, could be seen as a threat to objectivity What is the danger with accepting gifts -- the gift could be seen as an attempt to influence a decision you are making Because of this, gifts and hospitality should be declined as a general rule (although small gifts are acceptable) **[Importance of adhering to organisational and professional values, codes of practice and regulations]** What are the key purposes of having an ethical code for accountants: - To set out the required standards of professional behaviour and how to achieve them - Maintain the reputation of the professional bodies - Protect the public interest The ethical guideline are principles based, so do not cover every specific situation that may be encountered **[Key Values -- Expected in an Ethical Organisation:]** - Transparency with customers and suppliers - Reporting financial and regulatory information clearly and on time - Being open and honest by identifying when it is appropriate to accept gifts and hospitality - Paying suppliers a fair price and on time - Providing fair treatment to employees **[Internal Codes of Practice]** The AAT's ethical code is a framework of guidance for accountants In addition to this guidance, many organisations have their own code of business ethics to outline the benchmarks of ethical behaviour expected These codes help inform employees of the organisation so that they can make correct decisions, and ensures that all employees act in a similar manner Should internal codes be statutory or non-statutory -- non-statutory, as these codes are not legally binding **[AAT Level 4 -- Internal Accounting Systems & Controls (INAC)]** **[Chapter 5 -- Internal Controls]** [ ] **[Internal Control]** Internal controls -- the policies and procedures that are put in place to help an organisation accomplish its goals **[What are the 5 main reasons why internal controls are needed:\ ]** - **Facilitate Operations -- policies that ensure the smooth running of the business, making the structure of the organisation and the decision making process clear** - **Safeguard Assets -- controls to help safe guard both physical assets (machinery) and intangible assets (reputation etc)** - **Prevent and Detect Fraud -- controls to ensure that fraud doesn't take place, and also to detect fraud if it ever does occur** - **Ensure Quality of Reporting -- procedures to ensure the accuracy of information contained in both internal and external reports** - **Compliance -- controls to ensure that the organisation complies with all different laws and regulations** **What are the common policies and procedures that are present in most organisations:** - Maintenance of accounting records - Ordering supplies or services - Authorising payments - Writing cheques and signing off BACS payments - Handling of cash **Control Environment** What is the control environment -- an environment that is formed by the attitudes, awareness and actions of management and those responsible for ensuring that the internal controls meet the organisation's needs **What are the characteristics of a good control environment:** - Management integrity - Communication of management - Communication of ethical behaviour - Policies and standards on the organisations ethical policies - Control structure of the organisation - Human resource policies - Providing training **[Risk Assessment]** Risk assessment -- the process of identifying risks within the organisation When doing a risk assessment of a work related scenario, you need to consider: - The objectives of the company - The risks involved - What controls are in place, and whether they are sufficient - Whether any recommendations can be put forwards to improve controls **[Control Activities]** What are control activities -- the things that a business does to ensure that there are adequate controls in place to protect the organisation from fraud or error **[There are a number of controls that can be put in place:]** - Performance Reviews - Information Processing - Physical Controls - Segregation of Duties - Monitoring Controls Performance reviews -- involves comparing actual results to the budget, usually using ratio analysis Information processing -- involves approval and control of documents by appropriate people, arithmetical accuracy checks, ensuring that all accounts reconcile Physical Controls -- involves ensuring the physical security of assets (i.e. locking away petty cash etc) Segregation of duties -- involves ensuring that more than one person is involved in each transaction to deter fraud Monitoring Controls -- involves monitoring all controls to ensure that they are working properly, and to ensure that remedial action is taken where errors are identified **[Computerised System Controls]** What can computerised system controls be broken down into: - Application controls - General controls Application controls -- controls relating to manual or automated procedures relating to processing of transactions, specific to each application Examples of application controls -- initiating automated transactions, and checking on completeness and accuracy at all stages using exception reports General controls -- controls relating to the overall system and