1_the Business and Accounting Environment

8/8/2019 1_the Business and Accounting Environment

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THE

BUSINESS

ANDACCOUNTIN

G


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ENVIRONMENT

Definition oforganization.

An organization as a social arrangement which pursues

collective goals, which control its own performance and

which has a boundary separating it from its environment.

Key Points Description

Socialarrangement

Individuals gathered together for a purpose.

Collective goals The organization has goals over and above the goals ofthe people within it.

Controlsperformance

Performance is monitored against the goals and adjustedif necessary to ensure the goals are accomplished.

Boundary The organization is distinct from its environment.

Reasons why organization exist.

Pooling of physical

Individual or company pooling limited resources (4Ms)

together to attain some objectives.

Pooling of expertise


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Individuals complementing their skills, expertise,

experience, etc in their attempt to attain some results.

Power Centre

Individual rarely has the power to influence events on a

large scale whereas a group of people can certainly

influence decisions.

No individual is all-rounder

No individual is capable of satisfying his/her needs.

Therefore organizations are formed to offer a variety of

products and services.

Synergy advantage

A teams output is better than an individual.

Difference between organizations.

Ownership

E.g. : Private sector, owned by private owners/ shareholders as for

public sector, government is the owner.

Control

Individuals as owners themselves, by people working on their behalf

or indirectly by government.

Activity

What does the organization do or what is their core business?

Manufacturing? Service?

Legal status / Size

What is the status of the company as defined by the Companies

Act?

Unlimited companies either sole proprietorship or

partnership.


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Limited companies either private or public: A limited

company is format to limit the liabilities of its owner would

only be held liable up to and only limited to the amount of

shareholdings that they hold in the company.

Source of finance

Where does the company find money to finance their organization?

Borrowing, government funding, share issues.

Technology

High use of technology such as I.T. industry or low use of

technology such as sundry/ sundry shop.

Profit / Non-profit orientated

Profit = Company

Non-profit = Charity, for example WWF World Wild Life

System

A system is a collection of interrelated parts which had

taken together forms a whole such that:

The collection has some purpose

A change in only of the parts leads to a change

in some other parts.


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An organization is a system made up of

Departments Sub-systems

These sub-systems / parts are interrelated & interdependent.

The well being of the organization depends primarily on the

coordination of these sub-system / parts.

Distinctio

n

Description

A closed

system

Isolated from its environment and independent of it

thus no environmental influences affect the behavior

Eg: medical research, NASA, the court & the jury

An open

system

Connected and interacts with its environment

Takes in influences and influences from its environment

Stable system which is nevertheless continually changing /

evolving

Semi-

closed

system

Their relationship with the environment is in some degree

restricted

Eg: government in general, ministries in the government

Environment influences on organizations

Environment is everything outside the boundary of anorganization.


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Macro Environment

Politico-legal environment (bank)

Legal framework that affect every companies:

1. Law of contract terms and conditions

2. Criminal law - theft, bribery

3. Company law - reporting requirements

4. Employment law - equal opportunity

5. Health & safety - safety procedures

6. Data protection - personal data

7. Tax law - corporation tax payment, VAT

Legal and regulatory factors affect particular industries, if the public

interest is served. This is either of the two reasons:

The industries are effectively, monopolies

Large sum of public money are involved

Government is another key influence on the P environment.

E.g.: ruling government, diplomatic relationship with other countries

Economic environment

Government policy affects the whole economy.

Government is responsible for creating a stable framework in which

business can be done.

It is an important influence at local and national economic activities and

here are some of the factors and impacts:

Factor Description

Overall growth or

fall in Gross

Domestic Product Or demands for goods & services

Local economic

trends

Type of industries, labours rates, house rates


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Interest rate How much does it cost to borrow money

(affects cash flow)

Some companies carry a high level of debt

Rising of it affect customers mortgage

payments

Inflation rate Concern the purchasing power of money.

High rate weaken the purchasing power of

money

One needs more money to purchase / buy

Government

spending

Eg: suppliers to government will be directly

affected.

The businesscycle

A natural order of things, a mixed of good &bad times, therefore affecting trading

activity.

Socio-cultural environment

All the stakeholders of a company form the society where the business operates.

Thus, need to carry out a demography study study of human population and

human population trends.

Development DescriptionGrowth Size of population.

Age distribution The young

The youth

The aged


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Geography Concentration of population into certaingeographical areas.

Household and family

structure

Basic social unit

Size determine by number of children, whether

elderly parents live at home, etc.

Social structure Population broken down into a number of sub-

groups with different attitudes and access to

economic resources.

Nature of employment Employees are looking for quality working life and

employers are looking for the ways to reduce cost.

Technological environment

Technology can contribute to overall economic growth.

Our study focus on information technology and telecommunications.

Technological

impact

Description

Type of product /

services that are made

and sold

Music DVD / MP3

Movie(cartridge) DVD

Magazine E-mag

Way the products are

made

From labour intensive capital/machine

intensive


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Way services are

provided

From labour intensive capital/machine

intensive

Ways the firms are

managed

Advancement of IT has provided employer more

confident to delegate & decentralize

Means of

communication

From manual to electronic

Micro Environment

The five competitive forces model

Prof. Porter

Industries & marketplace

The 5CFs Description

Barriers to new

entrants

How easy or difficult for a potential company to

enter the market / industry.

