Examiners interview: P1 Governance, Risk and Ethics

Interviewer: Hello. Welcome to the examiners interview for P1, Governance, Risk and Ethics. The examiner, David Campbell, has provided the answers and his words are spoken by an actor.

The interview covers a range of issues, focussing on candidates performance over the last four exam sessions and how to improve it.

So before you review candidate performance over the last four examination sessions, can you remind us what the key themes of the syllabus are?

Examiner:

Yes. The key themes are governance, internal control, risk management, professionalism and ethics. All of these are underpinned by accountability. When I say accountability I mean companies to investors, professionals to their values, directors to their shareholders, business systems to their stakeholders and so forth.

All parts of the syllabus are interconnected, so you cant be professional in one area of governance and unprofessional in another. You cant have good investor relations whilst having poor risk management systems.

Governing an organisation well, for the benefit of key stakeholders, requires excellence in corporate governance. This in turn rests upon sound systems of risk management and internal control.

The ethical assumptions of managers in these organisations and their standards of professional behaviour provide the glue that makes the whole governance system work efficiently.

Interviewer: That was useful, thank you. So how have candidates performed against those areas in the last four examination papers?

Examiner:

Well, my remarks apply to the last four P1 diets: June and December 2009 and the same for 2010. I am pleased to report a fairly consistent global pass rate of around the high 40s to low 50s in percentage terms, which shows, I believe, that tutors and students are developing a good understanding of the study guide content and also the examiners style.

Interviewer: So shall we review what was done well in each exam since June 2009?

Examiner:

Yes. The June 2009 section A case study was on Global Bank and the rogue trader Jack Mineta. The sections which were done particularly well in June 2009 were parts (b) and (c) of question 1 and also part (a)(i) of question 3, and the same in question 4. It is usually the case that questions requiring a level one intellectual level are done better than those using level 2 and 3 verbs. I was pleased to see question 1 part (b) done well by many, as this involved careful case analysis. The second part of (b) was to assess the internal control performance of Global Bank and the task was to read through the case and pick out the areas where internal control was poor. A similar requirement has appeared in other P1 papers.

Question 3 (on Miss Hoiku) was done quite well overall. It concerned a number of themes concerning directors contracts and rewards, although part (c) was done poorly in question 3. Question 4 was on John Pentanol and part (a)(i) was done well (describe the roles of a risk manager). Note, however, that this was only worth four marks.

Interviewer: Thank you. Shall we go on to what was done well in December 2009?

Examiner:

Yes. The case in question 1 was about the Mary Jane, a ship that sank, partly because of a number of internal control failures. I think some candidates were expecting the use of the AAA model at some point and, for the most part, the stages were correctly reproduced and moderately well applied to the case as required. There was some misunderstanding of the nature of the decision being considered by the AAA model, however this is a reminder that it is insufficient to simply remember frameworks such as this. It is also important to use it to do whatever is required in the question. Part (b) was done quite well overall. The requirement to carefully examine a case to pick out and analyse control failures had been used before on a P1 paper, so candidates that had worked through past papers would have had some practice on this.

In question 2, the mainly bookwork task of explaining the content of an induction programme was done well by many candidates. Likewise, candidates were able to explain what integrity meant in question 3(a) as it is one of the core values in professionalism and a personal quality that underpins professional ethics.

Question 4 (a) asked about risk embeddedness. This is a theme that has been examined before. It is nice to see well-prepared candidates being

able to describe these important concepts in risk management, although there were issues with applying the bookwork learning to the case.

Interviewer: OK. And so to June 2010. What was done well in that exam?

Examiner:

In June 2010, the compulsory question in section A was on Hesket Nuclear. I used the case to explore a number of issues in terms of stakeholders, trade unions, agency issues and environmental footprints. Typical issues for a nuclear facility, in other words. Part (b) was on trade unions and I was pleased to see some good responses to this after the article I wrote on different actors in corporate governance in Student Accountant, some time before this exam. Part (c) on agency was done well, as was the first part of (d)(i) on social and environmental footprints, although the question went on to ask candidates to construct a case showing that the companys overall social and environmental footprint was positive. This was less well done.

