Answers

Professional Level – Essentials Module, Paper P1 (SGP)

Governance, Risk and Ethics (Singapore) September/December 2017 Answers

1 (a) Importance
Board sub committees are a generally accepted part of board constitution in governance. Committees play an important role
in reducing board workload and should allow the NFA board to concentrate on other key responsibilities like the promotion of
the game in Geeland to other countries. The committees should play an important role in giving confidence to supporters and
other key stakeholders that bribery and corruption is eliminated from the game of football and a positive reputation of the game
is maintained.
The NFA should use the inherent expertise of a committee structure to improve decision making in key areas like the control
of referees which the committee has been given responsibility for. The structure should communicate to stakeholders that the
responsibilities delegated to the committees, like remuneration, are key and are taken seriously by the main board.
Recruitment
The existing criteria for recruitment are based on enthusiasm for the game of football and on social contacts and personal
influence. The recruitment of referees should be conducted, and appointments made, on merit, against objective criteria. The
referee sub committee has failed to establish detailed recruitment standards against which a potential referee can be assessed
and failed to prepare a description of the role and capabilities required for any referee appointment. For example, there is no
rigorous professional qualification or training programme for referees as in other professions, such as accountancy.
Referee appointments should be advertised through a range of formal recruitment routes. The current approach is likely to yield
a limited pool of candidates, potentially resulting in the NFA not appointing the best possible candidate. This is also likely to
mean under representation and a lack of diversity in the people appointed for the role of referee.
With limited recruitment criteria, the committee would be unable to ensure the right person for the role is nominated. The
recruitment criteria need to extend beyond enthusiasm and include knowledge of the game, good man management skills
including excellent communication skills and the ability to remain objective under pressure.
Remuneration
An important role of the committee is to set fair rewards linked to the contribution and commitment expected of referees. Levels
of pay are not reflecting the time commitment and responsibilities of the role. Remuneration is unlikely to be sufficient to attract,
retain and motivate the referees for their efforts and responsibilities, since the role is considered a critical and key role at the
NFA, but the pay increases do not reflect this importance.
The committee should be looking for comparisons when setting the pay structure for referees. They have not been sensitive
to pay and employment conditions elsewhere in football and in the country generally, especially in determining annual salary
increases. They could consider benchmarking against payments made to referees in other neighbouring countries and link
the percentage increases paid to that of other comparable positions in listed companies and to increases in salaries given to
footballers.
Control
The committee should recognise the importance of internal control and control mechanisms and all functions and personnel
should be subject to monitor and review. The importance and complexity of the role of a referee makes referees an obvious
subject for frequent review and yet there is no recognition of the risks associated with football referees and refereeing.
They have failed to understand the importance of effective internal controls to ensure correct decisions are made by referees.
There is a lack of concern for the risks which arise because of their inaction to make a referee accountable for their decisions,
and this is exacerbated by the fact that referees can select their own assistant referees, creating a risk of potential collusion.
The fact that the names of the referees and the assistants presiding over each match is pre-released 28 days before a match
takes place is another example of a weak internal control. The lack of use of technology is another internal control failing, and
the available goal decision technology used in other countries is not adopted in Geeland. They are failing to understand the
necessity of risk management and control systems to support effective control and correct outcomes of football games.
Governing the game of football effectively and maintaining integrity are two important values for the NFA and the committee
is failing to deliver systems and controls which enable those values to be delivered by a referee. It is a key function of the
committee to help to maintain a good reputation for the NFA and they are clearly failing in their duty with regard to referees.
There should be qualifications, ongoing assessment and training for all referees, both collectively and individually. The
committee should have an oversight role in monitoring the local training and development schemes. There is no requirement
for information flows from local associations to the committee. There should be accountability and feedback, with local
associations required to report back to the committee on the action they have taken to update referees on changes to the
laws and regulations of the game. The committee should act as a counter check confirming that all referees have received the
required level of updates and knowledge to ensure understanding, and consequently have the ability to implement the changes
when refereeing football games.

(b) Conditions
There is a culture of carelessness in the NFA. The tone at the top is one of tolerance of the current practices and not focusing
on the core aim of governing the game and maintaining integrity. The NFA is an organisation with weak regulatory controls and