covers all applications Examples of general controls -- limiting system access, rotation of passwords, backups of data **[Organisation Types]** Different types of internal controls suit different types of organisations How does the size of the organisation impact the controls that are required -- larger organisations have more staff, so it can be hard to monitor who is doing what, therefore more formal controls are needed in larger organisations compared to smaller organisations, which can be monitored easier What does the nature of an organisation refer to -- whether the business is cash-based, credit-based or online How does the nature of the organisation impact the controls that are required -- cash based businesses will require more physical controls, whereas online businesses will require more IT controls, so the type of control depends on what the businesses nature is. Controls should be tailored to the unique risks faced by each business **[Limitations of Controls]** Even the best control systems can only provide reasonable assurance that the financial statements can be relied upon **[Inherent Limitations of Control Systems]** - Human error -- we may not be conscious in our operation of the control system due to stress, tiredness, which will impact the effectiveness - Collusion -- control systems do not account for the risk of two or more people attempting to commit fraud against the company by getting around the controls **[Terminology]** Control objective -- the aim of the control, i.e. what it is trying to ensure or prevent from happening Risk -- the condition that exposes a company to danger Control procedure -- the action that is taken to mitigate the risk that the control objective is not met **[AAT Level 4 -- Internal Accounting Systems & Controls (INAC)]** **[Chapter 6 -- Fraud]** [ ] **[Fraud]** Fraud -- a deliberate act of deception to deprive someone of something that is rightfully theirs Fraud can be defined broadly in many ways, such as an act of deception, something false, or a person who acts deceitfully to gain an advantage What types of fraud are most common in the commercial organisation -- misappropriation of assets & misrepresentation of the financial statements **[Reasons for fraud growing over recent years:]** - Organisations becoming more complex - Increasing speed of modern computerisation - Fraud has not been dealt with appropriately in the past - Understaffing of internal audit - Some fraud levels being accepted as a cost of doing business - Ineffective/outdated internal controls - Aggressive accounting practices - High staff turnover **[Common Fraud Types]** Misappropriation of funds -- this essentially means theft **[What are the two types of misappropriation of funds:]** - Monetary Fraud - Inventory Fraud Monetary Fraud -- where cash can be stolen by employees, third parties, or both. This often involves altering of accounting records to cover up the theft Inventory Fraud -- where physical inventory items can be stolen, and the misstatement of inventory records covers up the theft. When is inventory fraud most common -- when the inventory is easily portable and valuable (such as jewellery or technology) Misappropriation of funds often involves collusion Collusion -- an agreement between two or more parties to limit open competition by deceiving, misleading or defrauding others of their legal rights, or to obtain an advantage illegally by defrauding or gaining an unfair advantage Collusion often involves illegal scenarios, hence is kept secretive Collusion in the competitive market -- where firms in the market agree to divide the market between them, set prices, limit production and opportunities to make it difficult for new firms to enter the market (often an oligopoly) **[Examples of collusion between employees and third parties]** - Receiving commission from a supplier - Intimidation from third parties to disclose information or to process inappropriate transactions - Related party transactions, where an employee or officer has an undisclosed financial interest in a transaction **[Misstatement of Financial Statements]** What is this often known as -- false accounting Misstatement of financial statements -- destroying, defacing, concealing or falsifying any account, record or document for accounting purposes This can be a one off misstatement or a continuous ongoing misstatement What is the main aim when firms misstate financial statements -- to make the results of the organisation seem better than they actually are How are statements often misstated -- by overstating assets or understating liabilities, either through fictitious transactions or time-based fraud Time-based fraud -- where transactions are recorded in the incorrect period There are often commercial pressures to report unrealistic levels of earnings, which can take precedence over fraud prevention controls **[The Fraud Triangle]** What is the fraud triangle used for -- to explain the reasons behind an individual's decision to commit fraud **[What are the three sections of the fraud triangle:]** - Opportunity - Motive/Pressure - Rationalisation **[Opportunity]** Opportunity -- the chance to commit fraud without being caught **[Examples of opportunity:]** - Where there is a lack of supervision - Where the supervision is ineffective - If violations aren't monitored - If there are no consequences for violations - If it is unlikely that controls will pick it up **[Motive/Pressure]** Motive/Pressure -- where otherwise trustworthy employees may be tempted to commit fraud with the right motivation **[Examples of motive/pressure:]** - Survival, where the employee does not have enough money to pay bills - Where there is status pressure to keep up with peers' earnings and spending - A partner's job loss, or a surprise bill leaving them out of pocket - If the employee is denied a promotion/pay rise they may feel wronged **[Rationalisation]** Rationalisation -- even with the opportunity and motivation to commit fraud, most employees will not, unless they can justify it to themselves that the fraud is okay, or if they can convince themselves that it is a victimless crime. This justification is called rationalisation Example -- if there is lots of stock in the warehouse, an employee may rationalise taking a box or two as the company will not miss them **[Impact on Internal Controls]** How does the fraud triangle help businesses prevent fraud -- if they can understand why people commit fraud, they can take steps to minimise these risks What element of the fraud triangle can the business directly influence (and how) -- opportunity, because the business can strengthen controls to prevent opportunities for fraud arising How to minimise the risk of motive and rationalisation -- by encouraging a good corporate culture, where employees feel valued, fairly treated, and adequately remunerated **[Systemic Weaknesses]** What types of systemic weaknesses can leave an organisation vulnerable to fraud: - Lack of controls - Poor implementation of controls - Lack of monitoring - Lack of leadership **[Warning Signs]** Warning signs of fraud -- weaknesses or behaviour which may suggest that fraud may be an issue **[Warning Signs -- People:]** - Management dominated by one person/small group - High turnover of key accounting/financial personnel - Frequent changes of legal advisors, auditors etc - Heavily financial performance based remuneration packages - Excessive hours worked by key staff - Lack of delegation - Lack of policies regarding company values and behavioural standards - Failure to take holiday entitlement without good reason - Rumours or evidence about lifestyle or work style of employees - Company management does not take appropriate action in response to people disregarding policies/procedures/code of conduct **[Warning Signs -- Processes:]** - No checks to ensure that only appropriate employees are recruited - No checks to ensure that sales are only made to appropriate customers - Suggestions that internal controls are being overridden - Indications that internal financial information is unreliable - Continuing failure to identify internal control weaknesses - No enforcement of holidays and processes during holidays - Control of the business is given low priority - No checks over posting access to IT systems - Internal/external audit have raised concerns about the quality of financial or management reporting **[\ Warning Signs -- Profits]** - Unusual transactions that have a significant impact on earnings - Deteriorating quality of earnings - Unusually high or unexpected levels of profit or loss - Unusual transactions with related parties - Inadequate documentation about a client or transaction - If a significant amount of managements compensation is derived from bonuses - Management is under pressure to produce high levels of performance - Transactions where the profit is not consistent with the cash flow **[Employee Behaviour]** **[Employee-related fraudulent activities that take place within an organisation:]** - Falsely claiming to be off sick - Getting a workmate to clock on and off for you - Claiming for overtime not worked - Claiming for expenses not incurred An organisation should have controls to prevent and detect such fraud **[Reducing the Risk]** **[What is the 5 step process for fraud risk assessment:]** - Identify the risk - Evaluate the risk - Respond to the risk - Ensure compliance - Monitor, review and report **[Step 1 -- Identify the Risk]** What does this process involve -- identifying the specific threats to an organisation and identifying areas of weakness **[Step 2 -- Evaluate the Risk]** What does this process involve -- quantifying the severity of the risk of fraud, through one of multiple resources available **[What are the 3 risk evaluation methods:]** - Simple Grading - Numerical Grading - Risk Matrix Simple Grading -- grading risks as low, medium or high Numerical Grading -- grading the risks based on a numerical system where the number increases as the risk becomes more serious Risk Matrix -- plotting the risks on a two-axis matrix to determine the seriousness of different risks What are the common axes for a risk matrix -- likelihood and severity Likelihood -- the probability of the action occurring Severity -- the seriousness of the consequences of the action occurring How are figures ranked using a risk matrix -- numerically, such that