ACCA

1
ICMAP PATHWAY EXAM (IPE)
73
QUESTION BANK
AND
36

SPECIMEN EXAM
49

VALID FOR EXAMS UP TO 31 DECEMBER 2020

ICMAP Pathway Exam ACCA Question Bank

ABOUT THIS QUESTION BANK

This Question Bank provides practice questions which should be used to help candidates to
prepare effectively for the IPE examination. These questions cover a wide range of the
technical areas included in the IPE syllabus, and are representative of the final exam questions
unless otherwise marked.

This Question Bank should be used in conjunction with the Study Text, allowing candidates to
apply their learning to exam format questions.

To use this Question Bank most effectively, candidates should:

• attempt all the questions within the Question Bank before sitting the final examination;
• carefully review their answers against the model solutions provided, identifying areas
to improve both technical and professional skills;
•

1
attempt at least some of the questions under exam conditions to practice their exam
technique; and
73
• attempt the questions from this Question Bank before attempting the specimen exam
(which is included within this document).
36

GUIDE TO EXAM STRUCTURE

The IPE is a case study examination and is examined as a closed book exam of 4 hours. The
exam time includes reading, planning and reflection time which can be used flexibly within the
49

examination. There is no pre-seen information and all exam-related material, including case
information and exhibits are provided within the examination.

Professional and ethical judgement will need to be exercised, together with the integration of
technical knowledge when addressing issues in a business context. Candidates will be
examined on concepts, theories, and principles from across all areas of the syllabus and
assumed knowledge, and should be capable of relating professional issues to relevant
concepts and practical situations.

All questions are compulsory and each examination will contain professional marks making
up 20-30% of the total marks available.

The pass mark for the pathway examination is 50%.

2 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

SYLLABUS MAPPING
The table below lists the questions included within the Question Bank. For each question, the
number of marks is included, along with a mapping to the learning outcomes covered. Details
of the learning outcomes contained in the IPE examination can be found in the Syllabus and
Study Guide.

Question Name IBE Learning outcomes Number of marks

covered
1 iCompute A2(c) and (d) 11 technical
I3(c) 3 professional
2 Mbabo Co A3(c), A3(d), 20 technical
I4(c), I5(a) 5 professional

3 Rosey & Atkins B2(b), B3(a) 16 technical

I2(c), I3(a) 4 professional

4 Plantex B2(c), B4(b) and (c) 20 technical

I3(c), I1(c) 6 professional

5 Lum Co

1
B3(c), B5(d), B5(b)
I5(a), I2(a)
20 technical
5 professional
73
6 Boom Co B5(a(iv)), B5(c), B5(g) 16 technical
I2(a), I4(c) 4 professional
36

7 Chambon School B6(a) (b) and (d) 16 technical

I5(a), I2(b) 4 professional

8 Ecocar C2(a) and (b), C3(a) 16 technical

I2(b) 4 professional
49

9 Cheapkit B2(b), A3(f), B2(c), B4(b) & 28 technical

(c)
I3(b), I2(c), I1(a) 8 professional

10 P&J B4(d), A3(c), B5(a(v)) 25 technical

I3(a), I4(a), I1(a) 8 professional

11 Xuland Oil B5(a), B5(g), A3(f) 24 technical

I1(a) 6 professional

12 Care Services B1(a), B6(b), A3(f) 24 technical

I2(a), I1(b), I4(c) 6 professional

13 Hayho A3(a), B2(b), B1(a) 24 technical

I4(c), I3(c), I1(c) 6 professional

14 West & Leroi B3(b) 13 technical

I1(b) 3 professional

3 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

15 Midshire Health A2(c), C1(a) 20 technical

I1(c), I2(a) 6 professional

16 Happy & Healthy D1(a) and (b) 15 technical

I5(a) 2 professional

17 Lodge D2(c) 5 technical

I4(a) 2 professional

18 Nette E1(a) 6 technical

I1(b) 2 professional

19 Foodie F1(a) 8 technical

I1(c) 2 professional

20 Healthy Eating Group F1(c) 10 technical

I3(c) 3 professional

21 Rockingham Hospital G3(a) 18 technical

I2(a), I1(c) 5 professional

22 There 4 U Company F3(d)

I3(a)
1 19 technical
3 professional
73
23 Astrodome Sports F5 (b) & (c) 20 technical
I2(c), I5(a) 5 professional

24 Better Gardens Co. F4(c) & (d) 14 technical

36

I1(c), I5(a) 4 professional

25 Universal University F5(a) 14 technical

I3(c), I5(a) 4 professional
49

26 Cod H1(b) 24 technical

I3(c), I5(a) 6 professional

27 RM Batteries H3(b), (c) & (e) 20 technical

I5(c) 5 professional

28 Metis G3(a), F5(b) 19 technical

I3(a) 5 professional

29 Dargeboard Services F1(a), F4(c) & (d) 28 technical

I1(c) 7 professional
The specimen exam is included after the questions above.

The specimen exam is representative of the final IPE examination, and it is strongly
recommended that the above questions are attempted before attempting the specimen
exam.

4 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

QUESTION 1 ICOMPUTE

iCompute was founded 20 years ago by the technology entrepreneur, Ron Yeates. It initially
specialised in building bespoke computer software for the financial services industry. However,
it has expanded into other specialised areas and it is currently the third largest software house
in the country, employing 400 people. It still specialises in bespoke software, although 20% of
its income now comes from the sales of a software package designed specifically for car
insurance.

The company has grown based on a “work hard, play hard work ethic” and this still remains.
Employees are expected to work long hours and to take part in social activities after work.
Revenues have continued to increase over the last few years, but the company has had difficulty
in recruiting and retaining staff. Approximately one-third of all employees leave within their first
year of employment at the company. The company appears to experience particular difficulty
in recruiting and retaining female staff, with 50% of female staff leaving within 12 months of

1
joining the company. Only about 20% of the employees are female and they work mainly in
marketing and human resources.
73
The company is currently in dispute with two of its customers who claim that its bespoke
software did not fit the agreed requirements. iCompute currently outsources all its legal advice
36

problems to a law firm that specialises in computer contracts and legislation. However, the
importance of legal advice has led to iCompute considering the establishment of an internal
legal team, responsible for advising on contracts, disputes and employment legislation.
49

The support of bespoke solutions and the car insurance software package was also outsourced
a year ago to a third party. Although support had been traditionally handled in-house, it was
unpopular with staff. One of the senior managers responsible for the outsourcing decision
claimed that support calls were “increasingly varied and complex, reflecting incompetent end
users, too lazy to read user guides”. However, the outsourcing of support has not proved
popular with iCompute’s customers and a number of significant complaints have been made
about the service given to end users. The company is currently reviewing whether the software
support process should be brought back in-house.

The company is still regarded as a technology leader in the market place, although the presence
of so many technically gifted employees within the company often creates uncertainty about the
most appropriate technology to adopt for a solution. One manager commented that “we have
often adopted, or are about to adopt, a technology or solution when one of our software
developers will ask if we have considered some newly released technology. We usually admit
1 © ACCA. All rights reserved.
ICMAP Pathway Exam ACCA Question Bank

we haven’t and so we re-open the adoption process. We seem to be in a state of constant

technical paralysis.”

Although Ron Yeates retired five years ago, many of the software developers recruited by him
are still with the company. Some of these have become operational managers, employed to
manage teams of software developers on internal and external projects. Subba Kendo is one
of the managers who originally joined the company as a trainee programmer. “I moved into
management because I needed to earn more money. There is a limit to what you can earn here
as a software developer. However, I still keep up to date with programming and I am a
goalkeeper for one of the company’s five-a-side football teams. I am still one of the boys.”

However, many of the software developers are sceptical about their managers. One
commented that “they are technologically years out of date. Some will insist on writing programs
and producing code, but we take it out again as soon as we can and replace it with something
we have written. Not only are they poor programmers, they are poor managers and don’t really

1
know how to motivate us.” Although revenues have increased, profits have fallen. This is also
blamed on the managers. “There is always an element of ambiguity in specifying customers’
73
requirements. In the past, Ron Yeates would debate responsibility for requirements changes
with the customer. However, we now seem to do all amendments for free. The customer is
right even when we know he isn’t. No wonder margins are falling. The managers are not firm
36

enough with customers.”

The software developers are also angry that an in-house project has been initiated to produce a
49

system for recording time spent on tasks and projects. Some of the justification for this is that
a few of the projects are on a “time and materials” basis and a time recording system would
permit accurate and prompt invoicing. However, the other justification for the project is that it will
improve the estimation of “fixed-price” contracts. It will provide statistical information derived
from previous projects to assist account managers preparing estimates to produce quotes for
bidding for new bespoke development contracts.

Vikram Soleski, one of the current software developers, commented that “managers do not even
have up-to-date mobile phones, probably because they don’t know how to use them. We
(software developers) always have the latest gadgets long before they are acquired by
managers. But I like working here, we have a good social scene and after working long hours
we socialise together, often playing computer games well into the early hours of the morning.
It’s a great life if you don’t weaken!”

2 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Required:

Analyse the culture of iCompute and assess the implications of your analysis for the
company’s future performance. (11 marks)

Professional skills marks are available for demonstrating analysis skills when reflecting on the
implications of iCompute’s culture. (3 marks)

(14 marks)

1
73
36
49

3 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

QUESTION 2 MBABO CO

John Wang is a junior partner and training manager at Miller Dundas, a medium-sized firm of
auditors. He oversees the progress of the firm’s student accountants. One of those under
John’s supervision, Lisa Xu, recently wrote in her progress and achievement log about a
situation in an audit that had disturbed her.

On the recent audit of Mbabo Co, a medium sized, family-run business and longstanding client
of Miller Dundas, Lisa was checking non-current asset purchases when she noticed what she
thought might be an irregularity. There was an entry of $100,000 for a security system for an
address in a well-known holiday resort with no obvious link to the company. On questioning
this with Ellen Tan, the financial controller, Lisa was told that the system was for Mr Martin
Mbabo’s holiday cottage (Martin Mbabo is managing director and a minority shareholder in
Mbabo). She was told that Martin Mbabo often took confidential company documents with him
to his holiday home and so needed the security system on the property to protect them. It was

1
because of this, Ellen said, that it was reasonable to charge the security system to the company.
73
Ellen Tan expressed surprise at Lisa’s concerns and said that auditors had not previously been
concerned about the company being charged for non-current assets and operational expenses
for Mr Mbabo’s personal properties.
36

Lisa told the engagement partner, Potto Sinter, what she had found and Potto simply said that
the charge could probably be ignored. He did agree, however, to ask for a formal explanation
from Martin Mbabo before he signed off the audit. Lisa wasn’t at the final clearance meeting
49

but later read the following in the notes from the clearance meeting: “discussed other matter
with client, happy with explanation”. When Lisa discussed the matter with Potto afterwards she
was told that the matter was now closed and that she should concentrate on her next audit and
her important accounting studies.

When John Wang read about Lisa’s concerns and spoke to her directly, he realised he was in
an ethical dilemma. Not only should there be a disclosure requirement of Mr Mbabo’s
transaction, but the situation was made more complicated by the fact that Potto Sinter was
senior to John Wang in Miller Dundas and also by the fact that the two men were good friends.

4 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Required:

(a) Explain the meaning of “integrity” and its importance in professional

relationships such as those described in the case. (4 marks)

(b) Criticise Potto Sinter’s ethical and professional behaviour in the case. (8 marks)

Professional skills marks are available for demonstrating scepticism skills in

challenging Potto Sinter’s behaviour. (3 marks)

(c) Critically evaluate the alternatives available to John Wang for resolving his
ethical conflict. (8 marks)

Professional skills marks are available for demonstrating evaluation skills in assessing
the alternatives available to John Wang. (2 marks)

(25 marks)

1
73
36
49

5 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

QUESTION 3 ROSEY AND ATKINS

Rosey and Atkins (R&A) is one of the largest institutional investors in the country. Its investment
strategy has traditionally been to own a minor shareholding in each of the top 200 companies
on the stock exchange. The R&A shareholding is typically between 2% and 10% of each
company and it manages funds for over two million clients (people and businesses who buy
into share funds managed by R&A).

Established over 200 years ago, R&A has always believed itself to be socially responsible. As
part of its CSR strategy, R&A recently purchased 100% of the shares in a national house builder,
Natcon, which it owned as a direct holding and did not include in its managed funds. Natcon,
in turn, owned a large amount of land suitable for future low cost housing development. The
R&A website reported that the reason for this purchase was to address the board’s concerns
over a shortage of affordable housing in the country which R&A felt they could help to address
by having outright ownership of Natcon. R&A reported that there was a large social need for

1
affordable homes, and it hoped to create many hundreds of new low cost homes each year.
73
Natcon wanted to build a large estate of new homes in the town of Housteads and the local
government authority granted the required building permission. But the nearby University of
Housteads strongly opposed it because it believed the new houses would ruin what was
36

considered to be a panoramic view from the university campus which helped it to recruit staff
and students to the university. Both the Housteads local government authority and the
University of Housteads had money from reserves invested as clients (i.e. fund investors) with
49

R&A, but with the university having a substantially smaller investment in the fund than the local
government authority. The local government authority also owned shares in R&A, meaning that
it was both an investor in funds and a shareholder in R&A.

Required:

(a) Distinguish between private and institutional shareholders. (4 marks)

(b) Discuss the agency problems which might arise when an institutional
shareholder such as R&A holds money in funds on behalf of clients (i.e.
investors in R&A funds). (6 marks)

Professional skills marks are available for demonstrating commercial acumen skills in
showing awareness of potential agency problems between institutional shareholders
and their clients. (2 marks)

6 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

(c) Using a suitable stakeholder analysis framework, assess the competing claims
of the local government authority and the University of Housteads in the
proposed housing development. (6 marks)

Professional skills marks are available for demonstrating analysis skills when
investigating the competing claims of each stakeholder. (2 marks)

(20 marks)

1
73
36
49

7 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

QUESTION 4 PLANTEX

Plantex is a large international pharmaceutical company which has been at the forefront of
research into developing cures for many tropical diseases. The nature of its business means
that continuous and significant financial investment is required for research and development
activities, for which its shareholders expect sizeable returns.

At a recent meeting of the board of Plantex, the finance director, Rachel Tang, submitted a
paper on integrated reporting <IR> for discussion and consideration. She advised the board
that Plantex had only ever disclosed the minimum information required by law, but recent
developments in the International Integrated Reporting Framework has made a very strong case
for broadening the amount of published corporate information.

The primary objective of <IR> is to demonstrate the clear link between an organisation’s
competitive strategy, governance system and financial performance, alongside the social,
environmental and economic context within which it operates. Rachel Tang claimed that by

1
integrating these different areas, the board of Plantex would be in a far better position to allocate
73
its valuable resources more effectively and thereby make more environmental and socially
sustainable decisions.

The chairman was highly supportive of the proposal as he had been trying to encourage a
36

corporate citizenship agenda at recent board meetings. He suggested that <IR> would
demonstrate that Plantex took corporate social responsibility seriously by being more
transparent, accountable and responsive to its stakeholders’ demands.
49

Rachel Tang further asserted that <IR> would have the effect of simplifying published financial
information, with excessive detail being removed and critical information being highlighted. If
Plantex voluntarily adopted <IR>, its shareholders, and other stakeholders, would better
understand how the company was really performing and so be able to make a meaningful
assessment of its long-term strategy. This openness could encourage further investment and
strengthen its competitive position.

The chief executive, Stanley Broadway, suggested that this all sounded very good in theory,
but he found it hard to justify the extra expense without any recognisable return to shareholders.
He said it was “just another costly management fad that distracted the company from its real
purpose – making money for its shareholders!”

8 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Required:

(a) Assess the rights and responsibilities of Plantex as a corporate citizen of

society. (4 marks)

Professional skills marks are available for demonstrating analysis skills when reflecting
on the rights and responsibilities of Plantex as a corporate citizen of society. (2 marks)

(b) Prepare a consultancy report for the board which describes the advantages to
Plantex and its stakeholders of adopting <IR>. (10 marks)

Professional skills marks are available for demonstrating communication skills in

persuading the board of the advantages of adopting <IR>. (4 marks)

(c) Explain how using an <IR> approach will provide information about the six
capitals including the resources and relationships on which Plantex depends.

1 (6 marks)
73
(26 marks)
36
49

9 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

QUESTION 5 LUM CO

Lum Co is a family business that has been wholly-owned and controlled by the Lum family since
1926. The current chief executive, Mr Gustav Lum, is the great grandson of the company’s
founder and has himself been in post as CEO since 20X5. Because the Lum family wanted to
maintain a high degree of control, they operated a two-tier board structure: four members of the
Lum family comprised the supervisory board and the other eight non-family directors comprised
the operating board.

Despite being quite a large company with 5,000 employees, Lum Co never had any non-
executive directors because they were not required in privately-owned companies Lum Co’s
home country.

The four members of the Lum family valued the control of the supervisory board to ensure that
the full Lum family’s wishes (being the only shareholders) were carried out. This also enabled
decisions to be made quickly, without the need to take everything before a meeting of the full
board.
1
73
Starting in 20X5, the two tiers of the board met in joint sessions to discuss a flotation (issuing
public shares on the stock market) of 80% of the company. The issue of the family losing control
was raised by the CEO’s brother, Mr Crispin Lum. He said that if the company became listed,
36

the Lum family would lose the freedom to manage the company as they wished, including
supporting their own long-held values and beliefs. These values, he said, were managing for
the long term and adopting a paternalistic management style. Other directors said that the new
49

listing rules that would apply to the board, including compliance with the stock market’s
corporate governance codes of practice, would be expensive and difficult to introduce.

The flotation went ahead in 20X8. In order to comply with the new listing rules, Lum Co took
on a number of non-executive directors (NEDs) and formed a unitary board. A number of
problems arose around this time with NEDs feeling frustrated at the culture and management
style in Lum Co, whilst the Lum family members found it difficult to make the transition to
managing a public company with a unitary board. Gustav Lum said that it was very different
from managing the company when it was privately owned by the Lum family. The human
resources manager said that an effective induction programme for NEDs and some relevant
continuing professional development (CPD) for existing executives might help to address the
problems.

10 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Required:

(a) Compare the typical governance arrangements between a family business and
a listed company, and assess Crispin’s view that the Lum family will “lose the
freedom to manage the company as they wish” after the flotation. (8 marks)

(b) Assess the benefits of introducing an induction programme for the new NEDs,
and requiring continual professional development (CPD) for the existing
executives at Lum Co after its flotation. (8 marks)

Professional skills marks are available for demonstrating evaluation skills in assessing
the benefits of an induction programme and CPD. (3 marks)

(c) Discuss the difficulties that the Lum family might encounter when introducing a
unitary board. (4 marks)

1
Professional skills marks are available for demonstrating commercial acumen skills in
showing insight into the difficulties of introducing a unitary board. (2 marks)
73
(25 marks)
36
49

11 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

QUESTION 6 BOOM CO

Earlier this year, the remuneration committee of Boom Co, a listed company, met to determine
the rewards for the executive directors. It was the practice of the committee to meet annually
to decide on executive rewards for the forthcoming financial year. In line with best practice, the
committee was made up entirely of non-executive directors.

When the remuneration committee met, its chairman, Sarah Umm, reminded those present that
the committee should comply with the guidance of the relevant code of corporate governance.
She read out the section that she believed was most relevant to their discussions.

“A significant proportion of executive directors’ remuneration should be

structured so as to link rewards to corporate and individual performance.
The remuneration committee should judge where to position their company
relative to other companies. But they should use such comparisons with
caution in view of the risk of an upward movement of remuneration levels

1
with no corresponding improvement in performance. Remuneration for non-
73
executive directors should not include share options or other performance-
related elements.”

She explained that the committee should balance several concerns when setting rewards: the
36

link with performance, market rates and the company’s overall strategy. The strategic priority
in the next few years, she explained, was to incentivise medium to long-term growth whilst
retaining the existing executive board in place as long as possible.
49

At the end of the meeting, a new member of the committee, Sam South, suggested that there
should also be performance-related elements in non-executive directors’ rewards. Sarah Umm
explained that these were only available to executive members of the board in line with the
terms of the corporate governance code.

Required:

(a) Propose how the components of a reward package might be balanced to

“incentivise medium to long-term growth whilst retaining the existing executive
board in place as long as possible”. (6 marks)

Professional skills marks are available for demonstrating commercial acumen skills in
using judgement to propose a suitable reward package. (2 marks)

12 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

(b) Briefly explain the general roles of non-executive directors in a listed company
such as Boom Co. (4 marks)

(c) Critically discuss whether non-executive directors should receive performance-

related elements in their rewards, as suggested by Sam South. (6 marks)

Professional skills marks are available for demonstrating scepticism skills in

challenging Sam South’s suggestion. (2 marks)

(20 marks)

1
73
36
49

13 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

QUESTION 7 CHAMBON SCHOOL

The independent board of governors (an independent oversight body comprised of local
residents, parents and other concerned citizens) of the state-funded Chambon School for 11–
16-year-old children met to consider its most recent set of public examination results. A key
responsibility placed upon the school’s governors is the delivery, to its local government
authority, of a report on exam performance in a full and timely manner. A report on both the
exam results and the reasons for any improvement or deterioration over previous years are
required from the governors each year. Accordingly, this annual meeting on exam performance
was always considered to be very important. Although the school taught the national curriculum
(a standard syllabus taught in all schools in the country) as required of it, the exam results at
Chambon had deteriorated in recent years and on this particular occasion, they were very poor
indeed. In order to address the weaknesses in the school, Chambon’s budget had increased
in recent years and a number of new teachers had been employed to help improve results.
Despite this, exam performance continued to fall. A recent overspend against budget was

1
funded through the closure of part of the school library and the sale of a sports field.
73
One member of the board of governors was Sally Murol. She believed that the local government
authority might attempt to close Chambon if these exam results were reported with no
convincing explanation. One solution to avoid this threat, she said, was to either send the report
36

in late or to select only the best results and submit a partial report so the school’s performance
looked better than it actually was. There is no central computerised exam results service in the
country in which Chambon is located by which the local authority could establish the school’s
49

exam performance.