Question 2 was about Tomato Bank and George Woof. Tomato Bank clearly had an ineffective and incompetent committee structure and the case described a number of errors made by the remunerations committee. I was broadly happy with most responses to this and it showed the importance of careful analysis of the case. Part (b) was another one on the

components of a reward package, which was quite well done, although the second part of (b), on a balanced package, was less well done.

In question 3, part (c) on internal audit testing was done quite well.

Interviewer: OK, thanks for that. And so on to the most recent exam session, in December 2010?

Examiner:

In December 2010, candidates did quite well overall on two tasks that were about demonstrating their knowledge of the relevant area of the syllabus. In Question 1(a)(i), many candidates did well on the reasons for investor intervention, as well as in question 2(c) on risk.

I was very pleased, however, to see many candidates achieving good marks on question 3(a), which was partly a case analysis task. Many were able to discuss how John Sorias appointment would introduce conflicts of interest and I found that very encouraging.

Likewise, I was generally encouraged by answers to question 4(a) which asked about liquidity risk.

Interviewer: So thats what was done well in the last four exam sessions. Looking back on those sessions, are you able to draw some clear themes together and make some overall remarks?

Examiner:

Yes. On looking back at the last few papers, I think I can point to five things that have been done quite well overall. These comments may help tutors to think about how to consolidate these things whilst helping their students to develop in other areas. I think that broadly speaking, the core corporate governance content of the P1 study guide is better done than the content on risk, internal control and ethics. Section B questions containing a high proportion of marks from section A of the study guide (thats the content on corporate governance) tend to be attempted by more candidates, indicating that they are happier with that area of the study guide. Not surprisingly, demonstrating knowledge and comprehension of certain parts of the syllabus tends to be done quite well, as would be expected, but most P1 questions contain only a minority of such marks. Professional level papers mainly seek to test higher cognitive abilities.

I have seen little widespread evidence of candidates struggling with time so it seems that most are able to effectively budget their time in the exam hall.

Likewise, many candidates understand how to answer the questions even if they are unable to actually address the content itself. Most candidates for P1 will be experienced exam performers.

Finally, there is some evidence that some common P1 question types are being done well by many candidates. Requirements such as explaining internal control failures in a case scenario are a good example of this.

Interviewer: Tutors and candidates will also want to know what wasnt done so well in those four exam sessions. Shall we go back to June 2009? What were some of the things that werent done so well in that exam?

Examiner:

Well, remember that the section A case was about Global Bank. One of the things I noted about the answers to question 1 was that because Kohlberg had come up on the December 2007 paper, some had guessed it wouldnt come up again so soon after that. I was surprised that, for something that is relatively straightforward to revise, some of the answers showed a very poor level of preparation. I have warned before about question spotting, i.e. guessing what will and wont come up on a paper, and I suspect that in this case, Kohlberg was overlooked by some in favour of content they thought more likely to come up. Question spotting is dangerous and should be avoided. Likewise I was disappointed

that some struggled with narrow and wide stakeholders in question 1(d). An article I wrote in Student Accountant included the different ways of categorising stakeholders and some candidates had not fully absorbed that content. Part (e) was poorly done because, I think, some failed to read the question adequately. It was not asking about the roles of the chief executive but rather the roles of the chief executive in internal control. In most papers, it is the higher level intellectual tasks that are done less well.

In June 2009, candidates seemed to struggle with the verbs assess in Q2(d) and also criticise in question 3(d). Both have since appeared several times in P1 papers.

Interviewer: Thank you. And what about December 2009?