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 there appears to be a taken-for-granted approach to the refereeing decisions. It is evident from the scenario that the requisite
regulation is not in place for such important matters as ensuring the right outcome for a football game.
With the difference in salaries between referees and the players they officiate, there is a motivation for referees to act dishonestly
as they feel undervalued compared to the football players and equivalent responsible officers in listed companies. This creates
resentment and provides a considerable financial incentive for fixing the outcome of the game. They strive to attain the same
lifestyle as a successful footballer and many appear to have obtained the desired lifestyle by some means or other.
Once the lifestyle has been attained, there will be a motivation and a need to continue to fund the lifestyle. Referees can use
their discretionary powers to deliver personal enrichment at the expense of the integrity of the game.
Because referees can use this large degree of discretion and autonomy and the fact that their decisions are not challenged
presents them with an opportunity for corruption. The referees are not made accountable for their poor decisions and are seen
to go unpunished. Referee power is wielded without any effective oversight. There is an opportunity for the NFA to reduce the
power of the referee by introducing technology in order to validate controversial decisions made by a referee. The use of already
available technology used in other countries is being resisted, leaving the referee with an open opportunity for corruption.
The potential pay-off for engaging in match fixing outweighs any possible disadvantages or penalties, so increasing the readiness
of referees to take the risk. The lack of accountability enables gains to be made at least cost to themselves.
The NFA believes referee autonomy for appointing officials increases their motivation to achieve a higher level of performance
during the game. The autonomy allowed creates the opportunity for collusion. Referees can appoint allies who may also seek
personal enrichment and may be willing to turn a blind eye to any incorrect decisions made by the referee, thus making it easier
to enforce unjust or incorrect decisions collectively as a team, rather than be accountable as an individual.
Names of officials are released 28 days in advance of the game. The early advance notification allows sufficient time for corrupt
third parties to influence and even bribe referees, meaning the outcome of the game is effectively agreed before the match
starts.

(c) General purposes of an internal control system

The first general purpose of internal control is to achieve the orderly conduct of business by facilitating effective and efficient
operation of an organisation’s activities. In doing this, it must be able to respond appropriately to relevant risks and to configure
activities to achieve the organisation’s strategic objectives. The NFA needs to respond to the risk of match fixing which is
discrediting the game and the wider reputation of the NFA.
Internal controls should ensure the prevention of fraud and error. The referee is able to circumvent the limited controls in place.
Football supporters will lose trust in the ‘honesty’ of the game and may decide to stop watching. It is clear that controls to
prevent corruption are weak and need to be addressed.
Internal controls are essential in ensuring the robustness, quality and timeliness of both internal and external reporting. The
provision of this information is important in managing internal systems at the NFA which would include feedback from local
associations. External reporting will need to reassure supporters that action to improve controls has been taken.
Internal control is necessary to ensure compliance with any external laws, standards or regulations which apply. As regulator
of the game of football, the NFA is expected to adopt governance arrangements which are in line with best practice for listed
companies. It is clear from the actions of the referee sub committee that governance controls need to be addressed.
Control environment and control measures for refereeing at the NFA
The NFA should start with rebuilding a culture with strong ethical practices in order to restore the reputation of the game for
supporters and television broadcasters. Senior members’ attitudes will influence those lower down the NFA ladder, including
the referees. In representing the NFA, the ‘tone at the top’ should be one of a zero-tolerance of bribery and corruption so that
all employees adopt this perception and are less susceptible to unethical practices.
New policies and codes of ethics should be developed and reinforced on a regular basis helping to keep them deeply ingrained
in employees’ minds. They should become an integral part of the NFA’s culture, which will minimise the possibility of an ethical
lapse.
Ex footballers have responsibility for the referee sub committee and they appear to be lacking the skills required. Education and
training should be undertaken which would help to increase the efficiency and effectiveness of the role of the committee.
The organisational structure at the NFA appears to be decentralised and the quality of the personnel at the local level appears
to be inadequate. Increased and regular training and education should be given to referees and those who administer the game
at the local levels. Consideration should be given to a more centralised approach so that responsibility for training and the
disciplinary process is the responsibility of the referee sub committee.
The foundation of improvements will be in the NFA’s ability to communicate its ethical agenda openly and transparently to its
internal and external stakeholders. Referees and other employees should feel confident in their ability to prevent corruption and
should know that senior management will support them if they oppose corrupt practices. Procedures for reporting the suspicion
of corruption should be established and very clearly explained to staff. This will help to communicate to employees that the NFA
takes anti-corruption procedures seriously.
It is important to respond appropriately to risks and perform risk assessments so that the NFA understands the factors which
need to be taken into consideration. With referees, this might include the amount of control they have in decision making and

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 the lack of penalties and punishments to discourage the poor behaviour. The use of technology should be embedded so that
a referee does not have the final say in some decisions. Technology would decide on whether a goal should be allowed and
perhaps the use of television replays to check other refereeing decisions, including sending off the wrong players, would help
prevent other blatant errors.
Appointments of assistant referees to a game should be made by the NFA to try to reduce the opportunity for collusion. Officials
will need advance notice of the games they are required to officiate, however, there is no requirement for an announcement of
this to the general public. This should reduce the opportunity of external parties approaching the officials and persuading them
to accept a facilitation payment.

