Accounting in

Organisations and Society

Module 2 – Accounting and its role in managerial activities
Topic 1: Setting the scene

Topic Notes

Topic 1: Setting the scene

By Craig Deegan

RMIT University
Accounting and its role in managerial activities
Topic 1: Setting the scene
 Accounting in Organisations and Society

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March 2017

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Table of Contents
Learning Objectives ..................................................................................................... 1
Different stakeholders have different demands for information ................................... 2
So, what does management do? ................................................................................. 4
The accountants as part of the management team ..................................................... 4
The accountant’s role in managerial activities ............................................................. 5
Planning: key factors to consider ................................................................................ 5
Planning: planning as a continual process .................................................................. 6
Planning ...................................................................................................................... 6
Planning: managers and accountants need to think about the ‘long term’ .................. 7
Planning: value creating within an organisation .......................................................... 8
Planning: the role of the accountant in adding value- further considerations .............. 9
Planning: components of an Organisation’s plan ...................................................... 11
Organising: value drivers and resource allocation .................................................... 13
Organising: competency of accountants ................................................................... 15
Summary ................................................................................................................... 17
References ................................................................................................................ 20

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Learning Objectives
By the end of this topic you should be able to:
• Explain that there will be many relevant items of information about an organisation (an
‘information pool’), which might serve multiple purposes for multiple stakeholders.
• Provide a general description of the functions of managers.
• Explain that the accountant is a key part of the management team.
• Explain the vital role of planning in helping an organisation succeed.
• Explain the meaning of a ‘resource’;
• Explain that managers/accountants need to focus on various facets of Organisational
performance, and need to consider both the short term and long term implications of their
decisions.
• Explain the ways in which accountants can ‘add value’ to an organization, and to the
stakeholders of the organisation.
• Be able to identify some ‘drivers’ that will assist an organisation in creating value.
• Describe some key competencies that accountants should possess if they are going to
‘add value’ to an organisation and its stakeholders.
• Provide an overview of what components make up an Organisational plan.

Suggested Reading
Management Accounting in Context, 2014 in Horngren, Charles T., Datar,
Srikant M., Rajan, Madhav V., Wynder, Monte B., Maguire, William A. A. &
Tan, Rebecca C. W., Cost accounting: a managerial emphasis, 2nd ed.,
Pearson Australia, Frenchs Forest, NSW, pp. 6-14.
The International Federation of Accountants (IFAC), 2011, Competent and
Versatile: How Professional Accountants in Business Drive Sustainable
Success. <Accessed 3 Feb, 2017>
http://html5.epaperflip.com/?docid=e2b154a4-7900-40f7-99c8-
a53a013ce14f#page=1

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Opening Question
Accounting is expected to ‘create value’ to an organisation. In this regard:
What might we mean by ‘create value’?
As part of an organisation, how can accounting ‘create value’ to the
organisation and the stakeholders of the organisation?

Different stakeholders have different demands

for information
The majority of introductory accounting textbooks start with the front half of the book
addressing financial accounting for external stakeholders and then conclude with the second
half of the book addressing management accounting for internal stakeholders.
• In this course we will not provide a somewhat artificial delineation between management
accounting (information used internally for managing an organisation) and financial
accounting (financial reports used by external parties, such as shareholders and
creditors).
• This separation is artificial as, for example, much of the information generated on
product ‘costs’ (however determined) – which is often classified as a component of
management accounting - has relevance to stakeholders inside and outside the
organisation, whether this information be about financial costs, environmental costs or
social costs.
• Further, much planning (and collection of information) occurs before we are in a position
to report the results by means of financial accounting (which tends to report on an ‘after-
the-fact’ basis). Hence discussing financial accounting (with its emphasis on actual
profits and cash-flows) prior to other aspects of ‘accounting’ seems to be somewhat
inconsistent with reality.
• Therefore, whilst much of the material in this module has traditionally been classified as
belonging to ‘management accounting’ we will acknowledge that much of the information
that is necessary for managing a business also has relevance to stakeholders not
directly involved in the management of the organisation.
− Whilst many external stakeholders will have an interest in information used internally,
for proprietary or competitive advantage reasons, such information might not be
shared with external parties. The achievement of some of the organisation’s goals
might be dependent upon keeping particular information away from competitors.
− Moderating this disinclination to ‘share’ information will be considerations of
stakeholders’ ‘rights-to-know’ and regulative requirements for disclosure (for example,