each number (i.e. 1,2,3) represents a different severity/likelihood. Businesses can use as wide of a range of numbers in a risk matrix as they require. The more numbers they use, the more detailed the risk matrix **[Example of a risk matrix]** **[Step 3 -- Respond to the risk]** What does this involve -- putting controls in place to manage or mitigate the risk What types of controls could be introduced: - Staff controls (such as supervision) - Management controls (such as authorisation levels) - Physical controls (such as locked storage) - General controls (such as calculation checks) **[Step 4 -- Ensure Compliance]** What does this involve -- introducing procedures that need to be in place to meet legal and regulatory requirements **[Step 5 -- Monitor, review and report]** The organisation should see this monitoring, reviewing and reporting as an ongoing process, not just a one-off exercise Once a risk has gone through the first 4 stages of the risk management process the organisation should apply all three of these stages: What does monitoring the risk involve -- collecting data to keep track of the issue What does reviewing the risk involve -- once data has been collected, it needs to be checked to identify/highlight potential problems What does reporting on the risk involve -- reporting any issues that are identified to top levels of management using the most appropriate manner of communication **[Implications of Fraud]** **[There are three main implications of fraud:]** - Financial impact - Reputational impact - Employee impact The financial impact of fraud -- potential theft of assets of cash impacts the business' profitability and the level of reinvestment in the organisation The reputational impact of fraud -- internal and external reputation will be adversely impacted by fraud The employee impact of fraud -- fraud may damage employee's morale, as their trust in the organisation reduces with the detection of fraud **[Examples of fraud ]** **[Sales Ledger Fraud Examples:]** - Stolen cash receipts, not recorded sales in the cash book - Overcharging of sales to take additional cash - Inflating customers orders, to take goods for own use - Writing off debts, when the cash has been received and pocketed - Raising credit notes and pocketing cash received (often collusion with the customer) - Teeming and lading What is Teeming and Lading -- where payment is taken from the customer and retained, and later payments allocate against the remaining balance. The debtor balance will always be incorrect, but will not show as old, hence will not be chased **[Purchase Ledger Fraud Examples:]** - Ordering goods for own use - Payments to suppliers paid into own account - Fictitious suppliers with false invoices **[\ Payroll Fraud Examples:]** - Ghost employees - Increasing salary or rates - Overstating overtime - Expense claims being falsely made and paid - Leavers not processed - Adding new staff falsely **[el 4 -- Internal Accounting Systems & Controls (INAC)]** **[Chapter 7 - Technology]** **[Visualising Information]** Data Visualisation -- the communication of data in a user-friendly, diagrammatic way to facilitate understanding. It is concerned with communicating key information from data to users in a way that will be understood **[What to consider when determining how to present data:]** - Audience -- who is analysing the data, what knowledge do they have, and what data do they require - Timing -- for the information to be useful, it must be presented in a timely manner - Interactivity -- what format is required and do they need to dig into the data - Required outcome -- what do we want to achieve, and how will the data support this Formats for data visualisation -- images, charts, diagrams, tables, matrices, graphs **[Accounting Software Packages]** If accountants know their audience, what their information requirements are, and the level of detail required, they can display data in a more easy to use format that is accessible to the rest of the organisation Dashboard -- a type of graphical user interface which provides at-a-glance views of key performance indicators relevant to an objective or business process Business dashboards are a way of simplifying complex data, much like a progress report, which is easy to understand Dashboards encourage analysis of data so that action can be taken if any issues arise **[Cloud Accounting ]** Cloud computing -- the use of the internet to carry out processes that were traditionally done on localised hardware in an office environment Cloud computing may be online document editing and data storage that is run from a remote location, and can be accessed from anywhere with an internet connection **[The two main types of cloud computing:]** - IaaS -- infrastructure as a service (such as internet based data storage) - SaaS -- software as a service (such as a remote based email service) **[Impact on the Accounting System]** Cloud accounting can change the way that finance operates and how it records its activities **[What are the four key impacts on the accounting system of cloud accounting:]** - Access to data -- cloud accounting enables staff to work flexibly and collaboratively, despite geographical