(d) (i) Briefing notes:

The importance of independence in refereeing decisions to football supporters
Football supporters are important stakeholders in the game of football. It is important that decisions and actions of
referees are based on objective criteria in order to serve their interest in obtaining the fair result.
Potential corruption of referees, and the conditions which permit this, are not in the wider interest of the game or its
reputation. The supporters want consistency in decision making and decisions to be fair so that the outcome of matches
is not determined by accidental or deliberate errors.
There is a greater need for impartiality to avoid the referee being unduly influenced by a vested interest. This would
provide confidence to the supporters that the referee will not be affected by the influence of others and compromise their
professional judgement.
Assurances should be given that the referee will act in the best interest of the game and not in their own interest. Using
technology like a goal decision system would ensure that no one team is given favourable treatment and would increase
the likelihood that a correct decision would be made, or that an incorrect decision can at least be reviewed and corrected
at the time, using appropriate supporting technology.
(ii) The damaging effect which any suspicion of bribery and corruption of match officials can have on the NFA and the
wider reputation of the game of football
The risk of corruption puts the very fabric of the game at risk and undermines the integrity of the sport. Suddenly
everything will be questioned. Trust is an important part of all professional occupations and referees as professionals in
football should apply the same principles. Football supporters and television broadcasters who put their money into the
game might see themselves as the victims and choose to remove their support from the game if a professional approach
is not adopted.
Given the NFA’s public profile, there will be impacts on the NFA’s reputation. Regulators might intervene which could lead
to fines and penalties and affect the overall financial position of the NFA.
Corruption can significantly impact employee morale. The behaviour at the NFA is sending the message that corrupt
business practices like bribery are not serious concerns and that everything can be solved with incentives rather than
through hard work and building relationships.
The authority and reputation of NFA suffers when the outcome of games is unfairly influenced and referees do not officiate
with integrity. More resources might be required to effectively regulate the game of football in Geeland and maintain
the current level of operations. Public relations efforts to reassure stakeholders that integrity is still a core aim for the
NFA would mean re-routing important resources from other operations and lead to an inefficient use of NFA funds and
personnel.
Senior managers will need to spend valuable time and resources to monitor the fallout and reassure stakeholders that the
NFA is still capable of governing the sport. When the news about corrupt officials breaks, stakeholders lose respect and
trust, requiring reassurance that the NFA is still viable and that the game of football is worth watching and paying for.
(iii) Benefits and contents of a professional code of ethics which could be used by referees at the NFA
A professional code provides a foundation on which referees should base all decisions. Referees should fully understand
the expectations of the NFA and the ethical guidelines on which to make decisions. Behaviour in any given situation
should be clear and similar disputes can then be resolved on a consistent basis.
Such a code provides transparency and could enhance reputation and develop a new positive brand for the NFA. The code
will communicate the professional values of referees to the outside world and key stakeholders, who will then understand
the ethical position and know how they should behave in any given situation.
A professional code provides guidelines to help deter unethical practices by placing limits on behaviour and prescribing
behaviour in given situations. The code will state the boundaries across which it is ethically inappropriate to pass.
A professional code provides a framework for conflict resolution in the application of fundamental principles. The code of
ethics provides guidance on how to resolve the conflict and tries to encourage ethical and professional behaviour in the
NFA.

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 Content of a professional code
The code should include an introduction which provides the background to the code, stating who at the NFA it affects,
how the code is enforced and outlines of disciplinary procedure.
The code should define the fundamental principles and values of the NFA. This should include the key principles which
must be followed by all referees. Examples might include professional competence, integrity and objectivity for the
referees.
Including a conceptual framework would help to communicate how the principles should be applied. It should be
recognised that the principles cannot cover all situations and so the ‘spirit’ of the principles must be complied with.
There is a need for a practical and detailed application of the code. This would show examples of how the principles
are applied in specific situations, such as how the code might be applied when referees are approached about potential
match fixing.