A general feeling of the governors’ meeting was that perhaps the school needed some new
leadership and it was time to remove the existing head teacher. Mr Besse had been in the role
for many years and his management style was thought to be ineffective. He was widely liked
by staff in the school because he believed that each teacher knew best how to manage their
teaching, and so he tried not to intervene wherever possible. Mr Besse had sometimes
disagreed with the governors when they suggested changes which could be made to improve
exam performance, preferring to rely on what he believed were tried and tested ways of
managing his teaching staff. He was thought to be very loyal to longstanding colleagues and
had a dislike of confrontation.

14 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Required:

(a) Assess the extent to which Chambon School has met its objectives as a public
sector organisation. (6 marks)

Professional skills marks are available for demonstrating evaluation skills in assessing
the extent to which Chambon School has met its objectives. (2 marks)

(b) Explain the roles of a board of governors in the governance of Chambon School.
(4 marks)

(c) Discuss the potential advantages to Chambon School of seeking to address its
problems by replacing the head teacher. (6 marks)

Professional skills marks are available for demonstrating commercial acumen skills in
providing an insightful discussion of the advantages of replacing the head teacher.

1 (2 marks)
73
(20 marks)
36
49

15 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

QUESTION 8 ECOCAR

The EcoCar company was formed six years ago to commercially exploit the pioneering work of
Professor Jacques of Midshire University, a university in the country of Erewhon. Over a
number of years he had patented processes that allowed him to use Lithium-ion batteries to
power an electric car, which could travel up to 160 kilometres before it needed recharging.
Together with two colleagues from the university, he set up EcoCar to put the car into
commercial production.

Coincidentally, an area in the south of Midshire was suffering from major industrial decline. This
area was centred on the former Lags Lane factory of Leopard Cars, which had recently been
shut down by its parent company, bringing to an end 60 years of continuous vehicle
manufacture on that site. Many skilled car production workers had been made redundant in an
area that already suffered significant unemployment. Grants from the regional council and
interest-free loans from the government allowed EcoCar to purchase and re-furbish part of the

1
Lags Lane site and take on a hundred of the skilled workers made redundant by Leopard Cars.
73
The company now manufactures three car models: the original Eco, the EcoPlus, and the
EcoLite. The EcoPlus is a luxury version of the Eco and shares 95% of the same components.
The EcoLite is a cheaper town car and uses only 70% of the components used in the Eco. The
36

rest of the components are unique to the EcoLite. A comparison of an Eco with a similar petrol-
fuelled car (Kyutia 215) is given in Figure 1. This table also gives a comparison with a hybrid
car (Xdos-HC) where the petrol engine is supplemented by power from an electric motor.
49

Hybrids are a popular way of reducing emissions and fuel consumption. Petrol currently costs
$5 per litre in Erewhon. There are also experimental cars, not yet in production, which are
fuelled by other low-emission alternatives to petrol such as hydrogen.

16 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Model Eco Kyutia 215 Xdos-HC

Power source Lithium-ion batteries, Petrol Petrol with assistance

electric motor from an electric motor

Price $9,999 $7,999 $9,500

Emissions Zero 180gram/kilometre 95gram/kilometre

(CO2)

Economy Approximately $1 per 8 litres/100km 5 litres/100km

20 kilometres
(electricity charge)

Performance 0–100 kph: 18 0–100kph: 10 seconds 0–100kph: 12 seconds

seconds Max speed: Max speed: 180kph Max speed: 170kph
120kph

1
73
Range 160 kilometres until 550 kilometres on a 1,200 kilometres on a
the battery needs re- tank full of petrol tank full of petrol
charging
36

Figure 1 Comparison of the Eco with comparable conventional and hybrid cars

The Eco model range can be re-charged from a domestic electricity supply. However, to
49

supplement this, the government has recently funded the development of 130 charging stations
for electric cars spread throughout the country. It has also given businesses tax incentives to
switch to electric cars and is heavily taxing cars with high CO2 emissions because of the
detrimental effect of excess CO2 on the environment.

The EcoCar model range is largely bought by “green” consumers in Erewhon, who are prepared
to pay a price premium for such a car. They are also popular in the Midshire region, where the
residents are proud of their car making tradition and grateful to Professor Jacques and the
government for ensuring its survival, albeit at a reduced level. Only 5% of EcoCar’s production
is exported.

One year ago, EcoCar was bought by Universal Motors (UM), the second largest car
manufacturer in the world. Professor Jacques and his two colleagues remain as senior
managers and board members of the company. Car production of electric cars is still very low,
but UM believes that demand for electric cars will be very significant in the future and purchased
17 © ACCA. All rights reserved.
ICMAP Pathway Exam ACCA Question Bank

EcoCar as a way of entering this market. They believe that Lithium-ion batteries (the power
source for the EcoCar range) will eventually become lighter, cheaper and give better
performance and range.

Skills shortages

Since purchasing the company UM has identified some skills shortages. Although EcoCar was
established in an area where there already existed a pool of skilled car workers, the subsequent
retirement of many of these workers has left a skills gap. Although unemployment remains high
in the area, applicants for jobs appear to lack the skills and motivation of the older workers.
EcoCar is finding it difficult to recruit skilled labour and this shortage is being reflected in
increased wages and staff costs at the Lags Lane site.

In the initial growth of EcoCar, the technical capabilities of the three founding senior managers
were very significant. However, these three managers are now aged 50 or over. There is
concern that their technical expertise and thirst for innovation is diminishing. To some extent

1
the senior managers recognised this themselves two years ago and instigated a graduate
73
training scheme with the aim of “bringing new thinking into the company and ensuring its future”.
Four graduates were taken on and a graduate training scheme agreed. However, it was cut
within a year because “training costs got out of control” and all four graduates have
36

subsequently left the company. A resignation letter from one of the graduates criticised the
“poor management skills of senior managers”. UM is concerned that the research and
management culture is inappropriate and outdated. As a result, the graduates were not properly
49

managed or motivated and there is evidence that their contribution was not welcomed or
recognised. One of the managers of UM has stated that EcoCar needs to start a talent
management programme to solve the skills shortages.

Required:

(a) Discuss whether the Electric Cars represent a disruptive innovation in the motor
car industry. (8 marks)

18 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

(b) You are a human resources consultant working for a local consulting firm. You have
received a request from the managers of EcoCar who wish to understand better the
meaning of talent management, and what areas it should cover at EcoCar.

Write a report to the management of EcoCar that explains the meaning of talent
management and suggests how it might be applied at EcoCar. (8 marks)

Professional skills marks are available for demonstrating commercial acumen skills in
identifying how talent management could resolve the skills shortages at EcoCar.

(4 marks)

(20 marks)

1
73
36
49

19 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

QUESTION 9 CHEAPKIT

Cheapkit is a large clothes retailer in a major developed country. Its business strategy is based
around vigorous cost leadership and it prides itself on selling fashionable garments for men,
women and children at very low prices compared to its main rivals. For many years, it has
achieved this cost leadership through carefully sourcing its garments from developing countries
where labour is cheaper and where workplace regulation is less than in its home country.

For the past decade or so, Cheapkit has bought in a substantial proportion of its supplies from
Athland, a relatively poor developing country known for its low labour costs and weak regulatory
controls. Last year, 65% of Cheapkit’s supplies came from this one country alone. Athland has
a reputation for corruption, including government officials, although its workforce is known to be
hard-working and reliable. Most employees in Athland’s garment industry are employed on
“zero hours” contracts, meaning that they are employed by the hour as they are needed and
released with no pay when demand from customers like Cheapkit is lower.

1
Half of Cheapkit’s purchases from Athland are from Cornflower Co, a longstanding supplier to
73
Cheapkit. Owned by the Fusilli brothers, Cornflower outgrew its previous factory and wished to
build a new manufacturing facility in Athland for which permission from the local government
authority was required. In order to gain the best location for the new factory and to hasten the
36

planning process, the Fusilli brothers paid a substantial bribe to local government officials.

The Fusilli brothers at Cornflower felt under great pressure from Cheapkit to keep their prices
low and so they sought to reduce overall expenditure including capital investments. Because
49

the enforcement of building regulations was weak in Athland, the officials responsible for
building quality enforcement were bribed to provide a weak level of inspection when
construction began, thereby allowing the brothers to avoid the normal Athland building
regulations. In order to save costs, inferior building materials were used which would result in
a lower total capital outlay as well as a faster completion time. In order to maximise usable floor
space, the brothers were also able to have the new building completed without the necessary
number of escape doors or staff facilities. In each case, bribes were paid to officials to achieve
the outcomes the Fusilli brothers wanted.

Once manufacturing began in the new building, high demand from Cheapkit meant that
Cornflower was able to increase employment in the facility. Although, according to Athland
building regulations, the floor area could legally accommodate a maximum of 500 employees,
over 1,500 were often working in the building in order to fulfil orders from overseas customers
including Cheapkit.

20 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

After only two years of normal operation, the new Cornflower building collapsed with the loss of
over 1,000 lives. Collapsing slowly at first, the number of people killed or injured was made
much worse by the shortage of escape exits and the large number of people in the building. As
news of the tragedy was broadcast around the world, commentators reported that the weakness
in the building was due to the West’s “obsession with cheap clothes”. Cheapkit was criticised
as being part of the cause, with many saying that if retailers in the developed world pushed too
hard for low prices, this (the collapse of the building) was one consequence of that. In response,
Cheapkit’s public relations department said that it entered into legal contracts with Cornflower
in order to provide its customers with exceptional value for money. Cheapkit said that it was
appalled and disgusted that Cornflower had acted corruptly and that the Cheapkit board was
completely unaware of the weaknesses and safety breaches in the collapsed building.

One of those able to escape the building was Jess Lui, who was also the leader of a national
pressure group “Protect workers’ rights” (PWR) lobbying the Athland government for better
working conditions and health and safety practices for workers in the country. Having seen

1
hundreds of people killed and injured in the collapsed building, she believed that although the
73
government could do more, much of the blame lay with Cheapkit and the pressure it continually
placed on Cornflower to keep its prices low. Jess questioned whether multinational companies
such as Cheapkit should be allowed to exert so much economic pressure on companies based
36

in developing countries. As concern over the state of other workplaces in the developing world
became an increasing concern in the media, Miss Lui wrote a letter to the board of Cheapkit,
which she also sent to newspapers and other media. Many of the newspapers and television
49

channels reproduced the letter and it became a talking point in many countries because of the
issues it raised.

In the letter, she said that Cheapkit was an unethical company because it supplied a market in
its home country which was obsessed with cheap clothes. As long as its customers bought
clothes for a cheap price, she believed that no-one at Cheapkit cared about how they were
produced. She said that the constant pressure on prices had created a culture of “exploitative
wages”, including at Cornflower.

At the same time as events in Athland unfolded, the business journalists reporting on the events
and Cheapkit’s alleged complicity in the tragedy also became aware of a new innovation in
business reporting called integrated reporting, an initiative of the International Integrated
Reporting Council (IIRC). Jess Lui read one article which said that integrated reporting might
increase an organisation’s accountability and require it to account for a wider set of concerns

21 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

than was traditionally the case. This new understanding led to her including the following
comment in her letter to Cheapkit:

“… as the leader of the PWR, it is always in my interests to gain as much

information as possible from Cornflower and the other businesses with which
it transacts, including, in this case, Cheapkit. Perhaps the integrated
reporting initiative offers the advantage of a wider reporting model for
businesses, to include accountability for a much more diverse set of
concerns than has been the case in the past. The integrated reporting model
appears to substantially enhance the existing business model and it would
be in the interests of broader accountability if Cheapkit, and other businesses
in the garment supply chain, were to adopt this new reporting approach.
Anything that requires businesses to report on their wider impacts on society
and the environment is a good thing as far as social pressure groups like
PWR are concerned.”

1
The board of Cheapkit discussed the issues raised by the well-publicised discussion of Miss
73
Lui’s open letter and the comments from business journalists about integrated reporting. The
board was, in principle, a supporter of the integrated reporting initiative and thought it would be
useful to explain its position on a range of issues in a press release.
36

Required:

(a) Analyse the stakeholder claims of Cornflower’s employees and customers, and
49

how these claims may be in conflict. (6 marks)

Professional skills marks are available for demonstrating analysis skills when
considering the conflicting claims of Cornflower’s employees and customers. (2
marks)

(b) Explain “corruption” in the context of the case and discuss how corruption at
Cornflower contributed to the collapse of the building. (8 marks)

Professional skills marks are available for commercial acumen skills in demonstrating
awareness of how corruption contributed to the collapse of the building. (2 marks)

22 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

(c) The board of Cheapkit felt that the reputation of the company had been damaged
following publication of Jess Lui’s letter. It was decided that it should make a public
response to her comments and also respond to points about integrated reporting raised
by the business journalists, both of which had received a lot of supportive comment in
the media.

Draft a press statement from the board of Cheapkit to include the following
content:

(i) An explanation of Cheapkit’s role as a “corporate citizen” given its

international supply chain. (6 marks)

(ii) A description of the basic framework of integrated reporting, and the

potential benefits to Cheapkit’s different stakeholders, of reporting on
different capital types. (8 marks)

1
Professional skills marks are available for demonstrating communication skills when
informing the public about Cheapkit’s role as a corporate citizen and the potential
73
benefits of integrated reporting. (4 marks)

(36 marks)
36
49

23 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

QUESTION 10 P&J

P&J is a long-established listed company based in Emmland, a highly developed and relatively
prosperous country. For the past 60 years, P&J has been Emmland’s largest importer and
processor of a product named X32, a compound used in a wide variety of building materials,
protective fabrics and automotive applications. X32 is a material much valued for its heat
resistance, strength and adaptability, but perhaps most of all because it is flexible and also
totally fireproof. It is this last property that led to the growth of X32 use and made P&J a
historically successful company and a major exporter.

X32 is mined in some of the poorest developing countries where large local communities
depend heavily on X32 mining for their incomes. The incomes from the mining activities are
used to support community development, including education, sanitation and health facilities in
those developing countries. The X32 is then processed in dedicated X32 facilities near to the
mining communities, supporting many more jobs. It is then exported to Emmland for final

1
manufacture into finished products and distribution.
73
Each stage of the supply chain for X32 is dedicated only to X32 and cannot be adapted to other
materials. In Emmland, P&J is the major employer in several medium-sized towns. In Aytown,
for example, P&J employs 45% of the workforce and in Betown, P&J employs 3,000 people and
36

also supports a number of local causes including a children’s nursery, an amateur football club
and a number of adult education classes. In total, the company employs 15,000 people in
Emmland and another 30,000 people in the various parts of the supply chain (mining and
49

processing) in developing countries. Unlike in Emmland, where health and safety regulations
are strong, there are no such regulations in most of the developing countries in which P&J
operates.

Recently, some independent academic research discovered that X32 was very harmful to
human health, particularly in the processing stages, causing a wide range of fatal respiratory
diseases, including some that remain inactive in the body for many decades. Doctors had
suspected for a while that X32 was the cause of a number of conditions that P&J employees
and those working with the material had died from, but it was only when Professor Harry Kroll
discovered how X32 actually attacked the body that the link was known for certain. The
discovery caused a great deal of distress at P&J, and also in the industries which used X32.

The company was faced with a very difficult situation. Given that 60% of P&J’s business was
concerned with X32, Professor Kroll’s findings could not be ignored. Although demand for X32
remained unaffected by Kroll’s findings in the short to medium term, the company had to

24 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

consider a new legal risk from a stream of potential litigation actions against the company from
employees who worked in environments containing high levels of X32 fibre, and workers in
industries which used X32 in their own processes.

In order to gain some understanding of the potential value of future compensation losses, P&J
took legal advice and produced two sets of figures, both describing the present value of
cumulative future compensation payments through litigation against the company. These
forecasts were based on financial modelling using another product of which the company was
aware, which had also been found to be hazardous to health.

In 5 years In 15 years In 25 years In 35 years

$m $m $m $m

Best case 5 30 150 400

Worst case 20

1 80 350 1,000
73
The finance director (FD), Hannah Yin, informed the P&J board that the company could not
survive if the worst-case scenario was realised. She said that the actual outcome depended
upon the proportion of people affected, the period that the illness lay undetected in the body,
36

the control measures which were put in place to reduce the exposure of employees and users
to X32, and society’s perception of X32 as a material. She estimated that losses at least the
size of the best case scenario were very likely to occur and would cause a manageable but
49

highly damaging level of losses.

The worst case scenario was far less likely but would make it impossible for the company to
survive. Although profitable, P&J had been highly geared for several years and it was thought
unlikely that its banks would lend it any further funds. Hannah Yin explained that this would
limit the company’s options when dealing with the risk. She also said that the company had
little by way of retained earnings.

Chief executive officer, Laszlo Ho, commissioned a study to see whether the health risk to P&J
workers could be managed with extra internal controls relating to safety measures to eliminate
or reduce exposure to X32 dust. The confidential report said that it would be very difficult to
manage X32 dust in the three stages of the supply chain unless the facilities were redesigned
and rebuilt completely, and unless independent breathing apparatus was issued to all people
coming into contact with X32 at any stage. FD Hannah Yin calculated that a full refit of all of
the company’s mines, processing and manufacturing plants (which Mr Ho called “Plan A”) was

25 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

simply not affordable given the current market price of X32 and the current costs of production.
Laszlo Ho then proposed the idea of a partial refit of the Aytown and Betown plants because,
being in Emmland, they were more visible to investors and most other stakeholders.

Mr Ho reasoned that this partial refit (which he called “Plan B”) would enable the company to
claim it was making progress on improving internal controls relating to safety measures whilst
managing current costs and “waiting to see” how the market for X32 fared in the longer term.
Under Plan B, no changes would be made to limit exposure to X32 in the company’s operations
in developing countries.

Hannah Yin, a qualified accountant, was trusted by shareholders because of her performance
in the role of FD over several years. Because she would be believed by shareholders, Mr Ho
offered to substantially increase her share options if she would report only the “best case”
scenario to shareholders and report “Plan B” as evidence of the company’s social responsibility.
She accepted Mr Ho’s offer and reported to shareholders as he had suggested. She also said

1
that the company was aware of Professor Kroll’s research but argued that the findings were not
conclusive and also not considered a serious risk to P&J’s future success.
73
Eventually, through speaking to an anonymous company source, a financial journalist
discovered the whole story and felt that the public, and P&J’s shareholders in particular, would
36

want to know about the events and the decisions that had been taken in P&J. He decided to
write an article for his magazine, Investors in Companies, about what he had discovered.

Required:
49

(a) Define “social footprint” and describe, from the case, four potential social
implications of Professor Kroll’s discovery about the health risks of X32.
(10 marks)

Professional skills marks are available for demonstrating analysis skills when
investigating the potential social implications of the health risks of X32. (2 marks)

26 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

(b) Hannah Yin is bound by the IESBA (IFAC) fundamental principles of professionalism.
You are Peter Barlow, the head of professional ethics at the accountancy body that
Hannah Yin is a member of, and have been investigating her recent behaviour.

Draft a letter to Hannah Yin which criticises her professional and ethical
behaviour, clearly identifying the fundamental principles of professionalism she
has failed to meet. (8 marks)

Professional skills marks are available for demonstrating scepticism skills when
challenging the professional and ethical behaviour of Hannah Yin. (2 marks)

(c) Writing as the journalist who discovered the story, draft a short article for the
magazine Investors in Companies. You may assume the magazine has an
educated readership. Your article should discuss the board’s responsibilities
for internal control in P&J and question Mr Ho’s decision to choose Plan B.

1 (7 marks)
73
Professional skills marks are available for demonstrating communication skills in
drafting the article, and scepticism skills when questioning Mr Ho’s decision to choose
Plan B. (4 marks)
36

(33 marks)
49

27 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

QUESTION 11 XULAND OIL

Xuland is a developing country. Certain bodies which monitor different governments consider
Xuland to have problems with corruption. Xuland authorities are tolerant of breaches in
corporate governance compliance among its listed companies. It is common for police officers
to request, and receive, corrupt payments from members of society. There is also corruption
among public servants, in educational establishments and in many companies.

In the senior levels of business, there is a network of interconnections between business

directors and senior members of the government. The prime minister is known to be a reclusive
figure and a law prevents the media or public gatherings from voicing any criticism of him or the
government. The newspaper media is largely owned and controlled by the government, which
means that published criticism of the government is very rarely seen by people in Xuland.
Where it is in evidence, the state often takes drastic action to remove such people or to dissuade
them from making public criticisms.

1
Bob Tong is the CEO of the country’s largest business (Xuland Oil). Xuland Oil had been owned
73
by the government until five years ago. It is now listed on the Xuland stock exchange and has
secondary listings in other, more developed countries, where the shares have become attractive
to investors. This is because Xuland Oil is a monopoly supplier of energy in Xuland and
36

therefore enjoys a home market without competition. Accordingly, it is believed to make strong
profits in Xuland. It also exports energy (oil and gas) outside Xuland to neighbouring countries
by pipeline and to other countries by liquefying the gas and shipping it in very large container
49

ships.

CEO Bob Tong is believed to receive a substantial fixed salary. However, he also receives
“rewards” from private sector companies for awarding them large support contracts such as for
the supply of oil rigs, ships and other important non-current assets. He considers this a way of
making money for his retirement. The culture in Xuland means that he is very rarely criticised
in public for his behaviour. There is a listing rule about the separation of the roles of CEO and
chairman but it is rarely enforced and Mr Tong is also the executive chairman of Xuland Oil. He
considers it important that he occupies both roles to prevent his activities from being too closely
scrutinised.

Alice Tuesday, a business journalist from outside Xuland, reported that the figure noted in
Xuland Oil’s remuneration report was clearly not the true figure of what Mr Tong actually
received from his leadership of the company. This was because it failed to report the bribes he
received from supply contracts.

28 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

A major international policy-making body is considering asking all oil and gas companies to
produce a stand-alone environmental report each year, reporting in detail on the company’s
environmental footprint. This is because of a number of recent, high profile cases, in which the
poor environmental performance of oil and gas companies has been questioned. A prominent
intergovernmental body believes that oil and gas companies will be helping their own
reputations by joining the scheme to produce high quality environmental reports each year.