location - Control of data -- where access can be granted through a login and password so that any stakeholder may obtain access - Reliance on technology -- cloud accounting relies on a good internet connection, which if lost means that the user cannot access the data - Sustainability -- cloud accounting improves environmental friendliness as a lack of physical infrastructure reduces the carbon footprint **[Access to Data]** Remote access -- where users can access a network or computer via an internet connection or telecommunications Shared access -- where multiple users can view, and depending on permission levels, edit data **[Automation, Machine Learning and Artificial Intelligence]** Which of these three is most complex -- artificial intelligence Which of these three is least complex -- automation Automation -- the use of software to carry out low level tasks (usually repetitive and rules based) **[How may finance use process automation:]** - Processing credit notes - Sending customer statements - Performing supplier statement reconciliations - Basic tax returns Automation can free up staff time, which is better used performing more sophisticated tasks such as analysing data and decision making **[Machine Learning]** Machine learning -- an application of artificial intelligence (AI) that provides systems the ability to automatically learn and improve from experience without being explicitly programmed Machine learning focuses on the development of computer programs that can access data and use it to learn for themselves **[Artificial Intelligence (AI)]** Artificial Intelligence -- technology that can be used to make decisions, and to carry out tasks that have historically required human intelligence AI is not designed to replace human intelligence, but is a learning machine In some cases, AI may make more effective decisions than human decision making systems **[What are the advantages of AI over human intelligence]** - AI can process large volumes of data which humans would not be able to - AI is not influenced by factors such as human tiredness, boredom etc The current limitation with AI is that when a decision needs to be influenced by empathy or creativity, it cannot do this as effectively as human intelligence **[How may finance use AI]** - Forecasting -- AI can recognise and interpret past patterns to create better budgets for the future - Accounting entries -- AI can enable better coding of transactions, reducing errors and financial misstatements - Fraud Detection -- AI may be able to recognise patterns of normal transactions, and fraudulent transactions better than humans **[Impact on the Accounting System -- Automation, ML and AI]** - Change in staffing levels -- AI may mean organisations need less staff - Change in error rates -- fewer mistakes due to automated processed - Implementation and running costs -- the organisation will need a budget for costs relating to the setup and running of systems **[Data Analytics]** Data Analytics -- collecting, organising and analysing volumes of data to discover patterns and meaningful new information, which will aid decision making Data analytics uses logic, reasoning and critical thinking to create predictions and recommendations **[Advantages of Data Analytics]** - It enables the finance function to provide information to its stakeholders which is more timely and more accurate - Helps to improve business performance by combining financial and non financial data - Processes become quicker, resulting in quicker decision making - New pattens can be discovered in vast quantities of data, which leads to better decision making - Opportunities can be identified for the business to work smarter - It may reduce the risk of fraud by detecting unusual behaviour patterns Any data analytical activity should be measured in terms of the cost vs benefit to see if it is worthwhile doing **[What may an organisation require to operate data analytics:]** - Resources to fund set up costs - The expertise to enable the collection of the data with confidence that it is accurate - Ability of analysts to interpret the data that is collected - Technical and legal expertise, to ensure that data is collected, stored and used securely and legally - Compliance with privacy laws to ensure that the information does not fall into the hands of competitors or the public domain **[The Four Types of Data Analytics]** - Descriptive analytics - Diagnostic analytics - Predictive analytics - Prescriptive analytics Descriptive analytics -- an analysis of the past, looking into what has happened Diagnostic analytics -- looking deeper into data and finding patterns or anomalies, determining why did these patterns occur, and whether we wish to encourage them or not. Predictive analytics -- creating accurate estimates on what will happen in the future (trends and forecasts). This is reliant on accurate data and a stable environment Prescriptive analytics -- using predictive analytics and making recommendations based on these estimates, planning action based on these predictive analytics In summary: Descriptive analytics -- what happened Diagnostic analytics -- why did it happen Predictive analytics -- what happens