2 (a) The role of the CEO

The CEO of TR Co is responsible for both the development and execution of the company’s long-term strategy with the prime
objective of creating shareholder value. This leadership role entails being ultimately responsible for all day-to-day management
decisions and for implementing the company’s long and short-term plans. The CEO should act as a direct liaison between
the board and senior management team, and also communicate to the board on behalf of management. The CEO should
inculcate a culture which establishes those shared attitudes, goals and behaviours which characterise the values promoted by
the company. The most critical aspect of corporate culture is shared values, so the CEO should ensure that these are applied
consistently from top to bottom and across all departments in TR Co.
Inappropriate actions
In the current situation at TR Co the behaviour and motives of the CEO are highly questionable. By pressuring the CFO to apply
accounting treatments which might artificially inflate the actual profit figure, and indirectly causing the financial controller to be
uncooperative with the auditors on this matter, the CEO is not exhibiting the core values expected of the most senior executive
director on the board.
It appears that the primary motivation behind the CEO’s actions is self-interest. By applying the suggested accounting
treatments, it is likely to generate a higher share price at the time the CEO is planning to exercise his share options. This is
clearly an attempt by the CEO to manipulate the reported profit figure to engineer an unrealistic capital gain, and therefore is
an unacceptable abuse of his power.
Although not stated, it could also be inferred that the CEO is using his friendship with the senior partner at Shaw & Bennett to
exert pressure on the auditors to accept the accounting treatments without question. The auditors are acting for the shareholders
of TR Co, so the behaviour of the CEO is a breach of his fiduciary duty as a director of the company.
Correct behaviour
The CEO should require the company’s accounts department to draw up financial statements which accurately reflect corporate
performance through the correct application of accounting standards. This is because any overstatement of profit would not
be in TR Co shareholders’ interests and any subsequent downward adjustment is likely to detrimentally impact on the share
price. Any capital gain received when share options are issued should be an accurate reflection of the additional value which
has been gained since the options were granted, and so this remuneration tool acts as a motivator to drive long-term business
performance through the alignment of shareholder and option holder interests.
The CEO should encourage all staff to be open and engaging in their relationship with the auditors, and not to obstruct them in
their work. This type of cooperative behaviour would be in line with the culture which TR Co would want to exhibit, promoting
and conducting its affairs with the highest standards of integrity, probity and corporate governance. All external parties would
want TR Co to be a transparent company which is being managed in the best interest of its shareholders.
The CEO should never allow any personal friendships to affect his responsibilities as a director of the TR Co. Therefore, in this
instance he should refrain from discussing any aspect of the audit with the senior partner at Shaw & Bennett, instead allowing
the audit committee to effectively discharge one of their primary duties.

(b) The current situation at TR Co presents several threats to the independence of various stakeholders involved in the audit.
The Shaw & Bennett audit team
The auditors are engaged to act on behalf of the shareholders of TR Co to independently validate and verify the accuracy of
the company’s reported financial performance. However, the pressure from the managing partner, who is friendly with the
CEO to not question the policies and sign off the accounts, appears in part to be based on impending renewal of the audit
contract. Although not explicitly stated, it could be implied that any future contract awarded to Shaw & Bennett is contingent
on the outcome of the current audit. Therefore, if the audit partner decides to pursue her doubts further and delay completion
of the audit, this could jeopardise an existing revenue stream for the audit firm. This dilemma clearly presents a threat to her
independence and professional judgement.

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 The financial controller
The financial controller, being a qualified accountant, is obliged to comply with a professional code of ethics. This will govern
the financial controller’s professional behaviour in a number of areas including acting at all times with integrity, which is
currently being challenged by being uncooperative with the auditors. The financial controller should also apply professional
competence and due care always, so knowingly capitalising normal expenditure and failing to make sufficient provisions would
be a further ethical breach. It appears that the financial controller is being intimidated by the CFO to act in this inappropriate
way, which compromises objectivity and independence and is totally unacceptable.
The CFO
The CFO, who is also probably a qualified accountant, is being pressurised by the CEO to ensure that high profits are declared
over the next two years. Although he does not appear to have anything personally to gain except to keep the CEO, his line
manager, happy, the CFO is still using his position of authority to deliver the desired results. This behaviour is of particular
concern because the CFO is a director of TR Co and has a fiduciary duty to act in good faith on behalf of shareholders, yet his
actions are a clear breach of the trust placed in him.

(c) Suitable safeguards which could be introduced to deter unacceptable behaviour and prevent any conflicts of interest include:
Job descriptions
By clearly defining the roles of the CEO and the chairman of TR Co it will avoid any risks arising from conflict of interest. By
concentrating on representing the interests of the shareholders, the chairman is promoting the highest standards of corporate
governance in the company. The chairman may also be responsible for signing off the financial statements, and so would query
any irregularities brought to his attention by the auditors. This safeguard is likely to deter the CEO from acting in a way that is
in his personal interests, rather than those of the shareholders.
Board continuous professional development
All directors should continuously develop their knowledge and skills base, concentrating specifically on the duties and obligations
necessary to be effective members of the board. This would include a greater awareness of their fiduciary relationship to act
in good faith and in the best interests of the company. Duty of care is a specific fiduciary duty, requiring every director to use
reasonable skill and care in carrying out their tasks, and would deter both the CEO and CFO from acting inappropriately at the
TR Co.
Corporate code of conduct
If TR Co developed and issued a corporate code of conduct, it would act as formal control over individuals’ behaviour. By
prohibiting certain behaviours and actions, and then stipulating sanctions which could be applied for any serious breach, the
code should deter anyone in the company from behaving or acting inappropriately. Therefore, if the CEO was aware that his
attempts to manipulate the financial statements could result in disciplinary proceedings being brought against him, he would
be less inclined to act as he did.
Safeguards which could address the threats to independence of those parties involved in the TR Co audit include:
The CFO
Corporate governance provisions include the essential role of an audit committee, which acts as an intermediary to ensure
that external auditors are independent of both the company and its management. The audit committee reinforces the auditors’
independence by providing a channel of communication where they can raise any concerns or issues found during an audit,
which should improve the quality of financial reporting. At TR Co, this would have enabled the audit partner to express her
reservations about the capitalisation of expenses and adequacy of provisions, without needing to refer the matter to attention
of the CFO. The audit team would then be assured of the full cooperation required from TR Co to satisfactorily resolve these
matters before signing off the audit.
The financial controller
The promulgation of a corporate code of conduct should outline the core values of the business, together with those ethical
principles based on them. It can also explain how staff are supposed to approach ethical problems, and the standards to which
professionals will be held to account. This would clarify the responsibility of the financial controller and allow for the correct
discharge of duties without fear of intimidation.
However, should any employee feel that they are being pressurised to act in an inappropriate way, such as sanctioning wrong
accounting treatments, then a whistleblowing channel should be available. This allows for any employee to anonymously raise
their concerns with an independent group of non-executive directors to investigate further.
The Shaw & Bennett audit team
As a professional firm of accountants, Shaw & Bennett must adhere to the code of ethics which governs the accountancy
profession. The code should contain a conceptual framework which allows individual accountants to evaluate and address
any threats to compliance which they identify in the course of their work, and promulgates safeguards to either eliminate the
identified threat or reduce it to a more acceptable level. Such safeguards should include policies and procedures in the following
areas:

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 – identify and handle any personal relationships between audit team members, including partners, and clients;
– manage the reliance on revenue derived from individual clients, such as TR Co;
– quality control policies and procedures to ensure audits are conducted properly;
– prohibiting any individual from influencing the outcome of an engagement; and
– consulting with the firm’s technical team on contentious accounting issues.

3 (a) Internal controls

The main elements/components of the internal control system at Skydda can be evaluated using the COSO enterprise risk
management framework:
Control environment
This establishes the basis for how risk is viewed throughout the company and includes establishing the risk appetite, which
for a pharmaceutical company like Skydda engaged in expensive research is likely to be quite risk seeking. The Skydda
control environment includes the commitment of the board to maintain a sound system of internal control, which will be
encapsulated in the company’s culture. This ‘tone at the top’ of Skydda describes the management style, how authority is
delegated throughout the organisation, and the commitment of the board of directors to a robust and effective internal control
system. The fact they have implemented a range of internal controls in all primary business areas suggests a good control
environment.
Risk assessment
All risks are assessed in terms of their likelihood and probable impact on the company, which in turn defines the risk and
return profile which shareholders have bought into and accept. Skydda invests significant funds in research with the aim of
developing pharmaceutical products with significant future commercial values, however, this is a high-risk strategy with no
guarantees of success. Good practice, as described in the COSO framework for example, encourages the use of a wide range
of both quantitative and qualitative techniques to appraise any investment opportunity to ensure that any residual risk is within
the company’s risk appetite. At Skydda the requirement for a costed project proposal suggests that only those projects which
deliver a satisfactory return for the risks faced will be approved to proceed.
Control activities
The board of Skydda should establish appropriate policies and procedures to ensure that appropriate responses to the risks
assessed are effectively carried out. Such control activities are relevant at all levels within the company, and will include
authorisations to conduct research, commitment of capital expenditure from approved budgets, and periodic performance and
progress reviews. Collectively these control activities are usually referred to simply as internal controls.
Information and communication
Systems need to be developed to enable relevant control information to be gathered and then communicated to the right people
in the organisation so that they can carry out their duties and discharge their responsibilities. This will include both internally
and externally sourced information so that business decisions can be fully informed, essential for a company like Skydda where
the quality of its information systems is critical to this aspect of internal control. Indeed, by effectively communicating internal
control information, such as project progress reports, this will strengthen Skydda’s control environment and improve overall risk
awareness.
Monitoring activities
The entire internal control system must be monitored and supervised with any significant issues reported to senior management.
At Skydda operational performance, such as project progression, will be monitored by relevant management, but ultimately the
board is held accountable for all aspects of business performance.
The COSO framework draws a clear distinction between the ongoing monitoring by management which allows for regular
corrective actions, and the periodic review of the internal control system often conducted by the internal audit function which
might identify more fundamental root causes of problems.

(b) Internal control reporting

By reporting on the effectiveness of internal controls to its shareholders, the board of Skydda will inspire greater confidence in
the company’s performance. This is critical when the company engages in capital intensive research activities as it illustrates
that the board is managing risks responsibly and not taking excessive risks beyond the agreed appetite. External reporting can
act as a stimulus and control on directors’ decision making because it defines their accountabilities. They are unlikely to take
unnecessarily risky decisions and will obtain further information in areas where internal controls have been identified as weak
or ineffective.
To provide shareholders with the necessary assurance they require, the board should conduct an annual review of the
effectiveness of the company’s internal control systems, which should then be formally reported to shareholders. The Skydda
annual review should cover all material controls, including financial, operational and compliance controls, as well as risk
management systems. The review should be conducted against the COSO elements, thereby providing a holistic assessment
of the effectiveness of the internal control systems.