Examiner:

In December 2009, there was a mixed response to the requirements for the question on the Mary Jane. Question 1 part (c) on non-executive directors was not asking about their general roles, as many seemed to think, but rather the contribution that non-executive directors might have made at Sea Ships. A more careful reading of the case would have been helpful to many candidates. Both tasks in question 1 part (d) were done poorly, despite part (d)(ii) being relatively straightforward in what it was asking.

In question 2(c), there was some misunderstanding of the meaning of the requirement. It was not asking what the roles of a chairman were but rather to point out the ways in which Arif Zaman had misunderstood the roles. Again, a more careful reading of the case and the question would have been advantageous.

Question 3 was about the situation at Miller Dundas and the behaviour of an audit engagement partner, Potto Sinter. This question was mainly in the professional ethics area and was not done very well overall. But part (b), in which candidates had to criticise Potto Sinters ethical and professional behaviour, was particularly poorly done overall. The case contained a number of errors he made that could be picked out and discussed but many candidates were seemingly unable to do this.

Interviewer: Very interesting. Can we go on to June 2010? What did candidates struggle with in that exam session?

Examiner:

Question 1 part (a) was about voluntary and involuntary stakeholders. Whilst many candidates could define and distinguish between the two, a very common mistake was to categorise the pressure group, No Nuclear Now, as an involuntary stakeholder. I was surprised and disappointed by

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this, as the pressure group obviously chose to engage with Hesket Nuclear and so was clearly voluntary.

In question 2, part (c), I think some candidates struggled to see an ethical case at all for accepting less in pension value than Mr Woof was entitled to. This was actually a real debate in the financial press a while ago, when the CEO of a major failing bank was confronted with a large amount of public anger over what some considered a large reward for failure. Some said that even though he was contractually entitled to the whole amount, he might voluntarily forego part of the value. These questions really are sometimes drawn from real life events.

Question 4, about the Happy and healthy health food business was on professionalism and ethics. There were some level 1 and 2 marks in this question that I was surprised were not done better, such as explaining the difference between a family business and a public company. Likewise, the fundamental principles of professionalism, which is a key part of the content on professional ethics, was done surprisingly poorly. Part (c) on Mr Shreevess dilemma was done very badly overall, with many candidates unable to reach a decision as to what was Mr Shreevess most appropriate course of action.

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Interviewer: OK. And finally to the December 2010 session.

Examiner:

In December 2010, the case in section A was about ZPT, the internet communications company that had committed a number of serious corporate governance breaches. The situation was made much worse by the presence of an auditor complicit in ZPTs fraud. The case was loosely based on a situation that arose a number of years ago, after which, because of the seriousness of the company failure, legislators sought to tighten regulation. It was this response from legislators that I sought to explore in the three parts of question 1(c). Candidates struggled with all three parts of question 1(c). They commonly misinterpreted part (c)(i) in ignoring the requirement to explain the consequences of corporate governance failures. I was surprised that part (c)(iii) was done so poorly, as it was actually something that could have been learned beforehand by a well-prepared candidate, that is, the contents of a report on internal controls.

In question 2(b) I was expecting a number of strong answers because it was asking about the stages in environmental auditing and I had written an article on this in early 2009. Again, many candidates missed out on marks that, like in Q1(c)(iii), should have been relatively straightforward to gain.

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In question 3(c), some candidates confused the corporate governance section of an annual report with an annual report and some described the typical contents of an annual report, such as the income statement, chairmans report, etc. Again, a careful reading of the question would have prevented this misunderstanding.

Question 4, part (d) was often done poorly on social responsibility and the voluntary supplier payment policy. This was also rather too descriptive in many cases.

Interviewer: Thank you for all that. Are you able to give some examples of candidate answers to show how they typically went wrong in a real-life case?

Examiner:

Yes I am. Lets take the example of question 1(c)(i) from the most recent paper in December 2010. The question on the paper asked this: Explain the importance of sound corporate governance by assessing the consequences of the corporate governance failures at ZPT. A common error was to fail to respond to the second part of the question. These are excerpts from a real student in the December 2010 exam. Perhaps seeing the term sound corporate governance flicked a certain switch in this candidate and they associated the phrase with a narrative about what sound corporate governance is.