The initiative proposes that each environmental report should contain a meaningful discussion
of how each company is attempting to mitigate the worst effects of its environmental impacts.
It has been suggested that this report should include figures on all aspects of a company’s
environmental impacts and also the changes from year-to-year so that stakeholders can monitor
how each oil and gas company is performing over the longer term. Some companies, including
Xuland Oil, are resisting this initiative, because the board believes that people in Xuland do not
care much about the environment. The company’s internal audit function has offered to advise
on establishing internal controls, in order to assure the company that the information fed into

1
the environmental report has integrity and is accurate.
73
Xuland Oil has been criticised in international media for acting as an arm of Xuland foreign
policy. This has meant, for example, that countries which are not favoured by the Xuland
government are charged higher prices for oil imports. Some of the shareholders have been
36

angry about this, as they see their investment as a way of making reliable long-term returns and
most shareholders care nothing about Xuland foreign policy. They believe that Xuland Oil
should get on with producing returns and ignore the pressure by the Xuland government to be
49

a part of Xuland foreign policy. The pressure for Mr Tong and the company board to enact
foreign policy is thought to be linked to the intimate relations among the elites in Xuland society.
Many government ministers and senior business figures went to the same universities and
remain close friends outside their working lives.

The journalist, Alice Tuesday, has been investigating the problems at Xuland Oil for some years
and has widely reported the corruption in Xuland society. She pointed out that many of the jobs
in the Xuland public sector tended to be concentrated among one of the several ethnic groups
in Xuland and this, she believed, was anti-meritocratic and did not serve the country’s best
interests. It was she who exposed Mr Tong for taking bribes on supply contracts. She has also
recently accused the prime minister of taking money from public accounts for his own use. She
said that Xuland Oil needs to decide if it is a business organisation or a part of the Xuland state,
and to notify its shareholders accordingly. Mr Tong is a close personal friend of the prime

29 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

minister and other senior government ministers. He is also a strong supporter of the
government and its policies.

Alice Tuesday’s view is that Xuland is structurally corrupt and needs a thorough review of its
culture. As a developing country, Alice Tuesday says that it will not become a developed
country until it tackles its problem with corruption, including corruption in the police and in the
public services. She recently wrote that, “if Xuland tolerates corruption, it is choosing poverty
over development, and this a terrible shame for the decent, hard-working families in Xuland,
who deserve a better future. Xuland has been appallingly-led for many years, and the ruling
class has badly let down the people of Xuland.”

Required:

(a) Explain why, in the case of Xuland Oil, the shareholders would benefit if the roles
of CEO and chairman were split and an effective non-executive chairman was
appointed. (4 marks)

(b)
1
The bribes which Mr Tong accepted mean that his total remuneration is not based only
73
on the performance of Xuland Oil.

Explain why most shareholders would support a link between rewards and
36

performance and why this link is important to shareholders. (6 marks)

(c) Alice Tuesday intends to write an article for international media to discuss several
49

important issues with the governance of Xuland Oil.

Draft the article, to include the following content:

(i) Explain the meaning of “corruption” and discuss the barriers to

improving the corrupt practices in Xuland. (8 marks)

(ii) Propose measures which might be put in place to defeat corruption in

Xuland. (6 marks)

Professional skills marks are available for communication skills in explaining the issues
and potential solutionsin Xuland. (6 marks)

(30 marks)

30 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

QUESTION 12 CARE SERVICES

Care Services Co (CSC) is a private company, owned by Dr Sam Tan and his wife, Sonja. Sam,
a qualified medical doctor, has been involved with the care of elderly and vulnerable adults for
over 30 years and set up CSC five years ago to try to improve the quality of care in his locality
and to also build a business which he could then sell when he retired. The company employs
180 people in total with 165 of those being the carers who visit service users (usually the elderly,
disabled or those with learning difficulties) in their own homes to help with personal needs.

The services provided by CSC are outsourced to them by the local government authority and
the government health service. CSC receives funding from these bodies in line with national
government policy which determines that care is best delivered by specialist companies such
as CSC, rather than directly by the government. Contracts to care providers such as CSC are
awarded on a three-year basis. The criteria for provider selection are partly on the basis of cost
and partly on the basis of the perception of the quality of the care provided.

1
Because they deliver important social services and health care, CSC and other companies
73
providing personal care are subject to a rigorous regulatory regime. These regulations apply to
all care services, whether provided directly by the government or by companies such as CSC
who provide the outsourced care services. All carers, for example, must undergo compulsory
36

training on a wide range of issues. Each potential employee must be checked for past criminal
convictions, whilst high standards of hygiene and professional behaviour are expected at all
times.
49

As time passed, rival care service companies entered the market. As a result, CSC experienced
increased competition for contracts and it lost some of its care contracts with some government
agencies to competitor care providers. Because the award of contracts was partly based on
the perception of the company itself, and not just its care quality, Dr Tan came to believe that
the governance of the company might be something which should be reconsidered. He believed
that the perception of sound governance was necessary to ensure confidence in its services
from both its service users and those government bodies outsourcing the service.

Accordingly, he decided to adopt best practice in corporate governance with the creation of a
small executive board augmented by the appointment of a number of non-executive directors,
along with a committee structure. Natasha Mbana, the current co-ordinator of the company’s
care services, was made chief executive and Dr Tan proposed that he himself might become
the new non-executive chairman. Over time, a total of five non-executive directors were
appointed to the board of CSC and they were each paid a small annual fee for their services.
31 © ACCA. All rights reserved.
ICMAP Pathway Exam ACCA Question Bank

All of the non-executives were retired members of large public listed company boards with little
experience of public sector service delivery. They all lived in the locality in which CSC was
based and Dr Tan believed their presence on the board would look impressive when it came to
CSC renewing its service contracts.

As a company fulfilling public sector contracts for care service delivery, pay rates for carers are
often relatively low. This also applies to the financial rewards of the senior management in CSC
who receive much less in salary and benefits than those with equivalent responsibilities in the
private sector. CEO Natasha Mbana says that she accepts a lower level of reward because
she believes in the “public sector ethos” and believes that CSC provides a vital public service.
When the new non-executive directors saw what she earned, they noted that she was on much
less than the market rate for a chief executive and that she should receive a substantial increase
in her rewards to recognise her contribution to the company. Dr Tan said that this might not be
possible and that the new non-executive directors should recognise that rewards in the public
sector are often much less than those in large listed companies.

1
Last year, a problem arose for care providers when a small number of companies were exposed
73
by the media for very poor practice. CSC was not implicated in the allegations, but some other
companies in the industry were accused of making inadequate or very brief visits to service
users, or missing out visiting some service users altogether, under time pressure to see other
36

service users. Most service delivery contracts specified a minimum visit period of 30 minutes
per patient and that carers needed to provide a minimum standard of care on each visit,
including attending to the service user’s personal needs, food, drinks and medication. But
49

because of the pressure to complete their other duties, carers sometimes ignored these
minimum periods and thereby failed to fulfil service users’ personal needs.

This meant that affected service users were left in discomfort, without food, water and
medicines, and sometimes in considerable pain. This caused a lot of anger among the public,
and led the country’s health minister to ask about the internal controls in care provider
companies. The health minister expressed the view that the most vulnerable in society had
been let down badly, and the reputation of the care industry was badly damaged. Many
companies, including CSC, became aware of public resentment and, in some cases, public
hostility.

The manager of “We care”, another care supplier, went on television to explain that there were
a number of structural problems with providing care under the government contracts. He said
it was difficult to recruit carers and the low pay often meant that it was difficult to retain them.
Furthermore, the pressure to deliver the outsourced care services was intense with carers
32 © ACCA. All rights reserved.
ICMAP Pathway Exam ACCA Question Bank

having to hurry from one service user to another to complete their work. It was no surprise, he
said, that service users often received less care than they needed because the demands on
each carer were so high.

Aware that this scandal threatened the reputation of the whole care services industry, Dr Tan
decided that it might be beneficial for CSC to develop and publish a code of ethics which would
apply to the company and all of its carers. He was aware that the reputation of all care providers
might be affected by the bad practice of a few companies and he wanted to ensure that CSC
was well-thought of so it could compete successfully for future contracts and continue to enjoy
the support of its service users.

In response to the negative publicity, a number of care providers held a conference and it was
decided that Dr Tan, as a doctor and a senior figure in the industry, should write to the health
minister on behalf of them all. In particular, they asked Dr Tan to address the issues of the
internal controls in care provisions and the measures which providers would be undertaking to

1
ensure there would be no repetition of any bad practices. They thought this a worthwhile
measure to attempt to convince the health minister that providers had addressed his concerns.
73
Required:

(a) Explain the meaning of corporate governance and agency relationships, and
36

contrast how the objectives of corporate governance differ between a large

listed company and a smaller company delivering public sector services such
as CSC. (8 marks)
49

Professional skills marks are available for commercial acumen skills in demonstrating
insight into the differences in corporate governance objectives. (2 marks)

(b) The new non-executive directors believe that Natasha Mbana is underpaid in her
position as chief executive officer (CEO) of CSC, although Dr Tan disagrees and has
called a meeting of the remuneration committee to explain his viewpoint.

Prepare ONE presentation slide, with accompanying notes, to explain why

Natasha Mbana’s rewards as CEO of a public sector service provider are likely
to be lower than for a CEO of a large listed company. (8 marks)

33 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Professional skills marks are available for demonstrating communication skills when
informing the remuneration committee of the reasons for lower rewards in the public
sector. (2 marks)

(c) Discuss the potential for the proposed corporate code of ethics to improve
CSC’s reputation. (8 marks)

Professional skills marks are available for demonstrating scepticism skills in

questioning the potential benefit of the proposed code of ethics. (2 marks)

(30 marks)

1
73
36
49

34 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

QUESTION 13 HAYHO

Hayho manufactures high technology products. Several years ago, Hayho was widely criticised
for its operations in Arrland, a developing country with an oppressive and undemocratic
government. Investigative journalists produced material showing poor conditions for workers,
and pollution around the Hayho factories in Arrland. They also showed evidence suggesting
that Hayho had paid bribes to the Arrland government so that local opposition to the Hayho
operation could be forcefully stopped. After this episode, the company became very sensitive
to criticism of its operations in developing countries.

The board of Hayho is now deciding between two possible large new investments, both directly
employing about 3,000 people. Both options have a number of advantages and disadvantages
and Mr Woo, Hayho’s finance director, has recently made clear that only one can be chosen at
this stage. The two options are of similar investment value and are referred to as the “Jayland
option” and the “Pealand option”.

1
The “Jayland option” is to build a new large factory in Jayland and to recruit a completely new
73
local workforce to work in it. Jayland is a developing country with few environmental and labour
regulations. It has a poorly developed education and training system, and is generally
considered to be undemocratic. Its president, Mr Popo, has been in office since he seized
36

power in a military coup 30 years ago. Human rights organisations say that he maintains order
by abusing the rights of the people and cruelly suppressing any dissent against him. In early
exploratory talks between Hayho and the Jayland government, Hayho was given assurances
49

that it could pursue its activities with little regulation from the government as long as the Jayland
president, Mr Popo, received a personal annual “royalty” (effectively a bribe) for allowing Hayho
to operate in his country.

Finance director Mr Woo said that some stakeholders would probably criticise Hayho, perhaps
in the international media, for investing in Jayland. Hayho may be accused of supporting the
dictatorship of Mr Popo in that country, especially if the “royalty” was ever discovered. Mr Woo
calculated that the NPV (net present value) of projected pre-tax returns of the Jayland option
over a 10-year period was $2 billion but that there was also a risk of potential political instability
in Jayland during the lifetime of the investment.

The “Pealand option” is to buy an existing plant in Pealand which would then be refurbished to
facilitate the manufacture of Hayho products. This would involve “inheriting” the workforce of
the previous owners. Pealand is a “new democracy”, and a transitional economy, having gained
its independence 10 years ago. In an attempt to purge the corrupt business practices
35 © ACCA. All rights reserved.
ICMAP Pathway Exam ACCA Question Bank

associated with its past, the Pealand government has become very thorough in ensuring that
all inward investments, including Hayho’s factory purchase, meet exacting and demanding
standards of environmental protection and work conditions. Mr Woo, the finance director, said
that the NPV of projected pre-tax returns over a 10-year period was $1 billion for the Pealand
option but that the risk of political instability in Pealand was negligible. Both of the returns, the
forecast $2 billion for Jayland and the $1 billion for Pealand, were considered to be acceptable
in principle.

Mr Woo also said that there were issues with the two options relating to the effectiveness of
necessary internal controls. Whichever option was chosen (Jayland or Pealand), it would be
necessary to establish internal controls to enable accurate and timely reporting of production
and cost data back to head office. So a number of systems would need to be put in place to
support the production itself. One staff member, Emily Baa, who had previously worked in
Jayland for another company, gave her opinion to the board about some of the issues that
Hayho might encounter if it chose the Jayland option. She said that Jayland was very under

1
developed until relatively recently and explained how the national culture was unfamiliar with
73
modern business practice and behaviour. She said that property security may be a problem
and that there was a potential risk to assets there. She also said that, in her opinion, there was
a lack of some key job skills among the potential workforce in Jayland such as quality control
36

and accounting skills. She explained that quality control skills would be necessary to ensure
product specifications were met and that accounting skills would be necessary for the provision
of internal and external reporting. As a manufacturer of very technologically advanced products,
49

a number of stringent international product standards applied to Hayho products wherever in

the world they were produced.

Meanwhile, news that Hayho was considering a large investment in Jayland leaked out to the
press. In response, Hayho’s chief executive, Helen Duomo received two letters. The first was
from a prominent international human rights lobbying organisation called “Watching Business”
(WB). In the letter, the lobby group said that because of its “terrible track record” in Arrland and
elsewhere, Hayho was being carefully monitored for its “unethical business practices”. WB said
its interest in Hayho’s activities had been rekindled since it had received intelligence about the
possible investment in Jayland and warned Mrs Duomo not to make the investment because it
would provide credibility for the “brutal dictatorship” of Mr Popo.

Whilst Mrs Duomo, known for her forthright manner, would normally dismiss threats from groups
of this type, she knew that WB had a lot of support among senior politicians and legislators in
many parts of the world. She believed that WB could achieve some power through mobilising

36 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

public opinion through effective use of mass media, such as newspapers and television. WB
was also respected as a research organisation and its advice was often sought by politicians
and trade organisations.

Mrs Duomo said she was frustrated whenever anybody got in the way of her accountability to
the Hayho shareholders, but that some interests could not be ignored because of their potential
to influence. WB fell into this category.

The second letter she received was from the head of Quark Investments, Hayho’s single biggest
institutional shareholder. The letter sought to remind Mrs Duomo that the Hayho board was
employed by its shareholders and that Mrs Duomo should be determined and resolute in
maximising shareholder returns. The letter encouraged the board not to be diverted by “well-
meaning but misinformed outsiders concerned with things that were actually none of their
business”.

Aware that she had to manage two competing demands placed on her, Mrs Duomo sought

1
advice from Emily Baa, who had experience of life in Jayland. So she asked Emily Baa to
73
prepare some notes for the next board meeting to clarify whom the board of Hayho was actually
accountable to and how it might respond to the letter from WB.

Required:
36

(a) You are a corporate governance consultant engaged by the chairman of Hayho to
advise on the ethical aspects of investing in Jayland or Pealand.
49

Prepare ONE presentation slide, with accompanying notes, which assesses the
ethics of the decision to select the Jayland option or the Pealand option.

(12 marks)

Professional skills marks are available for demonstrating scepticism skills when
probing the ethical aspects of the decision. (2 marks)

(b) Prepare a briefing paper from Emily Baa to prepare the chief executive of Hayho,
Helen Duomo, for the board meeting. The paper should cover the following:

(i) A discussion of the meaning of accountability at Hayho, and an analysis

of how the influence of the Watching Business pressure group can be
predicted; (6 marks)

37 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Professional skills marks are available for demonstrating analysis skills when
considering the influence of the Watching Business pressure group. (2 marks)

(ii) A brief explanation of the agency relationship between the board of

Hayho and Quark Investments, and advice on why the demands from
Watching Business should be carefully considered. (6 marks)

Professional skills marks are available for demonstrating communication

skills when clarifying the agency relationship and why the demands from
Watching Business should be considered. (2 marks)

(30 marks)

1
73
36
49

38 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

QUESTION 14 WEST & LEROI

At an academic conference, a debate took place on the implementation of corporate

governance practices in developing countries. Professor James West from North America
argued that one of the key needs for developing countries was to implement rigorous systems
of corporate governance to underpin investor confidence in businesses in those countries. If
they did not, he warned, there would be no lasting economic growth as potential foreign inward
investors would be discouraged from investing.

In reply, Professor Amy Leroi, herself from a developing country, reported that many developing
countries are discussing these issues at governmental level. One issue, she said, was about
whether to adopt a rules-based or a principles-based approach. She pointed to evidence
highlighting a reduced number of small and medium sized initial public offerings in New York
compared to significant growth in London. She suggested that this change could be attributed
to the costs of complying with Sarbanes-Oxley in the United States and that over-regulation

1
would be the last thing that a developing country would need. She concluded that a principles-
based approach, such as in the United Kingdom, was preferable for developing countries.
73
Professor Leroi drew attention to an important section of the Sarbanes-Oxley Act to illustrate
her point. The key requirement of that section was to externally report on – and have attested
36

(verified) – internal controls. This was, she argued, far too ambitious for small and medium
companies that tended to dominate the economies of developing countries.

Professor West countered by saying that whilst Sarbanes-Oxley may have had some problems,
49

it remained the case that it regulated corporate governance in the “largest and most successful
economy in the world”. He said that rules will sometimes be hard to follow but that is no reason
to abandon them in favour of what he referred to as “softer” approaches.

There are arguments for both rules and principles-based approaches to corporate governance.

Required:

(a) Describe the essential features of a rules-based approach to corporate

governance; (3 marks)

39 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

(b) Construct the argument in favour of Professor Leroi’s opinion that a principles-
based approach would be preferable in developing countries. Your answer
should consider the particular situations of developing countries. (10 marks)

Professional skills marks are available for communication skills in constructing your argument
in favour of Professor Leroi’s opinion. (3 marks)

(16 marks)

1
73
36
49

40 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

QUESTION 15 MIDSHIRE HEALTH

Introduction

Two years ago, Terry Nagov was appointed as Chief Executive Officer (CEO) of MidShire
Health, a public authority with responsibility for health services in Midshire, a region with a
population of five million people in the country of Etopia. Like all health services in Etopia,
MidShire Health is funded out of general taxation and is delivered free of charge. Terry Nagov
was previously the CEO of a large private company making mobility appliances for disabled
people. He had successfully held a number of similar executive positions in companies
producing consumer products and goods for the consumer market. He was appointed to bring
successful private sector practices and procedures to MidShire Health. Etopia had experienced
a prolonged economic recession and such appointments were encouraged by the government
of Etopia who were faced with funding increased health care costs. They perceived that private
sector expertise could bring some order and greater control to the functioning of public sector

1
services. One of the government ministers publicly commented on the apparent “anarchy of
the health service” and its tendency to consume a disproportionate amount of the money
73
collected through general taxation. The government was keen on establishing efficiencies in
the public sector, by demonstrating “value for money” principles.
36

Vision and strategic planning

Terry Nagov believed that all organisations need to be firmly focused on a visionary objective.
He stated that “our (MidShire Health) mission is to deliver health to the people of Midshire and,
49

by that, I don’t just mean hospital services for the sick, but a wider vision, where health is a state
of complete physical, mental and social well-being and not merely the absence of disease or
infirmity”.

He believed that this vision could only be achieved through a comprehensive strategic planning
process which set objectives, policies and standards at a number of levels in the organisation.
In the strategic plan, the high-level objectives and policies of the organisation would be
cascaded down to operational levels in a series of lower-level plans, where departments and
functions had specific objectives that all contributed to the overall strategic vision. Terry Nagov
had successfully implemented such strategic planning systems at previous organisations he
had worked for. He believed that centralised, senior management should decide strategy, and
that line managers should be given power and responsibility to achieve their defined objectives.
This approach had worked well in the heavily automated industries he had worked in, with

41 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

semiskilled employees closely following standards and procedures defined by senior managers
in the organisation.

Terry Nagov believed that a project should be put in place to establish a formal strategic
planning system at MidShire Health and that this should be supported by a comprehensive
computer-based information system which recorded the outcomes and activities of the
organisation. He immediately engaged the commercial IT consultants, Eurotek, to develop and
implement this information system using a standard software package that they had originally
developed for the banking sector. The overall strategic planning system project itself would be
owned by a small steering group of two senior hospital doctors, two hospital nursing managers
and two workers from the health service support sector. Health service support employees
provide health services to the wider community in the form of health education and public health
information and initiatives. Their inclusion in the steering group was not welcomed by the
hospital doctors, but the CEO wanted a wide range of professional input. “Collectively”, Terry
declared, “the steering group has responsibility for delivering health to the Midshire community”.

Initial meeting of the steering group (meeting 1)

1
73
The initial meeting of the steering group was not attended by the two senior hospital doctors.
In Etopia, it is accepted that hospital doctors, although employed by the health authority on full-
36

time contracts, also have the right to undertake paid private work (practice) where they deliver
services for private hospitals to fee-paying patients. This right was negotiated by their
professional body, the Institute of Hospital Doctors (IOHD), many years ago. Many of the
49

patients they treat in private practice have paid for private health insurance so that they can be
treated quickly and thus avoid the long waiting times associated with the free, public service.
The initial meeting of the steering group coincided with a day when both doctors were
undertaking private work. In their absence, the steering group approved the overall vision of
the CEO and agreed to the initiation of an information system project to generate the detailed
planning and control information to support this vision. The exact nature and contents of this
information system would be determined by a small multi-disciplinary team reporting to the
steering group and referred to as the “implementation team”. It was made up of three
administrative staff employed by MidShire Health supported by four technical consultants from
Eurotek, experienced in implementing their software package solution. The composition of the
implementation team and steering group is shown in Figure 1.