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 The main content which should be included in an effective report on internal controls at Skydda includes:
(i) A formal statement declaring the company’s willingness to take on risk (i.e. its ‘risk appetite’), together with its required
supporting culture and whether this culture has been successfully embedded within the company.
(ii) Detail of the operation of internal control systems, which should also cover its design, implementation, monitoring and
review. There should be a description of the main features of the company’s internal control and risk management
systems in relation to its financial reporting processes.
(iii) Identification of risks and the determination of those which are considered significant to the company. Any incidence of
significant control failings or weaknesses which have been identified at any time during the reporting period which may
have caused material losses. This should include the extent to which they have, or could have, resulted in any unforeseen
impact.
(iv) Significant changes in the nature, likelihood and impact of principal risks, alongside Skydda’s ability to respond to
changes in its business and the external environment. This should include how the integration of risk management and
internal controls has been incorporated into the business strategy.
(v) The extent, frequency and quality of the communication of the results of management’s monitoring to the board which
enables it to build up an aggregate assessment of the state of control in the company and the effectiveness with which risk
is being managed or mitigated. This in turn determines the effectiveness of the company’s external reporting processes.

(c) Information flows

Internal control and risk management are fundamental aspects of good corporate governance, which in effect means that the
board is responsible for the identification and management of all risks facing the company. For the Skydda board to manage
risks and review the overall effectiveness of the company’s internal control systems, it will need adequate information flows
from all areas of the business.
Such information would then be used by internal audit if they are tasked to identify any control weaknesses or significant risks
within the system. In this context, the control information needs to provide a complete and up to date picture of the dynamic
risks facing the company, and how well the internal controls are at addressing them. For Skydda, which operates in a highly
regulated environment, any changes to the protocols governing clinical trials for new drugs could have a significant impact on
the time required to take a newly developed product to market.
Directors require access to information from wide and varied sources to supervise and manage the internal control systems in
Skydda. The sources will come from both formal periodic reporting and ad hoc communications from stakeholders who wish
to raise concerns. It is important that the information can be integrated and reconciled to provide management with a complete
and accurate picture of the situation, as failure to do so could further exacerbate any control deficiency and increase the risks
faced by the company. This might include analyses of major competitors to determine if they are progressing their research
at a faster rate than Skydda, since if they get an influenza cure to market first it would diminish the value of any research
undertaken at a high cost to the company.
Internal control systems provide the core operational information necessary to manage day to day activities in Skydda. This
information will be predominantly internally sourced, detailed and prepared very frequently so that any required corrective
action can be effected without delay. Operational control information will be used by organisational functions to report on
a regular basis to senior management and the board about the effectiveness of all business activities. In Skydda this could
include research programme managers submitting reports on product developments, including: costs against budget; progress
against predetermined milestones; and notable achievements.
The assembly of accurate internal control information will be required to compile reports to shareholders and other external
stakeholders. If the board is to retain the confidence and support of its shareholders it must be able to prove to them that
their investments are safeguarded and likely to deliver an acceptable level of return. Internally generated financial information
provides an objective basis for its shareholders to decide if they wish to retain, increase or dispose of their investment in
Skydda, which is fundamental to the company’s ongoing success.

4 (a) When evaluating any public sector investment proposal, it is essential that value for money can be proven so that good
stewardship of public finances can be displayed. This is because the public sector differs from the private sector in many ways,
but primarily in terms of aims and purpose, sources of finance and accountability. For the Livermouth Water Authority, value
for money assesses whether it has obtained the maximum benefit from the chosen water supply and distribution project from
the resources available to it.
The purpose of the value for money assessment is to develop a better understanding of costs and results so that public officials
can make more informed, evidence-based choices. It does not mean always going for the cheapest option, but instead ensuring
that the Livermouth Water Authority gets the required quality of provision at the lowest price. To achieve this, value for money
is evaluated using three criteria:
Efficiency, a measure of productivity which numerically determines the conversion of resources used (inputs) into the results
achieved (outputs). To provide water to Livermouth, the Housewater proposal would have only required the transfer of the
groundwater over less than 20 kilometres, whereas the Coombe Valley is located 60 kilometres away and separated from
Livermouth by mountains and valleys. It is therefore apparent that the Housewater site would be a more efficient source of
water for Livermouth.