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emissions of certain substances must be disclosed pursuant to regulation despite the

negative implications that might result in terms of organisational reputation).
− Also, certain ‘powerful’ stakeholders will be able to access information not
necessarily made available to other stakeholders.
• For example, information about the following will be of relevance to many different
stakeholders:
− The organisation’s actual and projected performance (financial, social and
environmental, with performance evaluation being influenced by whether the
organisation is ‘for profit’, ‘not-for-profit’, community-based, etc.),
− The organisation’s control of resources,
− The organisation’s resource usage,
− Organisational impacts (which can include economic, social and environmental
impacts),
− Compliance with organisational goals, regulations and/or particular stakeholder
expectations,
− Implications of future plans, and so forth, on various stakeholders including ‘the
environment’.
• The different stakeholders with such interests might be internal or external.
• Therefore, it is somewhat artificial to say that particular information is only relevant to
internal stakeholders (e.g., managers), or to external stakeholders (e.g., shareholders).
− In effect, there will be a ‘pool’ of information to draw upon which will be of interest (or
not) to a variety of stakeholders.
− Some items of information will have multiple uses/purposes.

Review Questions
Following from the previous section, think of some specific pieces of
information that would have multiple uses for multiple stakeholders (both
internal and external).
Identify information that would be useful for management purposes, but
would not be disclosed externally because of potential damage to
commercial advantage.

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So, what does management do?

In order to understand the type of information that will be beneficial to managers, we first
need to understand the role and responsibilities of the manager.
Generally speaking, management:
• Plans: What does the organisation want to do/achieve?
• Organises: How does the organisation achieve its goals, plans?
• Makes decisions: Determining the best course of action amongst alternatives.
• Monitors performance: How is the organisation performing relative to what it wanted to
achieve?
• Revises plans in light of performance/feedback: (and the cycle continues.)

The accountants as part of the management

team
The accountant has a role in all of the above activities. Accountants are effectively
‘gatherers’ of information. Professional Accountants are trained in the discipline of collecting
relevant information and compiling reports/’accounts’ that create value to the organisation
(accounting).
According to IFAC (2011,p.6):
Professional accountants in all organizations have a significant role in:
− Faming business models;
− Challenging conventional assumptions of doing business and redefining success in
the context of achieving sustainable value creation;
− Encouraging and rewarding the right behaviours;
− Ensuring that decisions are supported by the necessary information, analysis, and
insights;

− And ensuring that monitoring and reporting performance go beyond the traditional
ways of thinking about economic success.

Web Resource
IFAC website can be accessed through the following link:
https://www.ifac.org

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The accountant’s role in managerial activities

Planning: key factors to consider

• Planning is central to managing a business.
• Planning should be a continuous process, which should start well before an
organisation commences operations.
• The plan provides a benchmark against which future performance can be assessed.
• Various factors will feed into an organisation’s plan, such as:
− The organisation’s mission.
− Available resources (including human resources) and alternative locations of
resources.
− Various stakeholders’ expectations (current and projected).
− Current and future technologies.
− Economic, social and environmental implications of various strategies.
− Existing and projected regulations.

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Planning: planning as a continual process

• Once plans have been developed they need to be implemented with related activities
(and ‘costs’) being monitored and controlled for compliance with standards/goals that
were established and opportunities for improvement to processes need to be
continuously considered.
• In light of performance and experience processes that can be improved, previous plans
can be revised, and new plans established.
• Feedback from interested stakeholders can also be used in terms of how they have
responded to the actual process/outputs of the organisation.
− For example, the use of stakeholder surveys/social audits.