42 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Strategic planning
steering group CEO

Implementation
team

Hospital Nursing Health service Administrative Eurotek

doctors (x2) managers (x2) support staff (x3) consultants (x4)
workers (x2)

Figure 1: Composition of the steering group and the implementation team

Second meeting of the steering group (meeting 2)

The second meeting was attended by the two senior hospital doctors, but one of the health
service support sector workers could not attend. At the start of the meeting, the two hospital

1
doctors questioned the wide definition of health agreed at the previous meeting. One of the
hospital doctors suggested that delivering health in this wider context was completely beyond
73
the resources and capabilities of MidShire Health. “You have to realise”, he said, “that poor
health is often caused by poverty, bad housing and social dislocation. You cannot expect
MidShire Health to solve such problems. We can advise and also treat the symptoms, but
36

prevention and cure for these wider issues are well beyond us”. The nursing managers, who
had previously approved the wider definition of health, now voiced their support for a narrower
definition of health and sided with the hospital doctors. One of them commented that “our real
49

work is treating the sick and we must recognise this”. The CEO, outnumbered and
outmanoeuvred in the meeting, had to agree to a modification of his initial vision, narrowing the
overall objective to “effectively and efficiently treating disease”. “And, as we all know”, stated
one of the doctors, “efficiency can only be achieved through giving control and budgets to the
doctors, not to the administrators who are an unwanted overhead. This is the very first step we
should take.” The nursing managers agreed and the meeting came to a slightly acrimonious
and early conclusion.

Meeting three of the steering group (meeting 3)

At the third meeting, a presentation was made by the IT consultants, Eurotek, where they
demonstrated their software for recording business activities and showed how these activities
could be measured against agreed targets. A great deal of discussion took place on the targets
that could be set for measuring health efficiency. After a long heated debate, three measures
were agreed for hospitals. It was suggested that similar measures should be discussed and
43 © ACCA. All rights reserved.
ICMAP Pathway Exam ACCA Question Bank

developed for health service support services, such as health education. However, at this point,
the two senior doctors declared that they had to leave the meeting to “return to our real job of
treating patients”. The CEO agreed that the health service support workers could establish their
own measures before the next meeting. One of these representatives commented that “in my
day-to-day job I am confronted by many people who have preventable illnesses. Their problems
are due to poor diet and unhealthy habits. Preventing such problems must be better than curing
them!” The CEO agreed; this was what he wanted to hear!

Meeting four of the steering group (meeting 4)

The fourth meeting of the steering group began with a discussion of the preventative perspective
of health raised by one of the health service support workers at the end of the previous meeting.
Both the hospital doctors and nursing managers suggested that this did not come under the
revised definition of health used by the steering group, and the CEO quickly agreed. The rest
of the meeting was dominated by a discussion of the costs of the Eurotek software solution. A

1
local newspaper had run the headline “spending money on computers – not patients” and it
included a number of quotes attributed to one of the hospital doctors on the strategic steering
73
group where he criticised the appointment of Eurotek and the attitude of the MidShire Health
CEO. “Running a manufacturing company is very different from running a health service”, he
said. “We are motivated by service, not products and profit.” Terry Nagov, as CEO, openly
36

questioned the ethics of members of the steering group discussing confidential internal matters
with the press. The hospital doctors and the nursing managers fiercely defended their right to
do so. “You have to understand”, they said, “our loyalty is to the profession and to the public.
49

We must act in the public interest.” Nevertheless, the CEO raised the possibility of disciplinary
action against the hospital doctor. At this point, the senior hospital doctors and the nursing
managers left the meeting. The health service support workers stayed and pledged their
support to the CEO. They revealed that the autocratic behaviour of hospital doctors often
resulted in their work being both unrewarding and unrecognised. One commented, “We have
little professional autonomy, we feel controlled by the agenda of the hospital doctors”.

Meeting five of the steering group (meeting 5)

The possibility of disciplinary action against the hospital doctor had been published in the press
and the Institute of Hospital Doctors (IOHD) had made a formal complaint about the CEO’s
behaviour to Etopia’s health minister. Faced with pressure from within the hospital sector, Terry
Nagov was forced to retract his threat of disciplinary action and to issue a public apology, but
meeting five was boycotted by the hospital doctors and nursing manager representatives due
to “the lack of respect shown by the CEO”. Consequently, meeting five was cancelled.
44 © ACCA. All rights reserved.
ICMAP Pathway Exam ACCA Question Bank

Meeting six of the steering group (meeting 6)

This meeting received a report from the implementation team working on the specification of
the information system for MidShire Health. They reported that the software suggested by
Eurotek was excellent for time recording, analysis and reporting, but had very few features to
aid the planning and control of activities. “I suspected this all along”, said one of the hospital
doctors. “I think this report shows that you are more interested in finding out what we are doing.
The strategic planning exercise is really about cost reduction.” It was agreed that Eurotek
should be contacted to provide a price for developing a bespoke solution for the information
system requirements envisaged by the MidShire implementation team. “I realise”, the CEO
said, “this will affect the viability of the whole strategic planning project but I ask you all to pull
together for the good of MidShire Health and its image within the community.”

Just prior to the next planned meeting, the implementation team specifying the information
system reported that Eurotek had quoted a price of $600,000 to develop a software solution

1
that integrated planning and control of hospital activities into their software package solution.
This was additional to the $450,000 it was charging for the basic software package. The CEO
73
reacted immediately by cancelling the information system project “on cost grounds” and
disbanding the steering group. He stated that “from now on, I will personally specify and develop
the targets required to bring health to the people of Midshire. I will focus on using the current
36

systems to bring these into place”. Emails were sent to the steering committee members
informing them of the dissolution of the steering group, stating that no further meetings would
be held and no comments were invited. However, the costs of paying penalty charges to
49

Eurotek were soon released to the press and Terry Nagov resigned from his post as CEO of
MidShire Health to return to his previous company as chairman. The Institute of Hospital
Doctors (IOHD) took the opportunity to issue the following press release:

“Once again, the government has failed to realise that managing public
sector services is not the same as managing a private sector profit making
company. Money and time have been wasted and reputations needlessly
damaged. Doctors and nurses, people at the cutting edge of the service,
know what needs to be done. But time after time our views are disregarded
by professional managers and administrators who have little understanding
of health care delivery. The public deserve better and we, the IOHD, remain
committed to delivering services in the public interest.”

45 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Required:

You are a consultant engaged by MidShire Health to advise on organisational culture and
configuration.

Prepare a report for the board which:

(a) Explains how an understanding of organisational culture would have helped the
CEO anticipate the problems encountered in introducing a strategic planning
system and an associated information system at MidShire Health. (10 marks)

Professional skills marks are available for demonstrating communication skills when
informing how an understanding of organisational culture could have anticipated the
problems. (3 marks)

(b) Explains how an understanding of organisational configuration would have

helped the CEO

1 (10 marks)
73
Professional skills marks are available for commercial acumen skills when
demonstrating an awareness of the impact of organisational culture. (3 marks)

(26 marks)
36
49

46 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

QUESTION 16 HAPPY AND HEALTHY

“Happy and healthy” is a traditional independent health food business that has been run as a
family company for 40 years by Ken and Steffi Potter. As a couple they have always been
passionate campaigners for healthy foods and are more concerned about the quality of the
foods they sell than the financial detail of their business. Since the company started in 1970, it
has been audited by Watson Shreeves, a local audit firm. Mr Shreeves has overseen the
Potters’ audit for all of the 40 year history (rotating the engagement partner) and has always
taken the opportunity to meet with Ken and Steffi informally at the end of each audit to sign off
the financial statements and to offer a briefing and some free financial advice in his role as what
he calls, “auditor and friend”. In these briefings, Mr Shreeves, who has become a close family
friend of the Potters over the years, always points out that the business is profitable (which the
Potters already knew without knowing the actual figures) and how they might increase their
margins. But the Potters have never been too concerned about financial performance as long
as they can provide a good service to their customers, make enough to keep the business going

1
and provide continued employment for themselves and their son, Ivan. Whilst Ken and Steffi
73
still retain a majority shareholding in “Happy and healthy” they have gradually increased Ivan’s
proportion over the years. They currently own 60% to Ivan’s 40%. Ivan was appointed a
director, alongside Ken and Steffi, in 20X6.
36

Ivan grew up in the business and has helped his parents out since he was a young boy. As he
grew up, Ken and Steffi gave him more and more responsibility in the hope that he would one
day take the business over. By the end of 20X5, Ken made sure that Ivan drew more salary
49

than Ken and Steffi combined as they sought to ensure that Ivan was happy to continue in the
business after they retired.

During the audit for the year ended 31 March 20X9, a member of Watson Shreeves was
performing the audit as usual when he noticed a dramatic drop in the profitability of the business
as a whole. He noticed that whilst food sales continued to be profitable, a large amount of
inventory had been sold below cost to Barong Company with no further explanation and it was
this that had caused the reduction in the company’s operating margin. Each transaction with
Barong Company had, the invoices showed, been authorised by Ivan.

Mr Shreeves was certain Ken and Steffi would not know anything about this and he prepared
to tell them about it as a part of his annual end of audit meeting. Before the meeting, however,
he carried out some checks on Barong Company and found that it was a separate business
owned by Ivan and his wife. Mr Shreeves’ conclusion was that Ivan was effectively stealing
from “Happy and healthy” to provide inventory for Barong Company at a highly discounted cost
47 © ACCA. All rights reserved.
ICMAP Pathway Exam ACCA Question Bank

price. Although Mr Shreeves now had to recommend certain disclosures to the financial
statements in this meeting, his main fear was that Ken and Steffi would be devastated if they
found out that Ivan was stealing and that it would have long-term implications for their family
relationships and the future of “Happy and healthy”.

Required:

(a) Mr Shreeves is a professional accountant and auditor. Explain why he is

considered a professional by society and describe the fundamental principles
(or responsibilities) of professionalism that society expects from him and all
other accountants. (7 marks)

(b) Discuss the professional and ethical dilemma facing Mr Shreeves in deciding
whether or not to tell Ken and Steffi about Ivan’s activity. Advise Mr Shreeves
of the most appropriate course of action. (8 marks)

the most appropriate course of action.

1
Professional skills marks are available for demonstrating evaluation skills in assessing
(4 marks)
73
(19 marks)
36
49

48 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

QUESTION 17 LODGE

Lodge is a multi-national building and equipment contracting business that operates in Europe.
The board of directors has recently approved a compensation plan that ties management and
executive level bonuses to achieving targets on three key financial measures. The first ratio is
the current ratio, which is critical because the company has several debt covenants tied to
maintaining that ratio. The second is return on equity; the target is at least 1% above industry
average. The final measure is sales volume; top line sales numbers should grow by 5% per
year.

The finance director sits on the board of Chapman, one of Lodge’s major suppliers with whom
Lodge does significant business. The assistant accountant, Bailey, who did not see anything
in the notes to the financial statements regarding related parties, approached the finance
director to inquire why there was no mention of this relationship or these transactions. The
finance director responded that no disclosure was necessary, as Lodge receives better deals

1
doing business with Chapman than with any other suppliers of comparable goods.
73
Required:

Discuss the ethical and reporting implications of the above situation from the
perspective of the assistant accountant. (5 marks)
36

Professional marks are available for demonstrating scepticism in challenging the finance
director’s behaviour. (2 marks)
49

(7 marks)

49 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

QUESTION 18 NETTE

Nette, a public limited company, manufactures mining equipment and extracts natural gas. The
directors are uncertain about the role of the IASB’s Conceptual Framework for Financial
Reporting (Conceptual Framework) in corporate reporting. Their view is that accounting is
based on the transactions carried out by the company and these transactions are allocated to
the company’s accounting period by using the matching and prudence concepts. The argument
put forward by the directors is that the Conceptual Framework does not take into account the
business and legal constraints within which companies operate.

Required:

Explain the importance of the “Conceptual Framework” to reporting corporate

performance and whether it takes into account the business and legal constraints placed
on companies. (6 marks)

1
Professional skills marks are available for communication skills in explaining the importance of
the “Conceptual Framework” to reporting corporate performance. (2 marks)
73
(8 marks)
36
49

50 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

QUESTION 19 FOODIE

You have recently taken up the post of general manager with Foodie, a medium sized food
processing company in the South West of England. The company is seeking to achieve market-
led growth throughout the EU. The growth is seen as a development of the company’s success
to date in supplying local retailers with a range of ready-prepared meals. The product range is
noted for providing good quality meals at a keen price, and the company has a strong reputation
for being responsive to customers’ needs.

The company uses only quality-approved suppliers of raw materials and by carefully controlling
quality it has been successful in avoiding the health scares that have arisen in the industry in
recent years. The directors believe that careful promotion of the company’s quality
management programme will also make it possible to improve margins.

Market research has indicated that demand for the products is strong, and that the success of
the expansion will depend on the company’s ability to maintain quality standards while

1
increasing the volume of activity, and to create an effective distribution network that will allow
73
retailers to obtain orders at short notice. The need to meet customer orders at short notice has
led the directors to decide that the required expansion of the production facility will mean that a
number of new factories will be established in key locations that are close to potential
36

customers.To date the company has adopted a functional organisational structure with quality
being the responsibility of the production manager.

You have been invited to the next meeting of the board of directors in order to recommend
49

whether or not the company should develop a mission statement and what changes in
organisational structure and management responsibilities will be required if the proposed
expansion is to be successful.

Required:

In preparation for your meeting with the directors of Foodie, prepare a briefing paper
which discusses the purpose of a company mission statement, and the benefits and
problems which the company may experience if a mission statement is developed.

(8 marks)

Professional skills marks are available for communication skills in discussing the purpose of a
mission statement. (2 marks)

(10 marks)
51 © ACCA. All rights reserved.
ICMAP Pathway Exam ACCA Question Bank

QUESTION 20 HEALTHY EATING GROUP

The directors of The Healthy Eating Group (HEG), a successful restaurant chain, which
commenced trading ten years ago, have decided to enter the sandwich market in Homeland,
its country of operation. It has set up a separate operation under the name of Healthy
Sandwiches Co (HSC). A management team for HSC has been recruited via a recruitment
consultancy which specialises in food sector appointments. Homeland has very high
unemployment and the vast majority of its workforce has no experience in a food manufacturing
environment. HSC will commence trading at the start of next year.

The following information is available:

(1) HSC has agreed to make and supply sandwiches to agreed recipes for the Superior
Food Group (SFG) which owns a chain of supermarkets in all towns and cities in
Homeland. SFG insists that it selects the suppliers of the ingredients that are used in
making the sandwiches it sells and therefore HSC would be unable to reduce the costs

1
of the ingredients used in the sandwiches. HSC will be the sole supplier for SFG.
73
(2) The number of sandwiches sold per year in Homeland is 625 million. SFG has a 4%
market share.
36

(3) The average selling price of all sandwiches sold by SFG is $2.40. SFG wishes to make
a mark-up of 331/3% on all sandwiches sold. 90% of all sandwiches sold by SFG are
sold before 2 pm each day. The majority of the remaining 10% are sold after 8 pm. It
49

is the intention that all sandwiches are sold on the day that they are delivered into
SFG’s supermarkets.

(4) The finance director of HSC has stated that he believes the target sales margin of 32%
can be achieved, although he is concerned about the effect that an increase in the cost
of all ingredients would have on the forecast profits (assuming that all other
revenue/cost data remains unchanged).

(5) The existing management information system of HEG was purchased at the time that
HEG commenced trading. The directors are now considering investing in an enterprise
resource planning system (ERPS).

52 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Required:

Explain FIVE critical success factors to the performance of HSC on which the directors
must focus if HSC is to achieve success in its marketplace. (10 marks)

Professional skills marks are available for demonstrating analysis skills when identifying
possible critical success factors. (3 marks)

(13 marks)

1
73
36
49

53 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

QUESTION 21 ROCKINGHAM HOSPITAL

A new private hospital of 100 beds was opened to receive patients on 2 January 20X1 although
many senior staff members, including the supervisor of the laundry department, had been
working in the hospital for some time before it opened. The first three months were expected
to be a settling-in period, the hospital facilities being used to full capacity only in the second and
subsequent quarters.

On 1 May 20X1 the supervisor of the laundry department received her first quarterly
performance report from the hospital administrator, together with an explanatory memorandum.
Copies of both documents are set out below.

The supervisor had never seen the original budget, nor had she been informed that there would
be a quarterly performance report. She knew she was responsible for her department and had
made every endeavour to run it as efficiently as possible. It had been made clear to her that
there would be a slow build-up in the number of patients accepted by the hospital and so she

1
would need only three members of staff, but she had had to take on a fourth during the quarter
73
due to the extra work. This extra hiring had been anticipated for May, not late February.
36
49

54 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Rockingham Private Patients Hospital

Memorandum

To All department heads/supervisors

From Hospital administrator

Date 30 April 20X1

Attached is the quarterly performance report for your department. The

hospital has adopted a responsibility accounting system so you will be
receiving one of these reports quarterly. Responsibility accounting means
that you are accountable for ensuring that the expenses of running your
department are kept in line with the budget. Each report compares the actual

1
expenses of running your department for the quarter with our budget for the
73
same period. The difference between the actual and budget will be
highlighted so that you can identify the important variations from budget and
take corrective action to get back on budget. Any variation in excess of 5%
36

from budget should be investigated and an explanatory memorandum sent

to me giving reasons for the variations and the proposed corrective actions.
49

55 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Performance report – Laundry department

Three months to 31 March 20X1

Actual Budget Variation %

(over) variation
under
Patient days 8,000 6,500 (1,500) (23.1)
Weight of laundry processed (kilos) 101,170 81,250 (19,920) (24.5)
———– ——— ——— ——–
Department expenses $ $ $ %
Wages 4,125 3,450 (675) (19.6)
Supervisor salary 1,490 1,495 5 –
Washing materials 920 770 (150) (19.5)
Heating and power 560 510 (50) (9.8)
Equipment depreciation 250 250 – –
Allocated administration costs 2,460 2,000 (460) (23.0)
Equipment maintenance 10 45 35 78.0
———– ——— ——— ——–
9,815 8,520 (1,295) (15.0)
———– ——— ——— ——–

1
Comment. We need to have a discussion about the over-expenditure of
73
the department.

Required:
36

(a) Discuss in detail the various possible effects on the behaviour of the laundry
supervisor of the way that her budget was prepared, and the form and content
49

of the performance report. (10 marks)

Professional skills marks are available for demonstrating commercial acumen skills in
discussing how the supervisor’s behaviour may have been affected. (3 marks)

(b) Re-draft, giving explanations, the performance report and supporting

memorandum in a way which, in your opinion, would make them more effective
management tools. (8 marks)

Professional skills marks are available for communication skills in re-drafting the
documents. (2 marks)

(23 marks)

56 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

QUESTION 22 THERE 4 U COMPANY

Note – this question contains a lower level of professional marks than will be seen in the final
examination, where 20-30% of the total marks will assess candidates’ professional skills. This
question should still be attempted as useful preparation for the examination.

There 4 U Company (T4UC) commenced trading three years ago. It was founded by Ken
Matthews, who is the managing director of T4UC.

The initial aim of T4UC was to provide good quality repairs and servicing to customers with
domestic central heating systems and domestic “white goods” (i.e. items such as washing
machines, tumble dryers, dishwashers, refrigerators and freezers).

T4UC provides contract services on an annual basis to individual customers who require

1
insurance covering the repair and servicing of their central heating systems and domestic white
goods. T4UC charge an annual contract fee and undertake all client repair and servicing
73
requirements without further charge.

Ken, who has a very strong background in sales and marketing, recruited engineers who came
36

from a variety of engineering backgrounds.

Initial growth was prolific with Ken being very successful in establishing a good-sized customer
base within the first two years of the business. Ken believes that staff utilisation is the key driver
49

of T4UC’s profitability.

T4UC set up a website where clients could access product manuals and other diagnostic data
as well as being able to book an appointment with a service engineer.

57 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

The following data is available for the first three years of the business:

Year 1 Year 2 Year 3

Number of contracted clients 13,000 15,000 14,800

Number of visits to contracted clients 23,400 30,000 32,000

Number of clients gained via 200 100 5

recommendation

Number of telephone calls for product 52,500 62,000 59,500

support received

Number of telephone calls for product 52,000 60,000 58,000

support answered
Number of product support issues 46,800 51,000 46,400
resolved by telephone

1
73
At the end of year 3 Ken became anxious regarding the fact that the growth in the customer
base had stopped and that a number of clients had chosen not to renew their contracts with
T4UC. In view of these facts, Ken undertook an extensive survey of the customers who had
36

entered into contracts with T4UC since it commenced trading.

Ken received the following comments, which were representative of all other comments that he
49

received.

“T4UC ought to adopt a ‘right first time’ mentality.”

“I booked an engineer for last Monday who never arrived but two engineers turned up
on Tuesday!”

“You send me a different engineer each time to inspect my central heating system.
Some are here for an hour and yet others are here for the whole day and some of those
even have to come back the next day.”

“Your people never seem to have the required parts with them and have to come back
the next day!”

“An engineer arrived at my home to repair my washing machine but the required parts
which were shipped to my home direct from the manufacturer arrived three days later!
58 © ACCA. All rights reserved.
ICMAP Pathway Exam ACCA Question Bank

I’ve heard that Appliances R Us is the best organisation in your service sector and that
they provide a much more efficient service than T4UC and unlike T4UC is always
contactable on a 24 hours basis during every day of the year! When I have tried to
contact you on Saturdays and Sundays I have often given up out of sheer frustration!”

Ken also obtained the following data from the “Centre for Inter-Firm Comparison”.

T4UC Appliances Industry

R Us average

Customer satisfaction rating (%) 65 92 75

Remedial visits as a % of client 8 1 4

visits

Cost per client per visit ($) 150 75 100

Client to staff ratio

1
250:1 200:1 225:1
73
Ken undertook further investigations that revealed remedial visits were frequently due to staff
36

servicing appliances with which they were not completely familiar.

Required:
49

(a) Describe the Six-Sigma methodology for the improvement of an existing

process. (10 marks)

(b) Explain how the above-mentioned problems at T4UC could be analysed and
addressed using the Six Sigma methodology. Your answer should include
suggestions regarding additional activities that should be undertaken in order
to improve the performance of T4UC. (9 marks)

Professional skills marks are available for demonstrating analysis skills when applying
the Six Sigma methodology. (3 marks)

(22 marks)

59 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

QUESTION 23 ASTRODOME SPORTS

Astrodome Sports was formed one year ago by seven engineers who comprise the board of
directors of the company. The seven engineers previously worked together for Telstar, a
satellite navigation company.