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 Effectiveness is the impact of obtaining value for money and can be both quantitative and qualitative in nature; but can
perhaps be best described as delivering the best result from the investment. The purpose of the scheme is to meet the growing
demand for clean water from the Livermouth population, but using the limited information provided one is unable to determine
the amount of additional water available from either source.
Economic is the price paid (the impact on people as well as actual money spent) for providing a service at best value, taking
price and quality into account. The scenario states that the cost of the Coombe Valley project is five times more than the
Housewater scheme, so on purely economic grounds it is hard to justify the damming of the Coombe Valley. This is further
compounded by the government decision to levy this cost on to both the Livermouth population and the people of the Lambria
region, who do not themselves benefit from the scheme, while hundreds are inconvenienced by it.

(b) The decision to obtain water from Lambria rather than the Housewater site also presents the Livermouth Water Authority with
an ethical dilemma. The Tucker 5-question model could be used to examine this decision in both business and ethical terms
by asking the following sequence of questions:
Is it profitable?
This question seems only appropriate to a profit seeking company and not a public sector organisation. However, if one
considers the economic aspect of value for money and compares the money to be spent on the Coombe Valley project to the
on-going costs of transporting water from the Housewater site, one will be able to determine the least expensive (so most
profitable) option.
Although the scenario does not supply financial data about each proposal, the cost of transporting groundwater only
20 kilometres from Housewater to Livermouth is likely to be the least costly option. Consequently, it is reasonable to conclude
that the answer to this question is no, the Coombe Valley project is less profitable when compared to the alternative.
Is it legal?
When determining the answer to this question, it must be made regarding the legal jurisdiction in which the decision is taking
place. It is evident from the scenario that the government of Deeland, which has jurisdiction in Lambria where the Coombe
Valley dam will be built, is supportive of the proposal, indeed they decided that it should proceed. So, the answer to this
question is yes, because the Deeland government has the right to make laws and would have duly amended relevant legislation
if this project breached any aspect of the law before considering the proposal.
Is it fair?
This question considers the varied impacts which the decision has on affected stakeholders, who may be harmed by, or benefit
from it. The building of the Coombe Valley dam will affect the following groups of stakeholders:
– Several hundred local inhabitants will be displaced and forced to relocate to an area to the east of the construction for
their safety.
– Animals currently living in the valley may perish when their natural habitat is flooded to form the reservoir.
– The Lambrian population must financially contribute to a dam which will supply water which they do not need.
– The Livermouth population will be provided with a plentiful supply of clean water to meet the demands of its growing
population.
– Employment in Lambria will be increased as the project will inevitably draw on local and regional labour within Lambria.
From the above, the balance seems to be heavily towards harming more of the stakeholder groups, so perhaps it would be
correct to answer this question as no.
Is it right?
The answer to this question depends on the ethical stance adopted by the decision maker, whether they adopt a deontological
or teleological approach. The deontologist would be able to judge the righteousness of a decision in advance by basing it on
pre-determined criteria, and providing these were universally and consistently applied, the decision could be justified on ethical
grounds. A teleologist would be more concerned with cause and effect and how a decision will have consequences on others,
so it may base it on which outcome is best for the greatest number of people.
Using the information provided, it would be reasonable to consider the decision as unfair from both ethical perspectives.
Deontologists would question the moral right of the Livermouth Water Authority to select the most distant site, disrupting the
lives of residents, damaging the environment and taxing them rather than choosing the Housewater option. Teleologists would
weigh up the merits of the argument and consequential outcomes, and might find in favour of the Coombe Valley project
because of what it will do for the depressed region in terms of employment, but this would depend on whether the benefit
of additional employment outweighs the disadvantages of re-locating people, causing damage to wildlife and to the natural
environment and raising more taxation from Lambrian residents.
Is it sustainable or environmentally sound?
This question requires the decision maker to consider the environmental and social impacts which the decision will have,
both positively and negatively. To some extent the environmental and social footprints are being determined, and these are
particularly pertinent to this decision.
The Coombe Valley dam project will require an extensive amount of tunnelling and excavation work so that the water from
the reservoir can be piped to the Livermouth population, and this is in an area designated as of outstanding natural beauty.
The flooding of the valley will also harm the indigenous fauna and flora, some of which is rare and protected. However, it

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 will provide employment opportunities during the construction works, and provide a plentiful supply of clean water to the
population of the growing city of Livermouth.
However, on balance from an environmental perspective, the greater disruption and engineering works required would mean
that the Coombe Valley dam project would be the least environmentally sustainable option.
In conclusion, Tucker’s 5-question model would appear to not be supportive of the ethical case for obtaining water from
Lambria rather than the Housewater site.