The easier it is, the more threat it is.


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Threats of substitutes Alternatives that serve the same purpose.

More substitutes more competition for an

organization.

Bargaining power ofsuppliers

More supplier more bargaining power

Bargaining power of

buyers

Customers can go to substitutes instead the

organization only

Rivalry amongst the

existing competitors

The more players/ competitors, the greater the

level of competition.

Stakeholders

Stakeholders are groups, corporations or individual who

have an interest or a stake as well as ability to influence

the well being and future course of action of theorganization.

Stakeholders Description

Internal stakeholders They are stakeholders who are employed by /involved in the running of the organization.

Eg: management, employee, CEO


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Connected

stakeholders

They are stakeholders who have a financial link

with the organization.

Eg: shareholders, customers, suppliers,

bankers

External stakeholders No direct link with an organization financially or

in the running of the company.

Eg: competitors, government, public at large,

pressure group

Company law (Companies Act 1985)

Companies are required to publish accounts annually for distribution to

their shareholders.

A copy of accounts must be lodged with the Registrar of Companies (RoC)

and is available for inspection by any member for public.

Accounts showed must be true and fair view.

Companies Act also set formats for company account and states what

information must be disclosed.

Appoint external independent auditors to audit the accounts.

Non-statutory regulation

N-S R Description

The Financial

Reporting Council

(FRC)

Its chairman appointed by the government.

Guides the standard setting process.

The Accounting

Standard Boards (ASB)

Responsible for the issue of Financial Reporting

Standards (FRSs)

Lay down prescribed accounting treatments

where a variety approaches might be taken.

Aim: ensure that users can compare the

accounts of different companies.

The Urgent IssuesTask Force (UITF)

Offshoot of ASB. (assistant)


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Role: assist ASB but unsatisfactory / conflicting

interpretations have developed.

International accounting standards1. International Accounting Standards Committee (IASC) attempts to

coordinate the development of international accounting standards.

2. It includes representatives from many countries including UK and

USA.

3. ASB will support international standards by incorporating them

within the UK standards

The Stock Exchange regulations

1. Stock Exchange is a market for stocks and shares.

2. A company whose securities are traded in this market is quoted

or listed company.

3. It is more extensive that the disclosure requirements of the

Companies Acts.

Auditing regulations

An audit defined as an independent examination of &

expression of opinion on the financial statement of an

enterprise.

1. Accounts of a limited company are required to be audited by the

Companies Act.

2. A limited company must engage a chartered certified accountant to

examine the financial statements to whether the accounts present a

true and fair view and comply with the Companies Act.

3. At the conclusion of their audit work, auditors issue a report

addressed to the owner, members and shareholders of the companyand published as part of the accounts.


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4. Audit work is governed by Auditing Standards which issued by the

Auditing Practices Board.

Taxation

1. It will affect the work of the accounts of organizations that runs aPAYE system or is registered for VAT.

2. Keeping records and submitting returns of payroll work to the

Inland Revenue and the Department of Social Securities (DSS).

3. Timing of accounting work in important, since returns are

required every month for payroll and every three months for

VAT. Info must be ready in time with these requirements.

Corporate governance

Defined as the way the management of a firm is

influencedby many stakeholders (including owners,

shareholders and creditors).

Different economies have systems or corporate

governance that differs in the relative strength of

influence exercised by the stakeholders & how they

influence the management.

1. Also refers to the systems, processes and responsibilities

involved in running an organization & the way its organized

and directed at BOD.


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2. The guiding principle in the development of system of

governance is accountability.

Sphere Actions & Responsibilities

Directors Responsible for:i. formulating and setting strategic aims

ii. providing the leadership to implement them

iii. overseeing management processes and

reporting to shareholders

iv. ensuring that all the above are done within

the law

Shareholders They appoint the directors to be the BOD.

Appoint auditors to oversee the directors to

satisfy themselves that an appropriate

governance structure is in place.

Auditors Acts independently of directors andshareholders

Objective: checking system on the processes

and reporting system relate to companys

financial statement.

1. Corporate governance key problem :

How can the providers of capital ensure that thedirectors act in the capital providers interest?

2. High profile scandals and frauds exposed because

shareholders in listed companies have insufficient influence

and insufficient knowledge of how the company is being run.

3. The Cadbury Committee on corporate governance using Code

of Best Practice (The Cadbury Code).

4. Main provisions of the Code:

1. Separation of the post of chairman and chief executive

2. Should consist of non-executive directors


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3. BOD should have separate remuneration committee

made up entirely of non-independent non-executive

directors

4. Audit committees meet external auditors at least

annually without executive directors5. Directors emoluments disclosed in accounts / annual

reports

6. Executive directors contracts should not exceed 3

years without shareholders approval for re-

appointment

7. Funds available to non-executive directors who wants

independent professional advice

5. Provisions are mainly concerned with limiting the powers of

executive directors and making them more accountable tothe shareholders.

1_the Business and Accounting Environment

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