Planning
In performing managerial duties, broader issues of ‘sustainability’ need to be incorporated
within organisational strategy.
According to IFAC (2011, p. 6):
• Sustainable development and the sustainability of organizations have become
mainstream issues for politicians, consumers, and business leaders.
• From an economic, as well as an environmental and social perspective, sustainability
issues are transforming the competitive landscape, forcing organizations to change the
way they think about products and services, technologies, processes, and business
models.
• Long-term sustainable value creation requires responsible organizations to direct their
strategies and operations to achieving sustainable economic, environmental, and social
performance. It also requires incorporating wider stakeholder perspectives and issues
into decision-making.
• Ensuring that organizations pursue sustainable business models and development
practices will require radical changes in the way they do business. Achieving a
sustainable future is possible only if organizations recognize the role that they can and
need to play.
• Effective action by the accountancy profession and professional accountants to better
integrate and account for sustainability is an essential part of the response.
• Governing bodies and organizational Governing bodies and organizational leaders
should be focused on the long-term sustainability of their organization, and they should
be confident that their business models will deliver this.
Extending the focus of performance beyond the ‘financial’.
According to IFAC (2011, p. 8):
• A narrow focus on financial performance, such as short-term earnings and profits, at the
expense of social or environmental performance can result in a loss of trust in an
organization and damage overall performance, resulting in value destruction for all
stakeholders, and, in some cases, losing its license to operate.

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• Issues of human rights; corruption and bribery; non-compliance with labour and
environmental standards and responsibility; and discrimination in respect to employment
and occupation can be as important to the long-term prospects of larger, publicly owned
organizations, as well as to smaller organizations.

Example
The Exxon Valdez oil spill occurred in Prince William Sound, Alaska in
1989, when Exxon Valdez, an oil tanker bound for Long Beach, California,
struck Prince William Sound's Bligh Reef and spilled 11 to 38 million US
gallons of crude oil over the next few days. It is considered to be one of the
most devastating human-caused environmental disasters.
This disaster resulted in the International Maritime Organization introducing
comprehensive marine pollution prevention rules (MARPOL) through
various conventions. It can be accessed via the following link:
http://www.imo.org/en/About/Conventions/ListOfConventions/Pages/Interna
tional-Convention-for-the-Prevention-of-Pollution-from-Ships-
(MARPOL).aspx
Also, as a result, CERES Principles, 10-point code of corporate
environmental conduct, were announced. Since then, over 50 companies
have endorsed the Ceres Principles, including 13 Fortune 500 companies
that have adopted their own equivalent environmental principles. They can
be accessed via the following links:
https://www.greenbiz.com/blog/2010/05/28/bps-moment-truth
https://www.ceres.org/about-us/our-history/ceres-principles

Planning: managers and accountants need to

think about the ‘long term’
According to IFAC (2011, p. 9):
• The need for short-term results can distract managers from their long-term vision.
• Defining the long-term and embedding it into operations in a meaningful way can be
complex.
Pressures to focus on the short term – for example, through periodic (12 month) reporting
of profits and managerial bonuses based on yearly profits or sales – all increase the
pressure to focus on the short term.

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Review Questions
Assume a manager of a company that undertakes a lot of research and
development (R & D) is approaching retirement.
The manager has a major say in determining whether particular R & D
projects should be commenced.
The average project is in the R & D phase for four years before it
generates income. During this time, the costs associated with the R &
D reduce the profit of the company.
The manager receives a fixed salary of $250,000 plus an annual bonus
which is 2% of annual profit.
Question: Do you think it is a good idea that the manager still receives
the bonus particularly given that the manager is approaching
retirement?