(c) The Livermouth Water Authority, as a public sector organisation, has an agency relationship with its principals, who in this
situation are both the elected government of Deeland and the taxpayers of Deeland. Because the taxpayers, who are also the
electors of the government, may have their own specific demands, it can be very difficult to reconcile a public policy position
which meets the needs of competing groups. Noticeably the public demonstrations in Lambria were in direct opposition to
the Deeland government’s decision to build the dam in the Coombe Valley. However, the public outcry arose from the forced
relocation of the population, the damage to the natural environment and the additional costs to Lambrian taxpayers. By
proceeding with the project, the action of the Livermouth Water Authority conflicts with the wishes of one its principals to satisfy
the demands of the other for a clean supply of water.
However, as a public sector organisation whose prime purpose is to provide a public service, its performance is centrally
regulated and it is directly accountable to the government. It must demonstrate that public money is being used appropriately
and that stated objectives are being met in the provision of its public service. The government in turn is answerable to the
electorate, so if public policy is widely opposed, then the elected representatives and government ministers can be periodically
voted out of office. In a democracy, like Deeland, political parties argue over the nature of public policy and they do so from a
set of underlying assumptions which support outcomes.
The government has a duty to ensure that an adequate supply drinking water is available to the population of Livermouth, and
it ultimately decides on how this is to be delivered and funded. The Coombe Valley decision is, therefore, contestable on two
levels:
– Proceeding with the project against the will of the people, when a suitable and less costly and environmentally less
damaging alternative at Housewater had been identified. The lobbying by the powerful and influential stakeholder, the
local landowner Roger Capstone, may have directly influenced the decision. In a democracy, it is vital that government
decisions are taken in the wider public interest rather than protecting the vested interests of a rich and powerful minority.
– Financing the project through a local tax, not only levied on the population of Livermouth who benefit directly from the
new water supply, but also the people of Lambria who receive no marginal benefit from the project only a loss of land,
can be perceived as unfair. It is the government’s responsibility to determine how public projects are to be funded and it
could have decided to finance the Coombe Valley programme from general taxation, thus avoiding some of the controversy
and apparent unfairness. Another alternative would be for the government to encourage private investment utilities
companies, who then recover their costs from their future customers.

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Professional Level – Essentials Module, Paper P1 (SGP)
Governance, Risk and Ethics (Singapore) September/December 2017 Sample Marking Scheme

1 (a) 2 marks for explanation of importance of role

2 marks for each criticism
(10 marks)

(b) 2 marks for each condition discussed in relation to the referees

(8 marks)

(c) 1 mark for each purpose of an internal control system to a maximum of 4 marks
1 mark for each recommendation related to the control environment at the NFA up to a maximum of 4 marks
2 marks for each recommendation related to the refereeing of matches at the NFA up to a maximum of 4 marks
(12 marks)

(d) (i) 2 marks for each explanation of importance to supporters

(4 marks)
(ii) 2 marks for each point assessing the damage of bribery and corruption
(6 marks)
(iii) 1 mark for each benefit to the NFA to a maximum of 4 marks
1 mark for each point on the content of the code to a maximum of 4 marks
(6 marks)
Professional marks for clarity, persuasiveness, flow and appropriate structure
(4 marks)

(50 marks)

2 (a) Up to 3 marks role of the CEO described up to 3 marks

Up to 2 marks for each criticism of CEO action explained with action suggested up to 4 marks
One mark if no recommendation of appropriate behaviour
(Max 7 marks)

(b) Up to 2 marks for the CFO threat to independence up to 3 marks

Up to 2 marks for financial controller threat to independence up to 3 marks
Up to 2 marks for Shaw & Bennett threat to independence up to 3 marks
(Max 6 marks)

(c) Up to 2 marks for each safeguard to prevent conflicts up to 6 marks

Limit to one mark if not related to TR Co
Up to 2 marks for each safeguard addressing threats to independence up to 6 marks
Limit to one mark if not related to TR Co
(Max 12 marks)

(25 marks)

3 (a) Up to 2 marks for each element of an internal control approach evaluated? up to 12 marks
Limit to one mark if not related to Skydda

(b) Up to 2 marks for each need of reporting to shareholders explained

1 mark for each element of the internal control report described
Max 8 marks

(c) Up to 2 marks for each need of information flows

Limit to 1 mark if not specifically related to Skydda
Max 5marks

(25 marks)

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4 (a) Up to 2 marks for a contextual introduction of value for money
Up to 2 marks for efficiency as a criterion for comparison
Limit to one mark if not directly related to the water diversion project proposals
Up to 2 marks for effectiveness as a criterion for comparison
Limit to one mark if not directly related to the water diversion project proposals
Up to 2 marks for economy as a criterion for comparison
Limit to one mark if not directly related to the water diversion project proposals
(Max 8 marks)

(b) 2 marks for each of Tucker’s 5-questions used and applied to the information correctly
Limited to one mark per question if not used to evaluate the moral case described in the scenario
(Max 10 marks)

(c) Up to 2 marks for each contestable point of public sector policy discussed (4 marks)
Limited to one mark if not specifically related to Deeland
Up to 2 marks for each discussion of how the drinking water project should be decided upon (4 marks)
(Max 7 marks)

(25 marks)

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