In conjunction with one of the three largest construction companies in their country they
constructed the “365 Sports Complex” which has a roof that opens and uses revolutionary
satellite technology to maintain grass surfaces in the complex. The complex facilities, which
are available for use on each day of the year, include two tennis courts, a cricket pitch, an
equestrian centre and six bowling greens. The tennis courts and cricket pitch are suitable for
use as venues for national competitions.

The equestrian centre offers horse-riding lessons to the general public and is also a suitable
venue for show-jumping competitions. The equestrian centre and bowling greens have
increased in popularity as a consequence of regular television coverage of equestrian and
bowling events.
1
73
In spite of the high standard of the grass surfaces in the sports complex, the directors are
concerned by reduced profit levels as a consequence of both falling revenues and increasing
costs. The area in which the complex is located has high unemployment but is served by all
36

public transport services.

The directors of Astrodome Sports have different views about the course of action that should
49

be taken to provide a strategy for the future improvement in the performance of the complex.
Each director’s view is based on his/her individual perception as to the interpretation of the
information contained in the performance measurement system of the complex. These views
are as follows:

Director

A “There is no point whatsoever in encouraging staff to focus on interaction with

customers in efforts to create a user-friendly environment. What we need is to maintain
the quality of our grass surfaces at all costs since that is the distinguishing feature of
our business.”

B “Buy more equipment which can be hired out to users of our facilities. This will improve
our utilisation ratios which will lead to increased profits.”

60 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

C “We should focus our attention on maximising the opening hours of our facilities.
Everything else will take care of itself.”

D “Recent analysis of customer feedback forms indicates that most of our customers are
satisfied with the facilities. In fact, the only complaints are from three customers – the
LCA University which uses the cricket pitch for matches, the National Youth Training
Academy which held training sessions on the tennis courts, and a local bowling team.”

E “We should reduce the buildings maintenance budget by 25% and spend the money
on increased advertising of our facilities which will surely attract more customers.”

F “We should hold back on our efforts to overcome the shortage of bowling equipment
for hire. Recent rumours are that the National Bowling Association is likely to offer
large financial grants next year to sports complexes who can show they have a
demand for the sport but have deficiencies in availability of equipment.”

1
“Why change our performance management system? Our current areas of focus
provide us with all the information we need to ensure that we remain a profitable and
73
effective business.”

As management accountant of Astrodome Sports you have recently read an article that
36

discussed the following performance measurement problems:

i. Tunnel vision;
49

ii. Sub-optimisation;

iii. Misinterpretation;

iv. Myopia;

v. Measure fixation;

vi. Misrepresentation;

vii. Gaming;

viii. Ossification.

61 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Required:

(a) Explain any FOUR of the above-mentioned performance measurement problems

(i-viii) and discuss which of the views of the directors (a-g) illustrate its
application in each case. (12 marks)

Professional skills marks are available for demonstrating commercial acumen skills in
showing which of the views of the directors show which performance management
problem. (3 marks)

(b) Discuss the relevance of each of the following actions as steps in trying to
remedy performance measurement problems relating to the 365 Sports Complex
and suggest examples of specific problem classifications that may be reduced
or eliminated by each action:

(i) focusing on and improving the measurement of customer satisfaction;

(ii)
1
involving staff at all levels in the development and implementation of
73
performance measures;

(iii) being flexible in the extent to which formal performance measures are
36

relied on;

(iv) giving consideration to the auditing of the performance measurement

system. (8 marks)
49

Professional skills marks are available for demonstrating evaluation skills in assessing
the impact of each course of action. (2 marks)

(25 marks)

62 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

QUESTION 24 BETTER GARDENS CO

You are the Senior Management Accountant of Better Gardens Co (BGC), a well-established
manufacturer of a range of conservatories, summerhouses and large garden ornaments. The
company’s revenue and after-tax profits for the current financial year are forecast to be $100m
and $20m respectively. The company has 350 employees in total who are comprised as
follows:

Function/level: Number of employees

Directors/Senior managers 20

Sales staff 40

Assembly staff 250

Administrative and support staff 40

1
BGC’s products are sold to specialist garden centres by its sales staff,. The 40 sales staff work
73
from home and are supported by administrative and support staff who also undertake
telephone-based selling activities.
36

The manufacture of conservatories and summerhouses is undertaken by 210 assembly staff,

some of who work in teams and others who work on an individual basis.
49

The large garden ornaments, each of which is hand-finished, are produced by 40 assembly staff
that are responsible for their individual output.

The directors of BGC are considering whether to implement a reward scheme for all employees
within the organisation. They have approached you for advice with regard to this matter. The
production director recently stated “if we implement a reward scheme then it is bound to be
beneficial for BGC”.

Required:

As Senior Management Accountant, prepare a memorandum to the directors of BGC that

explains:

(a) the potential benefits to be gained from the implementation of a reward scheme;
(5 marks)

63 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

(b) the factors that should be considered in the design of a reward scheme for the
company; (6 marks)

(c) whether you agree with the statement of the production director. (3 marks)

Professional skills marks are available for communication skills in giving well-rounded
arguments in the memorandum. (4 marks)

(18 marks)

1
73
36
49

64 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

QUESTION 25 UNIVERSAL UNIVERSITY

The senior management of Universal University (UU) intend to develop both quantitative and
qualitative measures of performance in relation to lecturing staff.

As part of UU’s mission “to provide quality education” to its students, lecturers are encouraged
to apply their skill and judgement in the creation, delivery and assessment aspects of the
learning process.

Academic staff are organised on a departmental basis. Each department is expected to meet
and improve on targets in the achievement of its role. As part of their development both
personally and as departmental members, staff are encouraged to participate fully in research
publication, new course design and innovation in teaching and learning methods.

Academic staff have differing views on whether action on their part in pursuing aspects of such
goals is compatible with their personal goals.

Required:
1
73
(a) Using the above scenario, discuss in relation to the lecturing staff within UU
each of the following:
36

(i) The application of agency theory in their role as agents; and

(ii) The application of expectancy theory with specific reference to the

49

relationship between:

– Strength of motivation to do (X)

– Strength of preference of outcome (Y)

– Expectation that doing (X) will result in (Y) (8 marks)

Professional skills marks are available for demonstrating analysis skills when applying
the theories to the case. (2 marks)

65 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

(b) Hard Accountability is deemed to apply to lecturing staff in each of three specific areas
as follows:

(i) Accounting for the numbers;

(ii) Ensuring the numbers are accounted for;

(iii) Being held accountable for events and circumstances leading to the numbers.

Describe how each of the areas (b)(i) to (iii) may be applied at UU and critically
evaluate this approach to performance measurement in the context of the
scenario described above. (6 marks)

Professional skills marks are available for demonstrating evaluation skills in relating
the areas to UU. (2 marks)

(18 marks)

1
73
36
49

66 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

QUESTION 26 COD

Cod Electrical Motors (Cod) manufactures electrical motors for some of the 24 different
European domestic appliance manufacturers. Their motors are used in appliances such as
washing machines and refrigerators. Cod has been in business for over 50 years and has
obtained a reputation for producing reliable, low cost motors.

Cod has recently rewritten its mission statement, which now reads:

“Cod Electrical Motors is committed to providing competitively priced, high

quality products, with service exceeding customer expectations. We will add
value to our business relationships by investing in product development and
highly trained personnel.”

The board have recognised that their existing key performance indicators (KPIs) do not capture
the features of the corporate mission. They are worried that the staff see the mission statement

1
as a public relations exercise rather than the communication of Cod’s vision.
73
The monthly board papers contain a simple performance summary which is used as the key
performance measurement system at that level.
36

Example of board papers for month 11:

Cod Electrical Motors

49

Key performance indicators for month 11:

This month YTD Comparative

Profit ($m) 2.1 25.6 1.9
Free cash flow ($m) 3.4 17.6 1.6
Return on capital employed (%) 12.4 11.7 11.8

Notes:

(a) The comparative figure is for the same month in the previous year.
(b) ROCE is an annualised figure.
(c) YTD means year to date.

67 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

There are additional performance indicators not available to the board that line management
use for a more detailed picture.

Additional performance information

Note Current year Prior year

1
Activity
No. of orders 2,560 2,449
No. of deliveries 1,588 1,660
Staff
No. of staff (FTE basis) 2 1,229 1,226
No. of staff training days 2,286 1,762
No. of vacant posts 3 11 17
Customers
No. of orders with a complaint:
- late delivery
1 4
26 25
73
- product quality 39 31
- customer service 21 24
- other 52 43
36

Preferential supplier status 5 14 12

Production
New products
49

- begun in year to date 2 1

- in development at month end 4 3
- launched in year to date 1 1
Quality
- internal failure costs ($000) 3,480 2,766
- external failure costs ($000) 872 693

68 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Notes:

(1) Figures are year to date with comparatives from the previous year quoted on the same
basis.
(2) FTE = Full-time equivalent staff numbers.
(3) Post is considered vacant if unfilled for more than four months.
(4) Complaints are logged and classified into the four categories given when received.
(5) Number of customers where Cod holds preferred supplier status.

Required:

(a) Assess whether the current key performance indicators (KPIs) meet the
expected features of a modern performance measurement system. (7 marks)

Professional skills marks are available for demonstrating analysis skills in assessing
Cod’s existing situation.

1 (2 marks)
73
(b) Explain how the performance pyramid (Lynch and Cross) can help Cod’s board
to reach its goal of a coherent set of performance measures. (5 marks)
36

(c) Evaluate the current system using the performance pyramid and apply the
performance pyramid to Cod in order to suggest additional KPIs and a set of
operational performance measures for Cod. (12 marks)
49

Professional skills marks are available for demonstrating evaluation skills in applying
the performance pyramid. (4 marks)

(30 marks)

69 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

QUESTION 27 RM BATTERIES

RM Batteries (RMB) is a manufacturer of battery packs. It has expanded rapidly in the last few
years under the leadership of its autocratic chairman and chief executive officer, John Smith.
Smith is relentlessly optimistic. He likes to get his own way and demands absolute loyalty from
all his colleagues.

The company has developed a major new product over the last three years which has
necessitated a large investment in new equipment. Smith has stated that this more efficient
battery is critical to the future of the business as the company operates in a sector where
customers expect constant innovation from their suppliers.

However, the recent share price performance has caused concern at board level and there has
been comment in the financial press about the increased gearing and the strain that this
expansion is putting on the company. The average share price has been $1.56 (20X0), $1.67
(20X1) and $1.34 (20X2). There are 450 million shares in issue.

A relevant Z-score model for the industry sector is:

1
73
Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + X5
36

Where
X1 is working capital/total assets (WC/TA);
X2 is retained earnings reserve/total assets (RE/TA);
49

X3 is profit before interest and tax/total assets (PBIT/TA);

X4 is market value of equity/total long-term debt (Mve/total long-term debt); and
X5 is revenue/total assets (revenue/TA).

A score of more than 3 is considered safe and at below 1.8, the company is at risk of failure in
the next two years.

70 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

The company’s recent financial performance is summarised below:

Summary statements of profit or loss 20X0 20X1 20X2

$m $m $m
Revenue 1,460 1,560 1,915
Operating costs 1,153 1,279 1,724
–––––– –––––– ––––––
Operating profit 307 281 191
Interest 35 74 95
–––––– –––––– ––––––
Profit before tax 272 207 96
Tax 87 66 31
–––––– –––––– ––––––
Profit for the period 185 141 65
–––––– –––––– ––––––

1
73
Statements of financial position 20X0 20X1 20X2
$m $m $m
Assets
36

Non-current assets 1,120 1,778 2,115

Current assets 235 285 341
–––––– –––––– ––––––
49

Total assets 1,355 2,063 2,456

–––––– –––––– ––––––
Equity and liabilities
Share capital 230 230 230
Retained earnings reserve 204 344 410
Long-term borrowings 465 991 1,261
Current liabilities 456 498 555
–––––– –––––– ––––––
Total equity and liabilities 1,355 2,063 2,456
–––––– –––––– ––––––

71 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

A junior analyst in the company has correctly prepared a spreadsheet calculating the Z-score
as follows:

20X0 20X1 20X2

Share price ($) 1.56 1.67 1.34
No of shares (millions) 450 450 450
Market value of Equity ($M) 702 752 603

X1 WC/TA –0.163 –0.103 –0.087

X2 RE/TA 0.151 0.167 0.167
X3 PBIT/TA 0.227 0.136 0.078
X4 Mve/Total long-term debt 1.510 0.758 0.478
X5 Revenue/TA 1.077 0.756 0.780
Z 2.746 1.770 1.452

Required:
Gearing [debt/equity]

1107% 173% 197%

73
(a) Discuss the strengths and weaknesses of quantitative and qualitative models
for predicting corporate failure. (6 marks)
36

(b) Comment on the results in the junior analyst’s spreadsheet. (5 marks)

(c) Identify the qualitative problems that are apparent in the company’s structure
49

and performance and explain why these are relevant to possible failure. (5
marks)

Professional skills marks are available for demonstrating analysis skills in parts

(a)-(c). (3 marks)

(d) Critically assess the results of your analysis in parts (b) and (c) alongside details
of RMB’s recent financial performance and suggest additional data that should
be acquired and how it could be used to assess RMB’s financial health. (4
marks)

Professional skills marks are available for demonstrating evaluation skills in critically
assessing the results of your analysis. (2 marks)

(25 marks)
72 © ACCA. All rights reserved.
ICMAP Pathway Exam ACCA Question Bank

QUESTION 28 METIS

Company information and objectives

Metis is a restaurant business in the city of Urbanton. Metis was started three years ago by
three friends who met at university while doing courses in business and catering management.
Initially, their aim was simply “to make money” although they had talked about building a chain
of restaurants if the first site was successful.

The three friends pooled their own capital and took out a loan from the Grand Bank in order to
fit out a rented site in the city. They designed the restaurant to be light and open with a menu
that reflected the most popular dishes in Urbanton regardless of any particular culinary style.
The dishes were designed to be priced in the middle of the range that was common for
restaurants in the city.

Management responsibilities

1
The choice of food and drinks to offer to customers is still a group decision amongst the owners.
73
Other elements of the business were allocated according to each owner’s qualifications and
preferences. Bert Fish takes charge of all aspects of the kitchen operations while another,
Sheila Plate, manages the activities in the public area such as taking reservations, serving
36

tables and maintaining the appearance of the restaurant. The third founder, John Sum, deals
with the overall business issues such as procurement, accounting and legal matters.
49

External environment

Competition in the restaurant business is fierce as it is easy to open a restaurant in Urbanton

and there are many competitors in the city both small, single-site operations and large national
chains. The current national economic environment is one of steady but unspectacular growth.

Performance report

The restaurant has been running for three years and the founders have reached the point where
the business seems to be profitable and self-sustaining. The restaurant is now in need of
refurbishment in order to maintain its atmosphere and this has prompted the founders to
consider the future of their business. John Sum has come to you as their accountant looking
for advice on aspects of performance management in the business. He has supplied you with
figures outlining the recent performance of the business and the forecasts for the next year (see
Appendix 1). This table represents the quantitative data that is available to the founders when
they meet each quarter to plan any short-term projects or initiatives and to consider the longer-
73 © ACCA. All rights reserved.
ICMAP Pathway Exam ACCA Question Bank

term future. Bert and Sheila have often indicated to John that they find the information daunting
and difficult to understand fully.

John Sum has come to you to advise him on the performance reporting at Metis and how it
could be improved. He feels that the current report is, in some ways, too complex and, in other
ways, too simple. He wants to look at different methods of measuring and presenting
performance to the ownership group. As a starting point, he has suggested to you that you
consider measures such as NPV, EVA™ and MIRR as well as the more common profit
measures. John is naïve and wants the NPV and MIRR to be appraised as if the business was
a three-year project up to 20X4 so he knows the performance of the business to date. He has
requested that other calculations in your performance review should be annual based on the
20X4 figures although he is aware that this may be omitting in his words “some important detail”.

Recent problems

At recent meetings, Sheila has been complaining that her waiters and waitresses are not

1
responding well to her attempts to encourage them to smile at customers although her recent
73
drive to save electricity by getting staff to turn off unnecessary lights seems to be working. Bert
stated that he was not convinced by either of Sheila’s initiatives and he wants her to make sure
that food is collected from the kitchen swiftly and so delivered at the right temperature to the
36

customer’s table. Also, Bert has said that he feels that too much food is becoming rotten and
having to be thrown out. However, he is not sure what to do about it except make the kitchen
staff go through lengthy inventory checks where they review the food held in store.
49

John is worried about these complaints as there is now an air of tension in the owners’ meetings.
He has been reading various books about performance management and has come across the
quote, “What gets measured, gets done”. He believes this is true but wants to know how it
might apply in the case of his business.

John has also read about the importance of non-financial performance indicators and how non-
financial performance is often the driver of successful financial results.

Required:

Prepare a report to Mr John Sum addressing the following issues:

(a) Critically assess the existing performance report and suggest improvements to
its content and presentation; (11 marks)

74 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

(b) Assess how the quote “What gets measured, gets done” could apply to Metis.
(8 marks)

Professional marks for analysis for points made in both parts and clarity of discussion. (5 marks)

(24 marks)

Appendix 1 - Metis performance report for the year to 31 March

Metis Restaurant Year to 31 March Latest Previous
quarter to quarter
Actual Actual Actual Forecast 31 March 20X4
20X2 20X3 20X4 20X5 (Q4 20X4) (Q3 20X4)
$ $ $ $ $ $
Revenue
Food 617,198 878,220 974,610 1,062,180 185,176 321,621
Wine 127,358 181,220 201,110 219,180 38,211 66,366
Spirits 83,273 118,490
1
131,495 143,310 24,984 43,394
73
Beer 117,562 167,280 185,640 202,320 35,272 61,261
Other beverages 24,492 34,850 38,675 42,150 7,348 12,763
Outside catering 9,797 13,940 15,470 16,860 2,939 5,105
36

Total 979,680 1,394,000 1,547,000 1,686,000 293,930 510,510

Cost of sales
Food 200,589 285,422 316,748 345,209 60,182 104,527
49

Wine 58,585 83,361 92,511 100,821 17,577 30,528

Spirits 21,651 30,807 34,189 37,261 6,496 11,283
Beer 44,673 63,566 70,543 76,882 13,403 23,279
Other beverages 3,674 5,228 5,801 6,323 1,102 1,914
Outside catering 3,135 4,461 4,950 5,395 941 1,634
Total 332,307 472,845 524,742 571,891 99,701
173,165
Gross profit 647,373 921,155 1,022,258 1,114,109 194,229 337,345
Staff costs 220,428 313,650 348,075 379,350 66,134 114,865
Other operating costs
Marketing 25,000 10,000 12,000 20,000 3,000 3,000
Rent/mortgage 150,800 175,800 175,800 193,400 43,950 43,950
Local property tax 37,500 37,500 37,500 37,500 9,375 9,375
Insurance 5,345 5,585 5,837 6,100 1,459 1,459

75 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Utilities 12,600 12,978 13,043 13,173 3,261 3,261

Waste removal 6,000 6,180 6,365 6,556 1,591 1,591
Equipment repairs 3,500 3,658 3,822 3,994 956 956
Depreciation 120,000 120,000 120,000 120,000 30,000 30,000
Building upgrades 150,000
Total 360,745 371,701 374,367 550,723 93,592
93,592
Manager salary 35,000 36,225 37,494 38,806 9,373 9,373
Net profit/loss before
interest and taxes 31,200 199,579 262,322 145,230 25,130 119,515
Net margin 3.2% 14.3% 17.0% 8.6% 8.5% 23.4%

Notes:

1.

1
The business was founded with $600,000 which comprised $250,000 equity
from the founders and the remainder in a loan from Grand Bank. Under the
73
terms of the loan, all principal is repayable in 10 years’ time and interest is
charged at a fixed rate of 8.4% per year.
36

2. John has estimated the overall cost of capital to be 12.5%.

3. The company earns 4.5% on any returns in its deposit account.

49

4. John wishes you to use the $600,000 original investment as the capital
employed figure for analysis purposes as no new capital has been input and
the owners have taken out all residual earnings so far as dividends.

5. The corporation tax rate for Metis is 30%, paid in the same year as profits are
generated. Accounting depreciation is a tax allowable cost.

6. Marketing spending is for the short-term promotion of offers only.

76 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

QUESTION 29 DARGEBOARD SERVICES

Company background and mission

Dargeboard Services (DS), a listed company, provides facilities management (FM) services
where it manages activities such as cleaning, security, catering and building services on behalf
of its clients. Clients can outsource to DS a single activity or often outsource all of these aspects
in a full service contract. The mission of DS is “to give the shareholders maintainable, profitable
growth by developing the best talent to provide world-class services with maximum efficiency”.

Strategic performance dashboard

The board have asked the chief executive officer (CEO) to review the effectiveness of DS’s
systems for performance measurement and management. She has turned to you to begin this
process by considering the strategic performance dashboard of DS. She has supplied the most
recent example in Appendix 1.

1
She wants a report to the board which will cover three aspects of strategic performance
73
reporting at DS. First, it should address whether the current set of key performance indicators
(KPIs) measure the achievement of the mission by showing how each one links to all or part of
the mission. She does not want suggestions of new indicators. Second, taking each of the
36

current indicators in turn she wants the assumptions underlying the calculation of the indicators
examined. There has been a suggestion made in the press that DS is producing a biased set
of results aimed to mislead the markets. This would then artificially boost the share price and
49

so boost the value of the senior management’s share holdings. Third, the report should
evaluate the other presentational aspects of the dashboard against best practice.

Rewards system at DS

The idea of employee share ownership has always been at the heart of DS’s remuneration
schemes. Its aim is to support an entrepreneurial culture and is a key differentiator in the market
for new employees. The current reward system grants shares based on the appraisal of the
individual by the line manager against vague categories such as leadership and
entrepreneurship. The results of this scheme have been that only about 5% of staff received
their maximum possible bonus in previous years and half of them received no bonus at all.
Increasingly, this has led to the staff ignoring the reward scheme and describing it as “only for
the bosses’ favourite people”.

77 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

In response to this, the board have been discussing methods of analysing and improving the
rewards system at DS. The CEO believes that there are two types of reward scheme which
might suit DS and wants an evaluation of their relative strengths and weaknesses. Scheme
details are given in Appendix 2.