Planning: value creating within an organisation

• At its core, an organisation would be expected to create ‘value’ for various stakeholders
who might include owners, customers, employees, suppliers, suppliers’ employees,
community-based groups, and the ‘environment’.
− The value creation should ideally occur in an ecologically and socially sustainable
and responsible manner (and the community is increasingly expecting this to be the
case).
• This value creation is achieved by utilising various resources in a way, which leads to
desirable outcomes.
− And what is deemed ‘desirable’ might evolve across time.
• Porter (1985) describes the sequence of activities undertaken by an organisation as a
‘value chain’. Well performing organisations create relatively more value from the
various steps involved in acquiring and transforming resources into products and
services.
• Greater efficiency creates greater value.
• Value creation requires clear vision, strategy, and planning.
• Value creation relies upon well-functioning corporate governance (with corporate
governance referring to processes/policies/systems in place to help ensure an
organisation meets its objectives).

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Figure 1: Porter’s Value Chain

YouTube Resource
Do you know what a value chain is?
The following video could give you some ideas.
https://www.youtube.com/watch?v=g8p2H7EvoGM

Planning: the role of the accountant in adding

value- further considerations
We have already discussed the role of the accountant in adding value. A report by IFAC
(2011) entitled ‘Competent and Versatile: How professional accountants in business drive
sustainable organizational success’ notes (p. 15):
What Roles Do Professional Accountants in Business (PAIB) Perform:
The roles professional accountants perform can be described as creators, enablers,
preservers, and reporters of sustainable value for their organisations in both performance
and conformance* dimensions:
• As creators of value, by taking leadership roles in the design and implementation of
strategies, policies, plans, structures, and governance measures that set the course for
delivering sustainable value creation.

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• As enablers of value, by informing and guiding managerial and operational decision

making and implementation of strategy for achieving sustainable value creation, and the
planning, monitoring, and improvement of supporting processes.
• As preservers of value, by ensuring the protection of a sustainable value creation
strategy against strategic, operational, and financial risks, and ensuring compliance with
regulations, standards, and good practices.
• As reporters of value, by enabling the transparent communication of the delivery of
sustainable value to stakeholders’.
*Conformance can be defined as: Certification or confirmation that a good, service, or conduct meets the
requirements of legislation, accepted practices, prescribed rules and regulations, specified standards, or terms
of a contract.

Hence, accountants do more than just provide accounts of past financial performance.
They are expected to ‘add value’ to the organisation, and the ‘better’ the accountant, the
‘greater’ the value-add.
This can be diagrammatically represented as follows:
Figure 2: The Roles and Domain of Professional Accountants in Business

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Review Questions
Provide examples of how the accountant can add value in each of the
different roles just described.

Questions
The previous notes discussed the notion of an organisation ‘creating
value’. Creating value is a core responsibility of management.
• From what/whose perspective should we assess value?
• Is there an objective/absolute answer to such a question?
• What if an action increases the supply of particular materials for
manufacturing and effectively increases the wealth of workers and
employees but causes environmental damage – is this ‘creating
value’?
• What if a supermarket introduced self-service check-out machines to
enable them to reduce staff numbers, and wage costs and therefore to
increase ‘profit’ and therefore dividends for shareholders – is this
‘creating value’?
Hints: We consider the issue here of corporate social responsibility.

Planning: components of an Organisation’s plan

We have briefly discussed the role of planning. We will now consider some of the
components of an organisation’s plan.
• Overview /description of the business
− What does the organisation want to do and achieve and where does it want to do it?
− Who are its key stakeholders/customers?
− Why are they key stakeholders?
− Who are the key personnel and their roles/expertise?

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• Financial Plan
− What are the funding requirements and what are the potential sources of funding?
− What are the projected cash flows in the various phases of operations?
− What is the projected financial performance of the organisation?
− What budgets need to be prepared? (For example, sales (service revenue) budget,
operating expenses budget, purchases budget, manufacturing overhead budget,
administrative overhead budget, advertising budget, capital acquisition budget, cash
budget?)
• Marketing Plan
− Current competition
− Expected competition
− Expected demand
− Factors likely to influence demand
− Mechanisms in place to make the most of market opportunities and to assess
changes in the market.
• Social and environmental management plan
− Must operate in a socially and environmentally responsible manner
− What are the key social and environmental impacts generated from potential
activities?
− How were these impacts assessed?
− Determine the extent of the impacts to be assessed in terms of importance of
including supply chain considerations
− Life-cycle analysis
• Operating plan
− Necessary actions to succeed and protect market position (including need for
copyright/patents/trademarks etc.)
− Key suppliers/supply chains
− Required employees
− Implications of regulations
− Stakeholder expectations and related engagement policies