next Prescriptive analytics -- what do we do about it Which are the two most routinely used data analytics in finance -- descriptive and diagnostic These two are less complex forms of data analytics **[Data Security]** Cyber Security -- the protection of computer systems and networks from theft of, or damage to their hardware, software or electronic data, as well as from the disruption of misdirection of the services they provide Cyber Risks -- any risk associated with financial loss, disruption or damage to the reputation of an organisation from failure, unauthorised or erroneous use of its information systems **[Cyber security is usually provided by:]** - Virus protection software - Firewalls **[Risks to data]** - Cyberattacks -- an attempt to steal, alter or destroy data by hacking into a susceptible system - Phishing -- fraudulent attempts to obtain sensitive information or data by disguising oneself as a trustworthy entity in an electronic communication - Malware -- malicious software, such as viruses, ransomware and spyware - Denial of service attacks -- attacks that seek to make a system available to the intended users by disrupting the service, usually achieved by flooding the system with a huge volume of requests - Unauthorised access -- access that is unintended, and achieved either remotely or physically (e.g. if a computer is left unlocked) - Physical loss of equipment -- theft of computer equipment, which leads to the loss of the asset, and can compromise the security of the data held on the device - Data issued in error -- sending sensitive information to the wrong customer/client **[AAT Level 4 -- Internal Accounting Systems & Controls (INAC)]** **[Chapter 8 -- Business Analysis]** **[SWOT Analysis]** SWOT -- Strengths, Weaknesses, Opportunities, Threats SWOT Analysis -- strategic planning method used to evaluate the Strengths, Weaknesses, Opportunities and Threats involved in a project or business venture SWOT analysis involves understanding the objective of the business system and identifying the internal and external factors that are favourable or unfavourable to achieve that objective **[Strengths]** Strengths -- characteristics of the business, or project team that give it an advantage over others When looking at the strength of an accounting function, you are looking for things that make the process reliable, speedy and cost-effective **[Weaknesses]** Weaknesses -- characteristics that place the team at a disadvantage relative to others When looking at the weakness of an accounting function, you are looking for things that hinder the function in their effective day to day duties Weaknesses may involve lack of internal controls, or high fraud risks **[Opportunities]** Opportunities -- external changes to improve performance in the environment Opportunities may also be internal aspects that could be improved, such as improving an outdated system **[Threats]** Threats -- external elements in the environment that could cause problems for the business or project **[Where could threats arise:]** - New legislation which may impact the manufacturing process - New form of aggressive competition - Threat of take-over Identification of the elements within SWOTs is essential, because subsequent steps in planning for achievement of corporate goals may be derived from SWOTs. In the assessment you may be given a scenario relating to a company including information on the company background, mission statement, staff and external factors, and may be asked to complete a full SWOT analysis, identifying at least one of each SWOT **Important note for assessment -- you should focus on external factors when identifying opportunities and threats** **[PESTLE Analysis]** **[What does PESTLE stand for?]** - Political - Economic - Social - Technological - Legal - Environmental PESTLE involves analysing how each of these could impact the direction of the business Identifying PESTLE influences is a useful way of summarising the external environment in which a business operates To be effective, PESTLE analysis should be followed up by consideration of how a business can respond to these influences In this unit, we are only concerned with how PESTLE can be applied to an accounting function **[Political]** **[Political factors that may affect a business:]** - Changes in Government policy - Taxation - Government Grants - Imports and exports - Public spending **[Economic]** **[\ Economic factors that may affect a business:]** - Interest rates - Exchange rates - Disposable income - Business cycles (boom or recession) **[Social]** **[Social factors that may affect a business]** - Demographics - Health-consciousness or population - Changing fashions & trends - Unemployment rates **[Technological]** **[Technological factors that may affect a business:]** - Changes in technology - New products, processes and working methods - Speed of obsolescence **[Legal]** **[Legal factors that may affect a business:]** - Employment law - Health and safety law - Competition law - Data protection law **[Environmental]** **[Environmental factors that may affect a business:]** - Climate change or weather - Natural disasters **[AAT Level 4 -- Internal Accounting