Required:

Write a report to the board to:

(a) Evaluate the links between the current key performance indicators at DS in
Appendix 1 and its mission. (8 marks)

(b) Discuss the factors that should be considered when designing a reward scheme
for operational employees at DS. (8 marks)

(c) Assess the two reward schemes given in Appendix 2. (12 marks)

1
Professional marks will be awarded for communication based on the format, style and structure
73
of your answer. (7 marks)

(35 marks)
36
49

78 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Appendix 1 - Dargeboard Services: Strategic performance dashboard

Year to 31 December 20X6

Cleaning Security Catering Building Full Total Total

services service 20X5
Operating profit margin 6.5% 6.4% 6.5% 4.9% 5.9% 5.9% 5.8%
Secured revenue 76% 85% 92% 88% 93% 88% 87%
Management retention 86% 74% 87% 82% 89% 85% 87%
Order book ($m) 1,160 875 357 1,553 3,359 7,304 6,807
Organic revenue growth 7.1% 4.3% 5.0% 8.1% 7.9% 7.2% 4.6%
ROCE 17.2% 16%

KPI definitions and notes

1
73
1. Cleaning, security, catering and building services headings are for single service
contracts.

2. No commentary is provided as the CEO talks the board through the dashboard at each
36

board meeting.

3. Secured revenue is long-term recurring revenue. This is the percentage of budgeted

49

revenue which is already contracted. The budget is often not completed until well into
the year as it is a complex process. In 20X6, the original budget showed revenue of
$1,565m with the final budget signed off at the end of Q1 showing $1,460m. The
secured (contracted) revenue for the period was $1,285m. The accounts show year-
end revenue of $1,542m.

4. Management retention is the percentage of managers who were still employed

throughout the whole year. The figure only includes those employees on full-time
contracts (about 65% of all managers).

5. Order book is the total cash value of future contracted revenue. DS has contracts
which run up to 10 years into the future.

6. Operating profit margin. This excludes exceptional items such as the reorganisation
of the catering business which cost $55m in 20X6, where revenue was $245m.

79 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

7. Organic revenue growth is calculated by using the total revenue figure as reported in
the accounts. It includes net acquisitions which brought in revenue of $48m in 20X6.

8. Return on capital employed (ROCE). Capital employed is total assets less current
liabilities from the statement of financial position.

Appendix 2 - Schemes under consideration

Scheme 1 (based on the current scheme)

The reward system grants shares in DS based on the appraisal of the individual by the line
manager against vague categories (leadership and entrepreneurship). The line managers have
been informed that their bonus will in turn be partly dependent on how well they perform this
appraisal. The expectation will be that as a result, 20% of staff will receive their maximum
possible bonus and 20% will receive no bonus.

1
73
Scheme 2 (the new one)

Under scheme 2, employee targets are to be derived from the strategic indicators depending
on the employee’s area of responsibility. The senior management (with help from line
36

management where appropriate) will cascade down the strategic indicators to the relevant
operational or tactical level for that employee.
49

There will be five targets set by senior and line management in consultation and the employee
will then get up to 50% on top of their basic salary as a bonus (10 percentage points for each
of the targets achieved).

80 © ACCA. All rights reserved.

ICMAP PATHWAY EXAM ACCA SPECIMEN EXAM

QUESTION 1 SCIENCE FIRST

In the city of Philo, the closure of a large factory released a large amount of land very close to
the city centre which was bought by the Philo local government authority. As an area of high
unemployment due to closures of heavy industry including shipbuilding and coal mining, Philo
had an unemployment rate higher than the national average. As such, the local government
authority was always keen to see new investments which would create high quality jobs.
Although the former factory land had a potentially high commercial value if sold to housing
developers, the local government authority offered the local university the chance to buy it for a
favourable rate due to what it could offer the town as a whole. It was hoped that the university
would buy the land, creating a new development called “Science First” on the old factory site
which would in turn create 500 jobs.

As a city, Philo was well known for its science and engineering history, with many innovations,
inventions and science developments having been made in the city going back over 200 years.

competitive advantage.
1
Philo University saw investment in science as strategic to its future and as a key part of its
The Philo local government authority discussed the possibility of
73
developing the former factory site with the university. After a series of meetings between the
university and the local government authority, the university bought the land, as co-owners with
the local government authority, with the full support of the local authority for building laboratories
36

and related buildings on the site. They agreed the name Science First for the development and
jointly formed a company of the same name for the investment, Science First Co.
49

It was planned to build four large science laboratories on the site for medical, pharmacological
and technology research. Science First Co also wanted to develop a cluster of science-based
businesses on the site and offered discounted rents as well as negotiating lower local taxes, to
attract these businesses to the site. One of these new businesses, Topscience Co, had
received international attention because of a key breakthrough it had made in medical research.
Topscience was very concerned about how its building would appear on promotional
photographs and it noticed that just beyond the science park, and within a few metres of its new
building, were a number of blocks of poor quality social housing, owned by the Philo local
government authority and accommodating rental tenants. Topscience asked if the local
government authority would require Science First Co to re-landscape the area around the flats
and knock them down in favour of green spaces more in keeping, in Topscience’s opinion, with
the image of a science park. They suggested they would not be able to locate to the Science
First development in Philo unless this was done.

1 © ACCA. All rights reserved.

ICMAP PATHWAY EXAM ACCA SPECIMEN EXAM

Anxious not to be seen to be doing anything to hinder the park’s development, the Philo local
government authority agreed to Topscience’s demands and issued a notice to quit for all of the
local residents affected by the potential demolition of the flats. Upon hearing of the plan to
demolish the flats, the head of the local residents’ association, Ann Tang, was outraged. She
said that the local authority was so concerned about the science park’s development that it did
not care about social housing residents and that this was a betrayal of the authority’s ethical
responsibilities. Ann Tang also said that if the flats were demolished, there would be a loss of
a “close-knit, effective and cohesive” community of people who did not deserve to lose their
homes in this way, all for the sake of a science development in which they, the local residents,
had no say and did not vote for.

Ann Tang also acquired some figures which showed that, in order to invest in Science First Co,
the local government authority had to take budgeted funding away from other services including
the cancellation of a proposed new public library in the area where Ann Tang lives. Local
residents, who were excited about the new library development, planned to use the new library

1
as a lending library, as a place to study, as a café where people could meet and enjoy time with
73
friends, and as a place for other services to be provided including “mums and toddlers”,
“unemployment clubs” and art classes. The cancellation of this library development would also
mean that the ten jobs in the library would not now be created.
36

In seeking to address the challenges from the residents’ association and others, the local
government authority asked the finance director of Science First Co, accountant Kathy Wong,
to produce a balanced assessment of the contribution of the Science First development to the
49

city and the region. The local government authority, co-owners of Science First Co, insisted
that she produce a balanced assessment which could also be published for the benefit of local
residents. As a director of the development, however, she felt she ought to produce a report
which clearly showed the benefits of the park to the city of Philo. Accordingly, she produced a
report which concentrated on the benefits to Philo of the Science First development, in terms of
the creation of jobs, marginal revenues and improved reputation for both the university and the
city. Kathy Wong’s report concluded that the park was of substantial benefit and should be
supported by the local government authority, by the university and by local residents, who, she
argued, should understand the strategic benefits of the development to the city.

Ann Tang criticised Kathy Wong for not taking into account the costs to residents and other
local services of the Science First development. She said that the true social cost of the
development was negative because it threatened to destroy homes and it would entail the
cancellation of the proposed library. It would also have a negative effect on local infrastructure,
including the diversion of roads, footpaths and bus routes.
2 © ACCA. All rights reserved.
ICMAP PATHWAY EXAM ACCA SPECIMEN EXAM

The Philo local government authority, as a democratic body, is controlled by elected

representatives from a range of different political parties, each of whom represents a portion of
the total city population. Despite their political differences, the majority of elected
representatives strongly supported the Science First development.

Some of the elected representatives on the Philo local government authority decided that it was
right to consider the various stakeholders in the Science First development. Some elected
representatives, especially those representing residents around the development, wanted to
minimise the damage to local communities. They decided that the three main stakeholders to
be considered were the Science First Co, the residents’ association and the potential library
users.

The head of the Philo local government authority, Simon Forfeit, sought to address the concerns
of the elected representatives in a meeting of the elected members in which he set out the case
for why the Philo local government authority had so strongly supported the Science First

1
development. He said he recognised that in allowing and encouraging the Science First
development, it was clear there would be local problems to address, but that the strategic
73
interests of the city of Philo required this development. The city’s reputation as a science city
would, in his view, be enhanced by the Science First development. He argued that public sector
organisations had complicated objective-setting processes which have to prioritise some
36

interests over others. He said that he “can’t please everybody all the time and in any planning
decision there are winners and losers”.
49

Mr Forfeit said that a local government authority had many obligations and had to serve the
interests of local taxpayers who fund its work, and also the people who use its services. At the
same time, it had to act in the long-term strategic interests of the city, which was why it so
strongly supported the Science First development. The quality of jobs attracted by the science
site, being highly skilled and highly paid, meant that the local government authority had no
choice but to support and invest in the development even though some of the effects on local
residents might be perceived as negative. In addition to the 500 new jobs, which will be
advertised locally, Mr Forfeit said that the site would also provide space for expansion of the
businesses which locate to the site. Mr Forfeit said that in addition to Topscience, other
companies attracted to the site included companies producing electric vehicles, advanced
medical solutions and other companies in growth sectors.

3 © ACCA. All rights reserved.

ICMAP PATHWAY EXAM ACCA SPECIMEN EXAM

Required:

(a) The local government authority has commissioned a consultancy report to analyse the
stakeholder claims and influence in the Science First development.

(i) Analyse the claims of the Science First Co, the residents’ association
and the potential library users. (10 marks)

Professional skills marks are available for demonstrating analysis skills when
investigating the claims of each stakeholder in the Science First development.
(3 marks)

(ii) Explain how the potential library users and residents’ association might
attempt to increase their influence as stakeholders in the Science First
development. (5 marks)

1
Professional skills marks are available for commercial acumen skills when
demonstrating awareness of how these stakeholders might increase their
73
influence. (2 marks)

(b) Assess the contribution of the new Science First development to the public
36

interest. (12 marks)

Professional skills marks are available for demonstrating evaluation skills when
assessing the contribution of the new Science First development to the public interest.
49

(3 marks)

(c) Explain the role of accountants in society and explain possible challenges to
Science First Co’s finance director, Kathy Wong’s assessment of the Science
First development. (8 marks)

Professional skills marks are available for demonstrating scepticism skills when
challenging Kathy Wong’s assessment. (2 marks)

(45 marks)

4 © ACCA. All rights reserved.

ICMAP PATHWAY EXAM ACCA SPECIMEN EXAM

QUESTION 2 CONNECT

Connect, a public limited company, is quoted on the local stock exchange. This exchange has
recently announced that it is going to change its listing regulations to require all registrants to
prepare financial statements in accordance with IFRS instead of local GAAP for all accounting
periods beginning on or after 1 January 20X9. Furthermore it will require members of the
exchange to use IFRS for filing purposes with immediate effect. Connect has decided to adopt
IFRS immediately.

Local GAAP has undergone considerable convergence with IFRS in recent years and there are
no major recognition and measurement implications for existing members. However the local
GAAP disclosure requirements are less demanding than IFRS in several areas. One of these
is that there is no local regulation on the need to disclose related party transactions.

Connect has asked for your help in identifying relevant related party transactions in accordance
with IFRS and for guidance on the disclosures that need to be made. Mr Joint, the finance

1
director of Connect, has provided the following information:
73
(1) The two major shareholders of Connect are Big Boy Investment Fund (BBIF) which
holds 45% of the share capital and Mr Big who holds 10%. Mr Big is a multimillionaire.
He set up BBIF several years ago and is the majority investor in the fund. No other
36

shareholder owns more than 1%.

(2) Connect has 14 subsidiaries and there is considerable intra-group trading. Transfer
49

prices are generally below market rates for members of the group. The total inter-
group sales in the period are $110 million. This is at cost plus 10%. Normal trading
terms would be at cost plus 30%. The group revenue was over $800 million in the last
financial year.

(3) Connect has recently signed an advertising contract with JJ Advertising. JJ Advertising
is an agency owned by Janet Joint. She is the wife of Connect's finance director. The
contract is worth $10 million per annum. This contract was won in a competitive tender.

(4) Connect has recently sold a tract of land to Weld, a limited company. The land was
sold for $4.5 million (net of a selling cost of $100,000). The market value of the land
was $5.3 million and its value in use was $3.8 million. Mr Big is a director and major
investor in Weld.

5 © ACCA. All rights reserved.

ICMAP PATHWAY EXAM ACCA SPECIMEN EXAM

(5) Three of the directors of Connect have set up as consultants and each provides
services to Connect. Connect paid $2.6 million in respect of these services in the last
financial year.

Required:

Explain, for inclusion in a report to the directors, the reasons why it is important to
disclose related parties and related party transactions and the nature of any disclosure
required for the above transactions under IAS 24 Related Party Disclosures. Your answer
should include references to other relevant IFRS Standards. (13 marks)

Professional skills marks are available for demonstrating analysis skills when considering the
nature of any disclosure required under IAS 24. (4 marks)

(17 marks)

1
73
36
49

6 © ACCA. All rights reserved.

ICMAP PATHWAY EXAM ACCA SPECIMEN EXAM

Question 3 FLACK SUPERMARKETS

Company background

Flack Supermarkets (Flack) is a multi-national listed business operating in several developing

countries. The business is divided into two divisions: Metro, which runs smaller stores in the
densely populated centres of cities and Hyper, which runs the large supermarkets situated on
the edges of cities. Flack sells food, clothing and some other household goods.

Performance report

Competition between supermarkets is intense in all of Flack’s markets and so there is a constant
need to review and improve their management and operations. The board has asked for a
review of their performance report to see if it is fit for the purpose of achieving the company’s
mission of being:

1
“…the first choice for customers by providing the right balance of quality and service
at a competitive price. We will achieve this through acting in the long-term interests
73
of our stakeholders: earning customer loyalty, utilising all our resources and serving
our shareholders’ interests.”
36

This report is used at Flack’s board level for their annual review. The divisional boards have
their own reports. Also, there has been criticism of the board of Flack in the financial press that
they are “short-termist” and so the board wants your evaluation of the performance report to
49

include comments on this. A copy of the most recent report is provided as an example at
Appendix 1.

New information system

The CEO has proposed to the board that a new information system be introduced. She wishes
to spend $100m on creating a loyalty card programme with a data warehouse collecting
information from customers’ cards regarding their purchases. Her plan is to use this information
to target advertising, product range choices and price offers more efficiently than at present.
She had also heard that big data can be used to analyse unstructured information such as social
media discussions, and would like to know if this has any relevance to Flack.

7 © ACCA. All rights reserved.

ICMAP PATHWAY EXAM ACCA SPECIMEN EXAM

Required:

Write a report to the board of Flack to:

(a) Evaluate the performance report of Flack, using the example report provided in
Appendix 1, as requested by the board. (14 marks)

(b) Explain the meaning of big data and how it and the proposed new information
system and other unstructured data technology can help improve performance
at Flack. (16 marks)

Professional marks will be awarded for evaluation, based on the clarity of your arguments and
the structure of your answer. (8 marks)

(38 marks)

1
73
36
49

8 © ACCA. All rights reserved.

ICMAP PATHWAY EXAM ACCA SPECIMEN EXAM

Appendix 1 - Performance report

Metro Metro Hyper Hyper Flack Flack Flack Change on

Budget Actual Budget Actual Budget Actual Actual prior year
Current year Prior year
$000 $000 $000 $000 $000 $000 $000
Revenue
Food 1,093,521 1,104,567 5,431,277 5,542,119 6,524,798 6,646,686 6,513,752 +2.04%
Clothes 765,465 773,197 3,801,894 3,879,483 4,567,359 4,652,680 4,536,363 +2.56%
Other goods 328,056 331,370 1,629,383 1,662,636 1,957,439 1,994,006 1,964,096 +1.52%
Total 2,187,042 2,209,134 10,862,554 11,084,238 13,049,596 13,293,372 13,014,211 +2.15%

1
Cost of sales 1,994,583 2,014,730 10,199,937 10,408,099 12,194,520 12,422,829 12,186,796 +1.94%

73
Gross profit 192,459 194,404 662,617 676,139 855,076 870,543 827,415 5.21%
Gross margin 8.80% 6.10% 6.55%

Other operating costs 34,993 35,346 173,801 177,348 208,794 212,694 208,227

36
Operating profit 157,466 159,058 488,816 498,791 646,282 657,849 619,188 6.24%
Operating margins 7.20% 4.50% 4.95%

Finance costs 76,993 79,760 75,482

49
Group profit before tax 569,289 578,089 543,706 6.32%
Tax 142,322 144,522 135,926
Group profit after tax 426,967 433,567 407,780 6.32%

Total shareholder return 3.10% 2.70%

Return on capital 13.2% 13.3% 13.2% 13.5% 13.2% 13.4% 13.2%
employed

Number of stores 533 208

Total square metres 161,227 841,967

9 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

ANSWER 1 ICOMPUTE

The culture of an organisation can be explored from a variety of perspectives and through a
number of frameworks and models. No specific model or framework is required by the question
so a variety of appropriate approaches are acceptable. This model answer uses selected
elements of the cultural web.

Stories are told by employees in an organisation. These often concern events from the history
of the organisation and highlight significant issues and personalities. In the context of iCompute,
there is evidence of stories that celebrate the earlier years of the organisation when founder
Ron Yeates had an important role. “Ron used to debate responsibility for requirements changes
with the customer.” In contrast modern management is perceived as weak, giving in too easily
in negotiations with customers. Not only is this perceived weakness affecting morale, but it also
appears to be affecting profit margins and this is an important consequence for the organisation.

Symbols include logos, offices, cars, titles and the type of language and terminology commonly

1
used within the organisation. The language and symbols of technology appear to dominate at
73
iCompute. Software developers constantly scan the horizon for new technological
opportunities. They embrace these technologies and solutions and, as a result, continually
distract the organisation. As soon as a technical direction or solution is agreed, or almost
36

agreed, a new alternative is suggested causing doubt and delay. One of the managers claimed
that the company was “in a state of constant technical paralysis”. This paralysis has
implications. Furthermore, technological objectives can quickly outweigh business and financial
49

objectives, to the detriment of the company as a whole.

The perceived inability of managers to effectively participate in technological discussions is

derided by software developers who suggest that they are technically out of touch. Ownership
and understanding of up-to-date mobile phones is perceived to be important, particularly by the
software developers who are an important and powerful group.

Finally, the language of the manager who suggested that support should be outsourced is very
illuminating. Support calls are not from customers but from “incompetent end users, too lazy to
read user guides”. Re-focusing managers on customers appears to be long overdue.

Routines and rituals concern the “way we do things around here”. At iCompute this involves
long working hours and after-work social activities such as football, socialising and playing
computer games. The latter of these reinforces the technical focus (discussed in symbols) of
employees. The routines and rituals of the organisation are largely male-oriented (football,
computer games) and would probably exclude most females. This would almost certainly

1 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

contribute to the company’s inability to recruit and retain women employees. Furthermore, long
working hours and after-work activities will also alienate employees who have to get home to
undertake family commitments or simply do not wish to be “one of the lads”. This must
contribute to almost one-third of all employees leaving within their first year at the company.
The consequence of this culture is an expensive recruitment and training process.

The control systems of the organisation include measurement and reward systems. iCompute’s
technical expertise is only rewarded to a certain organisational level. To earn more, technically
adept employees have to become managers. Evidence appears to suggest that many are
unsuited to management, unable to deal appropriately with their former peers. These managers
also seem anxious to show that their technical expertise is not diminishing, emphasising the
importance of technology as a symbol. Consequently, they often try to demonstrate this
expertise (e.g. through programming) but are unaware that this brings derision rather than
respect. The absence of measurement systems has recently been recognised by management.
This has led to the initiation of an in-house project to improve time recording. However, software
developers see this as an unwelcome initiative.

1
73
Paradigm and discussion

Initially, iCompute was an entrepreneurial organisation with a significant work ethic based on long
36

hours, technical innovation and competitive management. Although the organisation has
superficially matured, the stories told by employees and the recruitment and retention of similarly
minded people, has led to the continuation of a male-oriented, technologically focused workforce
49

managed by unprepared and unsuitable managers. Managers’ reaction to conflict is to avoid it

(agreeing with customers over requirements), outsource it (software support) or put in formal
computer systems to control it (the implementation of a time recording system). The failure to recruit
and retain female staff appears to be a direct consequence of the organisational culture of
iCompute. The “work hard, play hard work ethic” is only suitable for employees with certain
objectives, characteristics and minimal childcare responsibilities. This culture needs to change if
the company is to employ a more balanced and representative workforce that is focused on
business rather than technological objectives.

2 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Marking Scheme
Marks Marks
8 marks for analysis of culture 8
3 marks for implications for iCompute 3
–––
Total 11
Professional skills marks for analysis up to a maximum of 3
–––
Total 14
–––

Professional Not at all Not so well Quite well Very well

skill:

Analysis 0 marks 1 mark 2 marks 3 marks

No attempt has Some limited A reasonable Excellent

been made to reflection, but attempt to reflect analysis that
reflect on the with little on the thoroughly
implications of
1
reference to the implications of reflects on how
73
iCompute’s specifics of iCompute’s iCompute’s
culture. iCompute. culture. culture may
specifically
36

impact its future

performance.
49

3 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

ANSWER 2 MBABO CO

(a) Integrity

The ISEBA code of ethics explains integrity as: The principle of integrity imposes an
obligation on all professional accountants to be straightforward and honest in
professional and business relationships. Integrity also implies fair dealing and
truthfulness.

Integrity is therefore a steadfast adherence to strict ethical standards despite any other
pressures to act otherwise. Integrity describes the personal ethical position of the
highest standards of professionalism and probity. It is an underlying and underpinning
principle of corporate governance and it is required that all those representing
shareholder interests in agency relationships both possess and exercise absolute
integrity at all times.