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They wrote this: Corporate governance is the system by which organisations are controlled But actually, a definition of corporate governance was not required by the question. The question was asking about the consequences of the particular corporate governance failures at ZPT.

So perhaps wrongly assuming that the question was asking what sound corporate governance was, the candidate then wrote that: Sound corporate governance includes having a committee structure such as remunerations committeeit is important to split the roles of CEO and Chairman...ZPT should form an audit committee All these are true, but none of them were required by the question. The answer then went on to say that, There is no mention in the case of a nominations committee so ZPT should set one up

I would make two points, apart from pointing out that this candidate had clearly not understood what the question was actually asking. Firstly, I would point out that if the case doesnt mention something, there is no value in pointing that out, such as in this last excerpt. Cases are seeded with relevant points for candidates to pick out. They should not conclude anything from silence on a certain issue. Second, unless the question asks for advice, it is unlikely that answers saying that a company should do

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this or that will be relevant answers. I see this quite a lot on weak answers, especially when the case describes a serious problem such as at ZPT, so I hope the illustration helps to show where people can go wrong.

Interviewer: Yes it does, thank you. Earlier in this interview, you made some summary comments on things that were done well overall. Are you able to do the same for things that were not done so well overall?

Examiner:

Yes. Reflecting on some of the things that havent been done so well in the last few exam sessions then, I would draw attention to the following.

Firstly, higher level cognitive tasks and sometimes those found in two-task questions. In many cases, P1 questions contain more than one task within the same part. Candidates should always look first at how many tasks there are in each part and then ensure they answer all those tasks. Some P1 questions contain a lower level task followed by a higher level task, usually separated by the word and. It is disappointing to see this second task done less well than the first, especially when, as is often the case, there are more marks for the higher level cognitive task after the and.

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Following on from this, there is ample room for improvement for answers that employ the level 3 verbs like evaluate, construct, criticise and assess. I would encourage tutors to include a large proportion of questions using these verbs when they do revision sessions.

Thirdly, requirements involving ethical reasoning are often done quite poorly. It is not sufficient simply to memorise the main ethical frameworks they must be applied when the question asks for that.

Fourthly, there is the issue of the four professional marks in question 1. I have, I think, raised this in all of my previous exam reports. It is frustrating for me to see so few candidates receiving all four of these marks when, for just a few minutes planning and laying out the answer according to the format asked for, more of the marks could be gained.

Interviewer: Now presumably there are some lessons to be learned from the above?

Examiner:

Yes, in summary, there have now been seven live P1 exam sessions up to and including December 2010. The first and most obvious lesson is to ensure that candidates see and study all of these previous papers. This will not only ensure that they are familiar with the length, style and feel

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of P1 papers but they can also, of course, systematically work through all of the past questions.

Secondly, ensure that candidates are familiar with the verbs and question styles that have been used. If candidates have worked through enough papers and responded to the types of verbs used in the questions, they will be much more prepared when they encounter their own live paper. As alluded to earlier, the cause of many poor answers is a lack of care in reading what is actually required in a question, as opposed to what at first glance it appears to be about.

Similarly, many questions require careful and detailed study of the case. Professional marks remain a problem in question 1 of the exam. I have mentioned this in most of my exam reports and it remains the case that most candidates fail to attract many of the four marks that are usually available for it. Perhaps more rehearsal of the common types of answers that attract professional marks might be helpful when preparing for the exam.

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Finally, P1 is a highly relevant paper as it covers issues of governance, risk and ethics that we see in business life all the time. To demonstrate this and to help candidates see the issues that arise in real-life business situations, newspaper and internet sources might be used as a basis for class discussions.

Interviewer: So moving on then, is anything changing in P1 in terms of new content or a new focus in future exams?