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All of the above plans would all be highly inter-related and no components can be
considered in isolation from the others. Changes in plans would feed through to changes
in other components of the planning.
For example, a change in the social and environmental management plan (for example, it
is decided that the workplace safety of employees within the supply chain needs to be
assessed as part of a purchase decision) could have implications for financial issues,
marketing, and operations.
If we consider the previous notes, we will see that the process of planning requires the
collection/capture of vast amounts of information.
− Some of this information will be financial and some will be non-financial.
− Some information will relate to the resources of the organisation whilst other
information will relate to impacts beyond the organisation.
− Consideration of numerous potential impacts should be considered as part of the
resource allocation decisions.

Organising: value drivers and resource allocation

Thakor et al (2001) also noted that ‘value creation’ – which is an important focus of
accountants - will be influenced by:
− Culture and leadership styles in place.
− Management’s willingness to collaborate.
− Preparedness to be innovative.
− The level of efficiency being embraced.
− Awareness of market opportunities and changes therein.
The determination of what influences value will in turn impact:
− The way resources are used.
− The way performance and resource usage is measured and associated rewards
determined.
− For example, if an organisation has a goal of reducing the amount of water being
used within an organisation, or the amount of CO2 being emitted then managers with
an ability to influence these outputs might be rewarded financially if they can achieve
particular reduction targets (which themselves would be reported in particular
accounts prepared by an ‘accountant’).

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Review Questions
Tight-tops Ltd outsources’ the production of shirts to an unrelated
organisation in Indonesia. It believes that one way it can ‘add value’ to
what it does is to improve the health and safety of the employees in the
Indonesian factory.
Question: How might the accountant assist this quest to add value?

According to IFAC (2011) there are eight drivers of sustainable organisational success,
that provide the basis for understanding how the global accountancy profession needs to
support the development of professional accountants, so that they can help organisations
achieve sustainable value creation. The drivers are summarised in the following figure.
Figure 3: Drivers of Sustainable Organisational Success

(Source: IFAC, 2011)

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Organising: competency of accountants

The 8 drivers of organisational success – as described by IFAC (2011) – require
accountants to have particular core competencies as described below.
Figure 4: Expected Key Areas of Competency for Professional Accountants in
Business

(Source: IFAC, 2011)

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(Source: IFAC, 2011)

Review Questions
We earlier noted that accountants have a role in encouraging and
rewarding the ‘right behaviours’.
What mechanisms might an accountant help put in place to encourage an
organisation to reduce its consumption of electricity (which we might
assume is predominantly sourced from coal-fired power stations)?

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Summary
In this topic, we considered:

In the topic that follows we will consider:

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Review Questions
Case Study: DC Surf Co.
Download video:
https://smoovivideov1.s3.amazonaws.com/11fce144-8af0-
e234_7452.mp4’