1
In terms of professional relationships, integrity is important for several reasons.
73
It provides assurance to colleagues of good intentions and truthfulness. It goes beyond
any codes of professional behaviour and describes a set of character traits that mean
a person of integrity can be trusted. For auditors such as Potto Sinter, integrity means
36

not only observing the highest standards of professional behaviour but also
maintaining the appearance of integrity to his own staff and also to the client.
49

It reduces time and energy spent in monitoring when integrity and openness can be
assumed (the opposite of an audit situation where the professional scepticism should
be exercised). Costs will be incurred by Miller Dundas if colleagues feel that Potto
Sinter is untrustworthy.

It cultivates good working relationships in professional situations. It encourages a

culture of mutual support that can have a beneficial effect on organisational
effectiveness. John Wang’s professional relationship with Potto is very important to
Miller Dundas. It is important, therefore, that Potto has personal integrity.

(b) Potto Sinter’s ethical and professional behaviour

Potto’s behaviour gives rise to the appearance of unprofessionalism and possibly of

corruption. $100,000 is a substantial amount but notwithstanding the amount, the
allocation of company funds on what appears to be a home improvement on a

4 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

director’s house should be robustly challenged. It is possible that Potto is acting

without integrity in this matter.

Potto’s failure to act on the information strongly suggests that he has failed in his duty
to other shareholders of Mbabo and to tax and other state authorities. The audit is for
the benefit of several parties including shareholders and government/tax authorities
and it is therefore vital that the information signed off is fairly presented (“true and fair”
in the UK). Being fairly presented is normally evidenced by following all accounting
standards. Other shareholders might be very intrigued to know why one director, even
though a shareholder himself, has used company funds for his own private purposes.

The comment on the clearance document appears to be evidence that Potto accepted
a weak explanation from Mr Mbabo or was prepared not to put any pressure on Mr
Mbabo for other reasons (perhaps for reasons of an ethical threat such as familiarity,
intimidation or self-interest threat or similar). Potto gave the appearance of a lack of

1
objectivity in his actions, possibly as a result of the threats to independence. Auditors
should be objective at all times.
73
Potto failed to satisfy the queries of, and to work well alongside, other important
members of the audit team. Being able to be a leader of, and a member of, a team of
36

people is an important part of professional behaviour and Potto’s summary dismissal

of Lisa’s question after the sign-off was unprofessional and unhelpful.

As a senior member of the firm, Potto set a poor example to junior colleagues, such
49

as Lisa, in his behaviour. Not only did he show evidence of poor audit practice but he
also failed to satisfy Lisa’s entirely justified curiosity over the matter.

Potto is complicit in a probable breach of IAS 24 on related party transactions. There

is a disclosure requirement of all related party transactions regardless of value, and
concealment of this is both unprofessional and technically irregular. Lack of disclosure
should have led to a qualified opinion, a disagreement, on the auditor’s report.

• Tutorial note: Reference to IAS 24 on related party transactions could be made

as could reference to a disagreement leading to a qualified opinion on the auditor’s
report. Although appropriate credit would be given for these it is possible to get full
marks on this part without referring to either of them.

5 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

(c) John Wang’s ethical conflict

John Wang may attempt to resolve his ethical conflict in the following two ways:

• To confront Potto directly to see if the matter can be resolved in a professional

manner between themselves. If Potto does not respond to this, John should
take the matter higher up the organisation. John would be complying with the
professional behavioural standards set out in the ACCA code of ethics and
elsewhere, and, indirectly, insisting that Potto does the same.

• To take no further action and “let it drop”. He would decide that the information
provided by Lisa should not go any further and that any knowledge he had
gained from her and her achievement log should be kept confidential.

The evaluation should make reference to the following four issues that may be used to
argue in either direction:

•
1
All professional accountants are required to comply in detail with the highest
73
professional and ethical standards. In addition to the ACCA and other
professional codes of ethics, most audit decisions are underpinned by regulation
and, in some cases, legislation. There are also issues relating to quality control
36

within Miller Dundas that need to be adhered to as best professional practice.

• John Wang’s leadership position in his role as training manager, partner and
49

professional accountant. His decision would be an important signal to Lisa over

the acceptability of Potto’s behaviour in a professional situation and the
importance placed on the complaints of junior staff such as herself. Assuming
that John recognised the non-compliance issue, this would also be a form of
professional negligence on his part to ignore it.

• His confronting Potto would probably compromise their friendship and future
professional relationship. It may also have an impact on John’s future career at
Miller Dundas. These factors may conflict, in John’s mind, with his duty of
objectivity. It is important to develop harmonious relationships in professional
situations as far as possible as they can be of benefit to both people involved
and to the organisation itself but never at the expense of professional objectivity.
Whistle-blowers, whether internal or external, rarely have a stress free
experience and John could possibly expect a certain amount of personal stress if
he were to report Potto.

6 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

• There is an issue over how determined Lisa Xu is to take the matter further. To
confront Potto would mitigate any risk that Lisa might take it further and
compromise both Potto and John. Lisa could, for example, approach the
managing partner or even an outside body and implicate John as well as Potto:
Potto for the unprofessional behaviour and John Wang for knowing about it but
doing nothing.

Although there are two theoretical alternatives in this dilemma, John’s required course
of action is clear. He should confront Potto with the allegation and then pursue
whatever course of action may ensue to satisfactorily resolve the situation.

• Tutorial note: The “pros and cons” of each option can be used in evaluating either
option depending on how you approach the question. Considering consultation
with a third party, such as a professional body, would obtain marks.

1 Marking Scheme
73
Marks Marks
(a) 2 marks for definition of integrity 2
2 marks for its importance in professional relationships 2
–––
Total 4
36

(b) 2 marks per point of critical evaluation up to a maximum of 8

–––
49

Total 8
Professional skills marks for scepticism up to a maximum of 3

(c)
2 marks for each possible course of action up to a maximum of 8
–––
8
Professional skills marks for evaluation up to a maximum of 2
–––
Total 25
–––

7 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

Professional Not at all Not so well Quite well Very well

skill:
(b) Scepticism 0 marks 1 mark 2 marks 3 marks

Does not make Some limited A reasonable Excellent

any challenge to challenge made attempt to scepticism
Potto’s ethical to Potto’s ethical challenge Potto’s exercised in
and professional and professional ethical and critically
behaviour. behaviour. professional challenging
behaviour. Potto’s ethical
and professional
behaviour.
(c) Evaluation 0 marks 0.5 marks 1 mark 2 marks

No attempt has Some limited A reasonable Excellent

been made to evaluation of the attempt to evaluation in
evaluate alternative evaluate the producing a clear
alternative courses of action alternative assessment of
courses of action available to John courses of action the alternative
available to John Wang. available to John courses of action
Wang. Wang. available to John
Wang.

1
73
36
49

8 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

ANSWER 3 ROSEY AND ATKINS

(a) Private and institutional shareholders

Shares in public listed companies are held by a range of individuals and institutions.
In most stock exchanges, it is convenient and relatively cheap to buy or sell shares
(usually on an internet-based application) and many individual people often buy and
sell shares in companies in this way. The institutional shareholder is an organisation,
rather than an individual, whose shareholding is usually much higher than an
individual’s “private” shareholding. Some investors buy shares directly in companies
through the stock exchange whilst others purchase a small part of a larger fund, such
as that at R&A.

Institutional shareholders tend to be large financial institutions with large capital sums
and include pension funds, insurance companies, banks, and specialised investment
companies. They have many clients buying into a certain fund, such as the one at

1
R&A, and this fund is then managed in some way with the agreement of the clients
73
who have placed money into that fund. The fund attracts a management cost (to pay
for the transactions and the fund management costs) which is deducted from the gains
(or losses) made.
36

(b) Agency issues and institutional shareholders

The agency problem exists whenever there is a separation between the ownership and
49

management of a company. It is called a “problem” because it is partly the role of

management to ascertain the wishes of the shareholders in order to most effectively
manage the strategy to maximise shareholder satisfaction.

The agency problems are potentially more complex with institutional shareholders than
when private shareholders buy shares directly in companies.

Because R&A owns shares on behalf of clients, the final shareholders are one stage
removed from the shareholdings. In other words, the R&A clients might find it more
difficult to convey their preferences to the companies they hold shares in and must
effectively delegate this responsibility to the fund manager employed by R&A. This
means that individuals or organisations who buy into R&A funds do not receive
company information for each of the shares held by the fund and not everything which
the individual companies do may meet with the expectations of each client of the fund.
In addition, it is difficult for the boards of those companies to determine the wishes of

9 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

the clients because they are “concealed” behind the fund manager and the
confidentiality systems of R&A.

There are many shareholders who are members of each fund. Although it is likely that
they all share the general objective of capital growth, there may be disagreements on
corporate social responsibility (CSR) matters such as the extent to which R&A should
be investing in house building companies to deliver a certain social good. A
shareholder seeking, for example, to maximise long-term returns might not see the
purchase of the house builder as a priority or necessarily one which can add most
value to their portfolio. In this regard, because the R&A client is a member of the R&A
fund, no client would have a direct voice in supporting or challenging company policy
(on CSR or on other strategic matters such as the purchase of Natcon).

The shares held in a certain fund might change over time as some shares are
purchased and others are divested by the fund manager. This means that the client

1
(the investor in the fund) might not know the identity of the companies the fund is
currently holding. Unless the investor is very active, by say, checking the composition
73
of the fund on a weekly basis (usually on the internet), it is likely that they would not
know which shares they indirectly own and this would restrict their ability to hold
principals to account, even if this was their intention and desire.
36

(c) Stakeholder claims

•
49

Tutorial note: In any stakeholder situation, including those which are in conflict,
the influence can be ascertained by the Mendelow matrix. This is one way of
mapping the influence of stakeholders. Identified stakeholders are assessed
according to their relative power and interest. Those stakeholders with the highest
combination of these variables are those with the most influence over outcomes.

The local government authority has a higher structural power than the university
because of its ability to grant or withhold planning consent. It also has limited power
as a shareholder of R&A and possibly some influence as an investor in R&A’s funds.
As an external stakeholder being an authority interested in the construction of low cost
housing and both a client and a shareholder of R&A, there are considerable conflict
issues. It has a social obligation to see the development approved as this will allow
lower cost housing to be built where most needed. The local government authority’s
interest in the activities of R&A therefore derives from two sources: its interest in
providing low cost housing and its concern for the profitability of R&A, in which it holds
shares.

10 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

The university has less power over the planning decision because it has no statutory
power, is not a shareholder in R&A directly and has a lesser investment in R&A’s funds
than the local authority as an R&A client. It is likely that the views of such an important
local institution would be taken into account, however, because a successful university
is important in the development of Housteads as a town. The local government
authority must balance the claims of a number of stakeholders when taking decisions
of this type, including the economic interests of R&A. The interest of the university is
over the spoiled view from one of its buildings (sometimes referred to as a visual
amenity). The university is of the opinion that the new houses will reduce the view
over countryside currently enjoyed. The weight given to the value of the view over and
against the social value of the new housing development to the local government
authority and the local community is an ethical matter and one which, in this case,
seems to have been decided in favour of the development.

Marking Scheme

(a) 2 marks for private investors

1 Marks Marks
2
73
2 marks for institutional investors 2
–––
Total 4

(b) 2 marks for discussion of each agency problem to a maximum of 6

36

–––
Total 6
Professional skills marks for commercial acumen up to a maximum of 2
49

(c)
3 marks each for stakeholder analysis up to a maximum of 6
–––
6
Professional skills marks for analysis up to a maximum of 2
–––
Total 20
–––

11 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

Professional Not at all Not so well Quite well Very well

skill:
(b) Commercial 0 marks 0.5 marks 1 mark 2 marks
acumen
Does not Some limited A reasonable Excellent
demonstrate any awareness of the attempt to commercial
awareness of the agency problem, explain the acumen in
nature of the but no examples agency problem, clearly explaining
agency problem. provided. but examples are the agency
not specific to problem, with
R&A. examples
specific to R&A.
(c) Analysis 0 marks 0.5 marks 1 mark 2 marks

No attempt has A suitable A reasonable Excellent

been made to stakeholder attempt to analysis skills in
use a suitable analysis analyse the thoroughly
stakeholder framework is competing investigating the
analysis mentioned, but claims of each relative power
framework. only applied in a stakeholder. and influence of
limited way to each
R&A. stakeholder.

1
73
36
49

12 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

ANSWER 4 PLANTEX

(a) Corporate citizenship

By embracing the corporate citizenship agenda, Plantex is able to recognise its

fundamental rights and acknowledge that it has responsibilities towards the wider
community.

Rights

Plantex has the right to exist as a separate legal entity and carry out its lawful business
within a society. By further extending these fundamental rights to a corporate citizen
means that Plantex is able to enjoy the full protection of the law as long as it acts within
the law. In effect, society grants Plantex the necessary protection under the law to
enable it to develop, expand and succeed as a business.

Responsibilities

1
73
Responsibilities are the duties which are owed to society by the corporate citizen as a
consequence of it belonging to that society, and thereby enjoying the rights and
privileges afforded it. To enjoy this level of protection, Plantex must comply with all
36

laws that affect it, and conduct its business in accordance with the society’s
behavioural norms.

Plantex’s shareholders and management would normally determine the extent to

49

which it is socially responsible for meeting their legal, ethical and economic
responsibilities. However, corporate citizenship goes further by ensuring a better
quality of life in the communities in which the business operates, while still preserving
profitability and wealth creation for shareholders.

(b) Report

To: The board of Plantex

From: Consultant

Date: xx/xx/xxxx

Introduction

This report aims to explain the advantages to Plantex, and its stakeholders, of adopting
<IR>.

13 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

Advantages of <IR>

The following are recognised advantages to Plantex of adopting <IR>:

Decision-making. The connections made through <IR> enable investors to better

evaluate the combined impact of the diverse factors, or “capitals”, affecting the
business. This in turn should result in better investment decisions by the shareholders
and more effective capital allocation by the company. In Plantex, long term financial
performance will be heavily influenced by the knowledge of staff and research and
development, which may not be apparent from traditional financial statements.

Reputation. The greater transparency and disclosure of <IR> should result in a

decrease in reputation risk, which in turn should result in a lower cost of, and easier
access to, sources of finance. Plantex requires substantial finance investment for its
R&D and its shareholders require a substantial return so a lower cost of capital could
bring about substantial savings.

1
Harmonisation. <IR> provides a platform for standard-setters and decision-makers
73
to develop and harmonise business reporting. This in turn should reduce the need for
costly bureaucracy imposed by central authorities.
36

<IR> also provides the following advantages to Plantex stakeholders:

Communications. The additional information would help to strengthen

49

communication links between Plantex and its key stakeholders. This would enable the
alignment of interests between the company and its stakeholders to be assessed and
improved as necessary. Significant stakeholders will include customers and regulators
that may complain about the prices of Plantex’s products, but if they understand better
the costs of developing them then they may be more likely to accept these.

Relationships. The information will lead to a higher level of trust from, and
engagement with, a wide range of stakeholders. This emphasis on stakeholder
engagement should lead to greater consultation with stakeholder groups and enable
the company to handle their concerns more effectively.

Accountability. Due to the broader perspective required by <IR>, both in terms of the
resources and relationships which it takes into account and the longer timeframe over
which value creation is considered, it makes Plantex more accountable as stewards of
society’s common resources, in particular human, natural and social capital.

14 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Conclusion

Through an understanding of the connections between a business’s operations and

the environments in which it operates, Plantex’s management will be able to take more
environmentally and socially sustainable decisions and allocate its scarce non-
renewable resources more effectively. Consequently the information contained within
<IR> enables investors and other stakeholders to better understand how an
organisation is holistically performing.

(c) Information about capitals

<IR> simplifies accounting information, as it dispenses with unnecessary levels of

detail and focuses attention on more critical information. <IR> aims to make visible
the “capitals”, resources and relationships, on which Plantex depends. It also
illustrates how Plantex utilises and impacts on those capitals and effectively transforms
them. The <IR> framework identifies six capitals:

(1)
1
Financial capital. This comprises the pool of funds available to Plantex,
73
which includes both debt and equity finance. This description of financial
capital focuses on the source of funds, rather than its application which results
in the acquisition of manufactured [revenue] or other forms of finance.
36

(2) Manufactured capital. This is the human-created, production-oriented

equipment and tools used in production or service provision, such as
49

buildings, equipment and infrastructure. This would include the specialist

equipment used by Plantex for the development of new drugs. Manufactured
capital draws a distinction between inventory (as a short-term asset) and plant
and equipment (tangible capital).

(3) Intellectual capital. This is a key element in an organisation’s future earning

potential, with a close link between investment in R&D, innovation, human
resources and external relationships, as these can determine the
organisation’s competitive advantage. Plantex depends heavily on
intellectual capital as it is key to its ongoing success; developed
pharmaceuticals become patented products which ultimately derive value to
the company and its shareholders.

(4) Human capital. This consists of the knowledge, skills and experience of the
company’s employees and managers, as they are relevant to improving
operational performance. Pharmaceutical companies like Plantex are

15 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

knowledge intense businesses which rely heavily on the innovation and

creativity of the talented scientists who work within it.

(5) Natural capital. This is any stock of natural resources or environmental

assets which provide a flow of useful goods or services, now and in the future.
Plantex requires access to refined, pure chemicals to create its
pharmaceutical solutions.

(6) Social and relationships capital. Comprises the relationships within an

organisation, as well as those between an organisation and its external
stakeholders, depending on where social boundaries are drawn. These
relationships should enhance both social and collective well-being.

Marking Scheme
Marks Marks
(a) 1 mark per right/responsibility, up to a maximum of 4
–––
Total

1
Professional skills marks for analysis up to a maximum of
4
2
73
(b) 2 marks for each advantage of adopting <IR> to a maximum of 10
–––
Total 10
Professional skills marks for communication up to a maximum of 4
36

(c)
1 mark for each capital considered up to a maximum of 6
–––
49

6
–––
Total 26
–––

16 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Professional Not at all Not so well Quite well Very well

skill:
(a) Analysis 0 marks 0.5 marks 1 mark 2 marks

No attempt has Theory of A reasonable Excellent

been made to corporate rights attempt has analysis
reflect on the and been made to thoroughly
rights and responsibilities apply knowledge reflecting on the
responsibilities of makes limited to the specifics specific rights
Plantex as a reference to of the case. and
corporate citizen. Plantex. responsibilities of
Plantex as a
corporate citizen.
(b) 0 marks 1-1.5 marks 2-3 marks 4 marks
Communication
Failure to Knowledge of A reasonable Excellent
persuade the <IR> has been attempt has communication
board of the repeated, but been made to skills strongly
advantages of with little link knowledge of persuade the
adopting <IR>. reference to <IR> to the board of the
Plantex. specifics of advantages of
Plantex. <IR>, using an

1 appropriate tone
and format
73
(report).
36
49

17 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

ANSWER 5 LUM CO

(a) Family and listed company governance

There are a number of differences between the governance arrangements for a

privately-owned family business like Lum and a public company which Lum became
after its flotation.

In general, governance arrangements are much more formal for public companies than
for family businesses. This is because of the need to be accountable to external
shareholders who have no direct involvement in the business. In a family business
that is privately owned, shareholders are likely to be members of the extended family
and there is usually less need for formal external accountability because there is less
of an agency issue.

Linked to this it is generally the case that larger companies, and public companies in

1
particular, are more highly regulated and have many more stakeholders to manage
than privately-owned, smaller or family businesses. The higher public visibility that
73
these businesses have makes them more concerned with maintaining public
confidence in their governance and to seek to reassure their shareholders. They use a
number of ways of doing this.
36

For example, public companies must comply with regulations that apply to their stock
market listing (listing rules). Although not a legal constraint in a principles-based
49

jurisdiction, listing rules require listed companies to meet certain standard of behaviour
and to meet specific conditions. These sometimes include using a unitary board
structure and thus, in the case, would require a change in the governance
arrangements at Lum.

The more formal governance structures that apply to public companies include the
requirement to establish a committee structure and other measures to ensure
transparency and a stronger accountability to the shareholders. Such measures
include additional reporting requirements that do not apply to family firms.

Crispin’s view

It is likely that the flotation will bring about a change in the management culture and
style in Lum. Flotations often cause the loss of the family or entrepreneurial culture
and this contains both favourable and unfavourable aspects. Whether the company
loses the freedom to manage as the family wishes will depend on a number of factors:

18 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

• Whether Gustav’s “wishes” (such as the values and beliefs) are known and
trusted by the shareholders. The need for returns to meet shareholder
expectations each year often places cost pressures on boards and this, in turn,
sometimes challenges a paternalistic management style (such as at Lum) which
some investors see as self-indulgent and costly.

• Lum Co will become subject to requirements of listing rules (e.g. relating to

corporate governance) and, because of its higher visibility on the stock market, a
range of other societal expectations may be placed on it. This will have an effect
on all aspects of the company’s internal systems and norms, including its prior
management style. Thus, the family will no longer be able to choose how to act
in a number of ways, which supports Crispin’s view.

• The board will be subject to influence from institutional investors. They will
demand an effective investor relations department, information on a number of

1
issues throughout the year, briefings on final year and interim results and sound
explanations whenever performance or behaviour is below expectation. This will
73
place Lum’s management in a very different environment to one of private
ownership.
36

• The board will be under pressure to produce profits against targets each year,
which may militate against the Lum’s previous long-term and sustainable
commercial approach. If, for example, the long-term approach may have meant
49

taking less profit from a particular operation in one year to leave liquidity or cash
in place for a future period, this may become more difficult for a listed company,
which can sometimes be under pressure to achieve short-term financial targets
such as a dividend payment.

(b) Induction and CPD

Induction for the new NEDs

Induction is a process of orientation and familiarisation that new joiners to an

organisation undergo. It is designed to make the experience as smooth as possible
and to avoid culture or personality clashes, unexpected surprises or other
misunderstandings. In the case of the problems with NEDs at Lum, an effective
induction programme will enable the new NEDs to gain familiarisation with the norms
and culture of Lum. This might be more important for Lum, being at flotation stage and
having a deep-seated family culture.

19 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

They will be able to gain an understanding of the nature of the company and its
business model. This will, as for the culture and norms, be especially relevant for a
company like Lum emerging from a long period as a private company with little need
to explain its business model to outside parties.