Examiner:

Yes, there are quite a few changes actually, all in the risk area of the study guide. In response to the challenges of keeping P1 topical and relevant, I have increased the risk content of the P1 study guide from June 2011 onwards. The additions I made also include some of the latest academic thinking in risk management. I wrote two articles in Student Accountant, entitled Changes to the Paper P1 study guide for June 2011, Part 1 and Part 2, to help learning providers and students get to grips with the new content. These are available on the ACCA website and should be read carefully.

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It might also be helpful to have sight of a copy of the new study guide as I talk through a summary of these changes now. In sections C1c and C1d of the revised study guide, I wanted to emphasise just how changeable risk assessments can be as factors in the business environment change. As events make a certain risk more or less likely, or make it have a greater or lesser impact, a given risk will be assessed differently. So C1d is the response to the changes in a given risk assessment in C1c. As a risk is assessed differently, so the way that management deals with that risk will change.

C1e is a new section on risk appetite. I put this in to highlight the different attitudes to accepting risks in different types of organisations. The risk appetite will be influenced by a number of factors including the industry, the type of management, the levels of returns being sought and the resources available. Essentially though, there is a continuum or risk appetite from risk averse to risk seeking.

In C3f, I introduced a concept called as low as reasonably practicable or ALARP for short. The ALARP principle arises from the inverse relationship between the magnitude of a given risk and the acceptability of that risk: the greater the risk, the less acceptable it is. It is obvious, however, that some risks are borne by organisations despite them being quite large, and

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this is where the ALARP principle comes in. When a given risk cannot be avoided, the ALARP principle says that it should be reduced to the point at which it is practicable, which usually means within cost constraints. A good example is health and safety risk. Risks to employee safety can be avoided by discontinuing the activity that gives rise to that risk. In practice, however, many companies accept some health and safety risk associated with an activity but seek to make it as low as reasonably practicable by enforcing the use of protective clothing and the regular maintenance of equipment. Other examples are given in my articles.

In C3g, I introduce an important issue in gathering the information for risk assessment: the idea of objective and subjective risk measurement. When making a risk assessment, you need to establish the impact or hazard of the risk and the probability or likelihood of it materialising. Now clearly, the more accurately these two variables can be measured, the more precise the risk assessment calculation will be. The problem is that it is not always possible to measure impact or probability as precisely as we would like. I give examples of this in the technical article I wrote on this and tutors and students should have a look at this.

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The final new addition to the P1 study guide, in C3h, is content on related and correlated risk. One of the interesting characteristics of risks is that groups of risks sometimes go together, in that they are often present at the same time in the same organisation. Such risks are described fully in my articles, with examples to illustrate.

Examiner:

There is one further change in addition to the new study guide contents. The name has changed! In order to more accurately convey the content of paper P1 to ACCAs stakeholders (including students), the name has changed from Professional Accountant to Governance, Risk and Ethics. There are no changes as a result of this name change, other than those I have just explained to you.

Interviewer: Thanks for all that. So as we come to the end of this interview, and given the seven exam sessions so far and all the individual P1 scripts that you have seen, what are your top tips that tutors and students can take away with them?

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Examiner:

Thats a very good question. In short, I have five points, or top tips as you say, that might help future candidates. First, dont question spot revise the whole study guide and expect anything. Dont trust the advice from well-meaning tuition providers that offer their guesses on what might come up or if you do, dont let that influence your revision. Second, work systematically through all previous papers and study the answers that I wrote for each question. These are all on the ACCA website. Third, concentrate on exam technique for level 2 and 3 verbs, as these are the ones that candidates most commonly struggle with. Fourth, answer all tasks in a question (before and after the and). Fifth, and finally, read and study the case and each question before starting the answer.

Interviewer: Well, thank you very much for your thoughts on all this. Im sure they will be very useful for P1 tutors and future P1 examination candidates.

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