Systems & Controls (INAC)]** **[Chapter 9 -- Recommending System Improvements]** **[Weaknesses -- Examples]** - Internal control weakness - Outdated computer systems - Stakeholders may not be getting the information they require from the current system - Wasted time, or duplication of data - Inadequate authorisation procedures - Outdated policies and procedures - If there are areas where the system could better support sustainability - Potential for errors - Danger of fraud - If the 5 ethical principles haven't been fully embedded into the company's procedures - If there is evidence that staff are lacking skills or training, and that no cross training is undertaken **[Recommendations]** It may be that you have one main recommendation which will help to overcome a number of weaknesses, as well as a number of other recommendations which address the other weaknesses, opportunities or threats **[Policies and procedures]** Recommendations may involve setting new policies and procedures, or changing old ones Providing training to staff is essential to address any lack of understanding or knowledge **[Internal Training]** Why is internal training needed -- to ensure that employees are aware of the organisations policies, increasing compliance, and to address any weaknesses **[Effect on Employees -- Changing Policies & Procedures]** How do staff usually respond to change -- negatively, even if the changes make their work quicker in the long run Before making changes it is important to consider how the proposed changes will impact individual staff members, and what you can do to alleviate any discontent/anxiety One-to-one meetings can be beneficial to allow staff to voice their opinions **[Managing Change]** Good planning is essential during a transitional period, to make sure that the change is managed well **[The 5 Main Support Methods to Assist Staff in Adapting to Change]** 1. Testing 2. Piloting 3. Direct Changeover 4. Dual/Parallel Running 5. Phased Implementation Testing -- making a demo version of the new system available to as many staff members as possible to identify problems before the software goes live Piloting -- where the new system replaces the old one on a small scale, and when it is all running smoothly the pilot is extended until the old system is replaced Direct Changeover -- where the old system is switched off, and simultaneously the new one is switched on What is the main advantage with direct changeover -- cost & time savings with not having to input data twice What is the main drawback with direct changeover -- if there are any issues, operations may cease Dual/Parallel Running -- where the old and new systems are run simultaneously for a limited period, during which the results of each system are cross checked What is the main advantage of dual/parallel running -- the data input into the new system is verified to the old system Phased implementation -- where the system consists of a number of distinct modules, which may be phased one by one. Each module may be introduced using parallel running or direct changeover **[What else do you need to consider when implementing a system change:]** - Stakeholders -- does this impact any stakeholders (such as customers or suppliers), and if so, how will we manage responses - Ethics & Sustainability -- does this new system fit in line with ethical and sustainable requirements **[AAT Level 4 -- Internal Accounting Systems & Controls (INAC)]** **[Chapter 10 -- Cost Benefit Analysis]** **[Cost Benefit Analysis]** Cost benefit analysis -- where you are looking at a new project/proposal, and you want to know whether it is worth doing, looking at both the costs incurred, and the benefits of the project (comparing both against each other) If the costs are more than the benefits -- it is not financially worth doing If the benefits are more than the costs -- it is financially worth doing What do we include in cost/benefit analysis -- any costs/benefits that are relevant to the project itself (relevant costs/benefits) Relevant Costs/Benefits -- any cost/benefit that [only] occurs because of the new proposal Non-Relevant Costs/Benefits -- any cost/benefit that would occur [regardless] of the new proposal **[Costs/Benefits must meet the 'relevant costs criteria']** **[For a cost/benefit to be relevant, it must be:]** - A future cost/benefit - An incremental cost/benefit - A cash cost/benefit Future costs/benefits -- one that will take place in the future as a result of the decision, and has not already been incurred or paid/received (or a historic/sunk cost) Incremental costs/benefits -- one that is avoidable if the decision is not implemented Cash costs/benefits -- one that results in an inflow or outflow of cash Examples of non-cash costs -- depreciation, amortisation, apportionment of overhead costs etc Tangible cost -- a cost that is quantifiable, and relates to an identifiable source Intangible cost -- an unquantifiable cost that emanates from an identifiable source that can impact company performance Intangible benefit -- a benefit that is subjective, and non-monetary, hence difficult to measure and quantify Tangible benefit -- a benefit that can be measured in financial terms