Background:
De and Claire studied a business course together 5 year ago. De majored
in Marketing and Claire majored in International Business. They met
through the University Surfing Club.
De works full-time as a marketing Assistant for a major retailer. On the
weekends he shapes surfboards in his shed. It started out as a hobby but
he has now started selling his boards in a few local surf shops. Claire
works part-time for a graphic design firm. She also designs her own t-
shirts and sells them online. She currently ships her t-shirts to 7 different
countries throughout South East Asia as well as the US.
De and Claire surf together a couple of times a month and often talk
about starting a business together. Finally, they have decided to take the
plunge and have set up ‘DC Surf Co’ with the vision of supplying high
quality surfing equipment and apparel. They have decided to start small
but have plans to grow quickly. For now, they are operating from a small
home office in De’s lounge room.
De and Claire decided to set up their business as a partnership. They
employed De’s neighbour Johnny on a part-time basis to assist with
setting up the website and other administrative tasks so that De and
Claire can focus on growing the business. De already had a relationship
with a few of the local surf shops and they have agreed to stock the full
range of DC Surf Co boards and apparel. They have also started selling
their goods online through their website. They have made a few bulk
purchases of materials (fiberglass, cotton, fabric) and are storing these in
De’s lounge room. They realise that they are quickly running out of space
and expect to either rent or purchase commercial premises within the next
6 months.
De and Claire considered restructuring the business from a partnership to
a company. They initially set up the business as a partnership because it
seemed to be the easiest and least expensive option but they then
wondered if perhaps they made the decision in haste and should have
researched business structures more thoroughly before making their
choice. After further consideration, they restructured the partnership into a
company.

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A large surfboard manufacturer has recently received negative media

attention for importing their surfboards into Australia from China where
the workers are subject to unsafe working and poor wage conditions. DC
Surf Co have noticed that a lot of potential customers are now enquiring
as to how and where DC Surf Co makes their boards. De is still
manufacturing his boards locally and has now employed one experienced
staff member and one trainee to assist him. Prior to the recent media
attention, no-one really asked about the origins of the boards and De has
never made an effort to voluntarily provide this information.
Additional Information
De decided to label his locally made boards with a sticker which says
“designed and made locally in Australia”. Since promoting his boards as
locally made, De has noticed a significant increase in sales but is finding
that most of this extra money is being used to purchase materials and pay
staff wages. De isn’t sure how well the business is performing and how he
should best go about improving the performance of the business. He
came across this article about how to make a living as a surfboard maker
and has decided that he and Claire should develop a business plan for
their business. De also thinks that they should hire an accountant to
assist them in their business but Claire isn’t convinced that this is
necessary and is worried about the extra cost. They decide on a
compromise which is to advertise a position for a part-time accountant to
work in the business 2-3 days per week.
Activity 1:
You have decided to apply for the role and are in the process of preparing
your application. As part of the process you are required to answer a
series of questions. The first of these questions asks:
Complete the table below by identifying five specific pieces of information
you would collect in your role as an accountant at DC Surf Co, identify
which stakeholders this information would be reported to and for what
purpose this information might be used.

Specific Information Stakeholder(s) Purpose(s)

Activity 2:
You have been shortlisted for the role and have secured an interview. At
the interview, Claire seems reluctant to employ an accountant. She asks
“how can an accountant add any value to our business?” Prepare a
response to Claire’s question with specific reference to the additional
information provided above and the accountant’s role in business
planning.

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Activity 3:
Congratulations! You got the job! To assist De and Claire with their
business plan, you are required to understand how Porter’s Value Chain
relates to their business. Use the information you have been provided so
far in the case study and conduct your own research on the surfing
industry to construct a diagram of the DC Surf Co value chain.

References

Ceres, n.k. The Ceres Principles, Accessed 3 Feb, 2017,

https://www.ceres.org/about-us/our-history/ceres-principles

International Maritime Organisation (IMO), n.k., International Convention

for the Prevention of Pollution of Ships (MARPOL). Accessed 3 Feb,
2017,
http://www.imo.org/en/About/Conventions/ListOfConventions/Pages/Inter
national-Convention-for-the-Prevention-of-Pollution-from-Ships-
(MARPOL).aspx

Porter, 1985 Competitive Advantage: Creating and Sustaining Superior

Performance, New York: Free Press.
The International Federation of Accountants (IFAC), 2011, Competent
and Versatile: How Professional Accountants in Business Drive
Sustainable Success. Accessed 3 Feb, 2017,
http://html5.epaperflip.com/?docid=e2b154a4-7900-40f7-99c8-
a53a013ce14f#page=1

Tulay, M., 2010, BP’s Moment of Truth, GreenBiz, Accessed 3 Feb,

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RMIT University
Accounting and its role in managerial activities
Topic 1: Setting the scene
Page 20