Induction will help NEDs in building a link with people in Lum and other directors. The
building of good quality interpersonal links is important in NEDs working effectively.
This applies to their relationships with other executive directors and NEDs, and also
with relevant employees. This is especially important in NEDs populating the board
committees.

Induction will enable the new NEDs to gain an understanding of key stakeholders and
relationships including those with auditors, regulators, key competitors and suppliers.
To understand the business model operated by Lum, NEDs need to understand its
external relationships and how these support the company’s operation.

CPD for the existing executives

1
73
The purpose of any programme of CPD is to update skills and knowledge as relevant
to the professional situation. This will typically involve content on regulation and law,
best practice, new developments, etc. Directors should undergo CPD regularly to keep
36

these areas up to date and to ensure they do not “fall behind” on key skills.

In the case of the changes at Lum, another specific benefit of CPD will be learning
49

about working with NEDs and the new board procedures that apply to listed
companies. For Lum this involved creating a new unitary board, employing NEDs and
generally taking a more consultative approach to decision-making.

They would also benefit from learning about compliance requirements as a listed
company. Legal and regulatory frameworks differ between private and public
companies. The listing rules that will be imposed by the stock exchange may be seen
as an imposition, especially the need to comply with the corporate governance code.
This is likely to necessitate a lot of internal change in governance and reporting
behaviour and the CPD will help to provide the directors with this support.

After the flotation, the board of Lum gained a number of shareholders other than the
Lum family. This would have created a new governance environment and so learning
about coping with the expectations of shareholders would also be a benefit of the CPD.
This would include, for example, learning about investor relations, dealing with
shareholders at an AGM and similar.

20 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

(c) Difficulties of introducing unitary board

The family will lose the tight control they enjoyed prior to the flotation. In a unitary
board, all strategic decisions need to be taken by a full board including the NEDs. It is
precisely to prevent small groups of powerful executives from making decisions on
their own that the counterweight of the non-executive board was introduced. This may
lead to frustration in the family members, which may affect the objectivity of some
decisions.

The company will lose the capacity for fast decision-making in the family supervisory
board because of the need to involve everybody. Large boards generally meet
regularly but on fixed dates. NEDs and other executive directors are likely to seek
explanations for decisions taken outside the main board discussions and can act
against any members, including family members as the Lum family only controls 20%
of the shares.

1
The change in culture brought about by the governance changes are difficult for the
73
family to manage and the movement to a unitary board is likely to add to the difficulty
of this adjustment. The need to consult widely (on a larger board) and to seek
consensus are likely to be significant changes for the family. For those used to the
36

family way of managing the company, these changes are likely to be difficult to deal
with.

Marking Scheme
49

Marks Marks
(a) 1 mark per point on comparison of governance arrangements to a maximum 4
1 mark per point assessing Crispin’s view, to a maximum 4
–––
Total 8

(b) 1 mark per point on benefits of induction up to maximum 4

1 mark per point on CPD for executives up to maximum 4
–––
Total 8
Professional skills marks for evaluation up to a maximum 3

(c)
1 mark per difficulty encountered to a maximum 4
–––
4
Professional skills marks for commercial acumen up to a maximum 2
–––
Total 25
–––

21 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

Professional Not at all Not so well Quite well Very well

skill:
(b) Evaluation 0 marks 1 mark 2 marks 3 marks

Largely Limited A reasonable Excellent

theoretical application of attempt to evaluation with a
answer with no knowledge to the evaluate the clear
reference to circumstances of benefits to Lum assessment of
specifics of Lum. Lum Co. of an induction the benefits to
programme and Lum of induction
CPD. and CPD.
(c) Commercial 0 marks 0.5 marks 1 mark 2 marks
acumen
Does not Some limited A reasonable Excellent
demonstrate any insight into why, attempt to commercial
insight into the in general, explain why acumen with
difficulties of difficulties may there may be insightful
introducing a arise in difficulties in reference to the
unitary board. introducing a introducing a circumstances of
unitary board, unitary board, Lum.
but makes no but limited
reference to the reference to
case.

1 Lum.
73
36
49

22 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

ANSWER 6 BOOM CO

(a) Components of reward package

Sarah Umm told the remuneration committee that the rewards should be linked
strongly with the company’s strategy and that these strategic priorities were to
“incentivise medium to long-term growth whilst retaining the existing executive board
as long as possible”.

The retention of the existing board will be aided by providing a basic salary that meets
market rate with in-kind benefits commensurate with the role. This is to ensure that
the director is satisfied, and believes himself to be fairly rewarded, regardless of
performance in the role. Retention can be helped by the payment of one or more loyalty
bonuses for staying more than an agreed time period. Again, these would be regardless
of performance and intended solely to reward loyalty. These may not necessarily be
monetary rewards. It may be, for example, that a director receives a car upgrade or

1
additional days paid holiday after the agreed time period.
73
Incentivising medium to long-term performance will require the use of reward
components such as performance bonuses and share options. Performance bonuses
can be included for achieving certain targets in alignment with strategy.
36

The dates on which rewards are paid can reflect the time-element of the incentives.
Sarah Umm wants to incentivise medium to long-term performance, so this is likely to
49

refer to years rather than months. In addition, the package could include share options
which can be exercised after a number of years. These enable directors to benefit
directly from increases in share value and because this is often a longer-term effect,
share options may be designed to come into effect after, say, three years.

(b) Roles of non-executive directors (NEDs)

There are four general roles of NEDs:

(1) Strategy role – NEDs may challenge any aspect of strategy they see fit and
offer advice or input to help to develop successful strategy.

(2) Scrutinising or performance role – the independence of NEDs is perhaps

most important here. NEDs are required to hold executive colleagues to
account for decisions taken and company performance. In this respect, they

23 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

are required to represent the shareholders’ interests against any vested

interests or short-term executive pressures.

(3) Risk role – NEDs ensure the company has an adequate system of internal
controls and systems of risk management in place.

(4) People role – NEDs oversee a range of responsibilities relating to the

management of the executive members of the board. This typically involves
issues concerning appointments and remuneration, but might also involve
contractual or disciplinary issues, and succession planning.

(c) NEDs and performance-related elements

The main reason why NEDs should not usually receive share options or other
performance-related elements as part of their reward packages (as Sam South asked)
is because it could threaten their independence and hence their usefulness to the

1
shareholders. Whereas executive directors may, for example, be incentivised to take
excessive risks to maximise their own rewards, a NED, without the performance-
73
related element, will have no such incentive and be likely to take a more objective view
of the strategy being discussed.
36

To be effective in their roles, NEDs need to be motivated in different ways to their

executive colleagues and too much similarity can mean that the scrutiny role is
weakened. If both executive and non-executive directors are similarly motivated, there
49

will be less scrutiny of proposed strategies for wider impacts, risks, complications and
stakeholder impacts, because there will be no-one incentivised to exercise effective
scrutiny.

If they received a similar mix of rewards to executives, they would be motivated to act
in similar ways and this might involve favouring short-term measures at variance with
longer-term strategic perspectives. A concern over short-term share price movements,
for example, might take the NEDs’ focus away from longer-term strategic issues and
make them more concerned with maximising market value in the short term.

Because NEDs comprise the remuneration committee, it would be inappropriate for

them to decide on their own rewards. It would be an abuse of the responsibility and
trust invested in them by shareholders were NEDs to reward themselves too much or
incentivise themselves in an inappropriate way. Accordingly, it is usual for NEDs to be
paid a fair rate based on external comparison figures (often a daily rate or similar), so

24 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

that there is no question of it being seen as excessive. A NED’s pay is usually a small
fraction of that for executive colleagues.

Marking Scheme
Marks Marks
(a) Up to 2 marks per reasoned point to a maximum of 6
–––
Total 6
Professional skills marks for commercial acumen up to a maximum of 2

(b) 1 mark per point made to a maximum of 4

–––
Total 4

(c)
2 marks per critical point well-made to a maximum of 6
–––
6
Professional skills marks for scepticism up to a maximum of 2
–––
Total 20

1 –––
73
Professional Not at all Not so well Quite well Very well
skill:
(a) Commercial 0 marks 0.5 marks 1 mark 2 marks
acumen
36

Reward scheme Some limited A reasonable Excellent

proposed does judgement in attempt to commercial
not appear proposing a propose a acumen with
appropriate to reward package, suitable reward judgements
Boom. but without package, but based on Boom’s
49

reference to the limited reference circumstances.

case. to Boom.
(c) Scepticism 0 marks 0.5 marks 1 mark 2 marks

Does not make Some limited A reasonable Excellent

any challenge to challenge made attempt to professional
the suggestion to the challenge the scepticism in
that NEDs should suggestion. suggestion, but critically
receive fails to fully challenging Sam
performance- explore the South’s
related rewards. implications. suggestion.

25 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

ANSWER 7 CHAMBON SCHOOL

(a) Objectives as a public sector organisation

Because it is a public sector organisation, Chambon will operate in a quite different

way to a private sector one. Whereas a private sector organisation’s objectives are
likely to be concerned with the generation of long-term shareholder value through the
ongoing generation of profits, a public sector school’s objectives are likely to be quite
different. The effectiveness, efficiency and economy (“3Es”) model is a useful way of
describing whether the objectives of a public sector organisation have been met.

To be an effective public sector organisation, Chambon exists primarily to educate

children and to cultivate an effective learning environment. It does this by employing
effective teachers and operating a structure and culture which supports those teachers
in their work. Infrastructure such as learning resources, libraries and sports facilities
are all important in achieving a conducive learning environment. The closure of a part

1
of the library was a serious threat to this as was the sale of the sports field. Such
73
measures, in turn, may reduce the ability of the school to effectively educate its pupils
in future.

Efficiency is defined as the amount of work achieved for a given level of input.
36

Chambon showed signs of a lack of efficiency. Despite budget increases (i.e. higher
levels of input), the school’s public examinations performance fell. An efficient
organisation would have successfully converted the higher levels of resource into
49

outputs, evidenced in the case of Chambon by better exam results. At Chambon, the
increased resources had no apparent effect on exam performance and in fact they
deteriorated further, suggesting an inefficient use of those resources.

The school (and the board of governors) failed to control its budgets and hence also
failed in its economic objectives. The school received higher budgets from the local
authority in an attempt to reverse the weak performance and despite this, it still
sustained a budget overspend, resulting in the necessity to close part of the library and
sell a sports field.

This is a wasteful and irresponsible use of public funds for which the board of
governors, in part, must share the blame. It is the board’s role to hold the head teacher
to account and ensure that the school is managed so as to achieve its objectives
effectively and within budget. It is likely that both the head of school and the governors
have been negligent in allowing this to happen.

26 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

So on each of the three general types of objectives for public sector organisations,
Chambon has failed to meet its objectives.

(b) Board of governors

The roles which public sector oversight boards are asked to undertake varies between
countries and according to the type of organisation. In the case of the board of
governors of a school such as Chambon, however, there are typically four general
roles:

(1) The board of governors at Chambon is required to comply with imposed local
authority rules on school governance including its own structure and terms of
reference, reporting rules and receiving complaints about the school’s
operations. Upon receiving its annual set of public examination results, it is
required to report on those. Other duties may be imposed in addition, such
as its duty to hear complaints from service users (e.g. the parents of school

1
pupils) and act on these as necessary.
73
(2) The board is required to ensure the school is well-run and that the head
teacher is supported or challenged as necessary. The school exists to
provide an important public service and to provide value to the taxpayers who
36

pay for it. In this regard, it is for the governors to ensure that an effective
management structure is in place in the school and that the quality of
teaching, learning and the pupil experience are adequate and capable of
49

delivering the required level of education.

(3) It is the role of the governors to make senior appointments and remove
underperforming officers from their positions. It is the duty of the governors
to appoint the head teacher and to ensure that he or she is effectively
managing the school to deliver the required level of quality and service to the
pupils and their parents. In the case of Chambon, there is evidence that Mr
Besse is underperforming and the governors are therefore considering his
position.

(4) The board of governors is usually required to set and monitor budgets and to
monitor management against key objectives. Because the governors are
acting on behalf of the local government authority and the funding agent, they
have to ensure that there is sufficient funding in place to deliver the required
level of services. Once the funding for a year (i.e. the budget) is agreed, the

27 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

governors must ensure that there is no overspend. This may be achieved by

asking for financial information at various points throughout the year to ensure
that the budget is met by the year end.

(c) Potential advantages of replacing the head teacher

A new head teacher may bring about a change of culture and staff expectations. Mr
Besse is clearly experienced, but perhaps one reason why he is liked by staff is
because he is unwilling to confront underperforming staff. His dislike of confrontation
may be one reason why underperformance is tolerated. If an unhelpful culture is
allowed to grow and embed itself, it can favour one interest over another. In this case,
it may be that the teachers and their conditions have been allowed to be given greater
prominence than the quality of the educational experience for the pupils. This could
be addressed and reversed with a new head teacher.

A new head teacher would signal a change in the school that Mr Besse’s regime, with

1
its tolerance of weak educational performance, was over. A new head, with the strong
73
backing the board of governors and the local government authority, would be able to
effect the necessary change which Mr Besse so clearly failed to do. By removing Mr
Besse, and allowing it be known that it was linked to the deterioration of examination
36

results and financial inefficiency, the governors could convey to the teachers, pupils
and parents at the school that his performance was inadequate and a new head was
therefore being appointed to improve the school’s performance.
49

A new head would enable the governors, acting on behalf of the local authority, to
make the changes necessary to improve exam and budgetary performance. Whilst Mr
Besse was resistant to taking such measures, a new head appointed by the governors
would be a “new broom” in his or her approach to changing teaching practices and
helping to cultivate the educational culture necessary to turn the school around. By
introducing more efficiency, new practices and a new style of managing staff, a new
head could introduce a new regime and address the weaknesses in teaching and
learning, and control costs more effectively, as necessary.

• Tutorial note: Other plausible points of discussion would be given credit.

28 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Marking Scheme
Marks Marks
(a) 2 marks for each consideration identified and discussed, up to a maximum of 6
–––
Total 6
Professional skills marks for evaluation up to a maximum of 2

(b) 1 mark per role to a maximum of 4

–––
Total 4

(c)
Up to 2 marks for each relevant advantage to a maximum of 6
–––
6
Professional skills marks for commercial acumen up to a maximum of 2
–––
Total 20
–––

Professional Not at all Not so well Quite well Very well

skill:
(a) Evaluation 0 marks 0.5 marks

1 1 mark 2 marks
73
Largely Limited A reasonable Excellent
theoretical application of the attempt to evaluation with a
answer with no “3E’s” to the evaluate the clear
reference to circumstances of performance of assessment of
36

specifics of Chambon. Chambon. Chambon’s

Chambon. specific levels of
the “3Es”.
(c) Commercial 0 marks 0.5 marks 1 mark 2 marks
acumen
49

Does not show Some limited A reasonable Excellent

any insight into insight into why attempt to commercial
the advantages there may be explain the acumen with
of replacing the advantages in potential insightful
head teacher. replacing a advantages of reference to the
leader, but replacing the circumstances in
makes no head teacher. Chambon.
reference to the
case.

29 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

ANSWER 8 ECOCAR

(a) Disruptive innovation

Disruptive innovation is defined by Johnson, Scholes & Whittington as “innovation that

creates substantial growth by offering a new performance trajectory that, even if initially
inferior to the performance of existing technologies, has the potential to become
markedly superior”. This suggests new products that offer substantial growth in market
share and may threaten existing products. In the case of electric cars, the innovation
is a car that is powered by lithium-ion batteries.

The comparison of the Eco with the Kyutia 215 petrol powered car and the Xdos-HC
in Figure 1 shows that the technical performance of electric cars is far behind that of
traditional petrol cars. The acceleration from 0 – 100 kph is 18 seconds for the Eco,
almost half that of the Kyutia 215 which can achieve the same speed in 10 seconds.
Maximum speed is also lower at 120 kph compared to 180 kph for the Kyutia 215. It

1
is interesting to note that the performance of the Xdos-HC, which uses a petrol engine
73
supplemented by an electric motor, is much closer to the performance of the Kyutia
215.

Another problem with the electric cars is the inconvenience of having to charge the car
36

at home, or at one of 130 charging stations. This is likely to be time consuming.

However, over time, more charging stations are likely to be introduced, although
drivers may still have to wait several hours for the car to charge.
49

In the longer term, as the technology is developed, it is likely that this

underperformance can be reduced. The government is also increasing taxes on CO2
emissions and providing tax incentives to businesses to switch to electric cars, which
is likely to lead to increased demand for the electric cars and less demand for petrol
cars. This may lead to a virtuous circle of higher profits leading to higher investment
in research to improve the performance of the electric cars, which will further increase
demand.

While the electric car will have an impact on sales of petrol cars, the market for petrol
cars is likely to remain far from obsolete. Many drivers do not share concerns about
the environmental impact of petrol engines. As shown in Figure 1, petrol powered cars
are currently significantly cheaper than electric cars, and even if the cost of electric
cars falls, and taxes increase on petrol cars, there will be many drivers who prefer the
better technical performance of the petrol cars. I would conclude that while the electric

30 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

cars will have an impact on the motor car industry, this impact would not be described
as disruptive.

• Tutorial note: There is no one definitive answer to such a question, and credit
would be awarded for any well-argued answers, supported by analysis of the
information in the case even if a different conclusion is reached.

(b) REPORT

• To: The management, EcoCar

• From: A Consultant

• Date: xx/xx/xxxx

• Subject: Talent management at EcoCar

1
This report explains the meaning of talent management, before going on to discuss its
73
application at EcoCar.

Talent management
36

Talent management has been defined by the Chartered Institute of Personnel and
Development as “Managing the ability to attract, develop, engage, retain and deploy
individuals who are considered particularly valuable to an organisation”. Typically,
49

talent management programmes are organised around four areas:

(1) Recruitment – identifying the current and future roles that must be fulfilled
within an organisation, and then identifying and recruiting appropriate
personnel to perform those roles.

(2) Development – developing the skills and knowledge of the key personnel.
Development involves more than just training – it also involves mentoring and
ensuring that individuals receive appropriate on the job training.

(3) Deployment of talent involves ensuring the right people are allocated to the
right part of the business.

(4) Succession planning involves planning who will replace key personnel when
they leave the organisation.

31 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

We recommend that EcoCar applies talent management as follows:

Recruitment

The company is having difficulties recruiting skilled labour to replace the workers who
are retiring, as there is a lack of labour with the right skills and motivation in spite of
high unemployment. One solution may be to introduce an apprentice scheme whereby
unskilled recruits are employed to learn on the job from the existing workers. Typically,
the apprentices are paid a relatively low wage until they complete the scheme. Such
schemes may also be supported by the government who may supplement the on the
job training with formal training at a technical college, providing recruits with
appropriate qualifications. This would give the company an opportunity to attract staff
with the right motivation who would then be able to learn the skills.

Development

business such as EcoCar.

1
Development of skills in research and development is essential in a knowledge based
The founder managers who possess the technical
73
knowledge appear to be losing their thirst for additional innovation and therefore
replacement staff must be found. Unfortunately, the graduate training scheme was not
a success due to the costs being cut after a year. It must be understood that far from
36

being a cost, effective training is an investment in the future of the company. The
graduate training scheme should be relaunched. The company also needs to ensure
that concerns expressed by the previous graduates about poor management skills of
49

senior management are addressed – possibly by hiring managers from outside the
company. Graduate training schemes should also provide opportunities for mentoring
and give the graduates a clearly mapped career path to keep them motivated so they
will not wish to leave the company.

Succession planning

Succession planning is also relevant, given that since the three founding senior
managers are losing their thirst for innovation, they may wish to retire soon.
Succession can also be addressed by the graduate training programme as talented
graduate trainees may be identified that can take over senior positions.

Deployment of talent

Currently, given the size of EcoCar, it does not seem that deployment of talent is an
issue that needs to be addressed.

32 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Conclusion

Overall, a well thought out talent management scheme should be implemented by

EcoCar that will help to overcome the skills shortages that the company is starting to
experience.

Marking Scheme
Marks Marks
(a) 2 marks for developed point to a maximum of 8
–––
Total 8

(b) Thorough explanation of talent management to a maximum of 3

Application to Ecocar to a maximum of 5
–––
Total 8
Professional skills marks for commercial acumen up to a maximum of 4
–––
Total 20
–––

Professional Not at all Not so well

1 Quite well Very well
73
skill:
(b) Commercial 0 marks 1 mark 2-3 marks 4 marks
acumen
The answer Some generic The solution Excellent
36

discusses the benefits of talent explains well commercial

meaning of talent management how talent acumen in
management but provided but not management identifying the
does not identify applied to the could help skills shortages
how it could case of EcoCar. EcoCar, but is and explaining
49

resolve skills limited to only how talent

shortages at one problem management
EcoCar. area (e.g. focus could resolve
only on shortage these.
of skilled labour).

33 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

Answer 9 CHEAPKIT

(a) Claims of employees and customers

A stakeholder “claim” is the nature of the relationship between the stakeholder and the
organisation. It describes what the stakeholder is seeking from its relationship: what it
“wants”. In some cases, the nature of the claim is clear and meaningfully articulated
but in others, it is unclear, amorphous and unvoiced.

The claims of employees and customers are usually clear, with both being articulated
in part by market mechanisms and in part by occasional collective representation. This
means that unhappy employees leave and unhappy customers stop buying from the
business. The employees of Cornflower, located in Athland, are likely to seek fairer
terms and conditions, a safer workplace, both physically and psychologically, and more
secure employment and better pay from their employers. In some countries, trade
unions or labour pressure groups can express the collective will (claim) of employees.
The PWR is an example of this.
1
73
In contrast, Cornflower’s customers, such as Cheapkit, are looking for a continuing
supply of cheap garments. Cheapkit’s business strategy is based on the assumption
that such supply will be available and Cheapkit will have invested in capital (land and
36

buildings) basing its strategy on the assumption of continuing supply at low unit prices.
Cheapkit therefore has an incentive to maintain the pressure on Cornflower to minimise
its costs, including labour costs.
49

Conflicts in the claims

A potential conflict between the claims of the customers, such as Cheapkit, and
employees is in the control of costs at Cornflower. Because Athland is weakly
regulated and corruption seems to be tolerated, Cornflower is able to employ local
people on “zero hours” contracts and, in the opinion of some, on “exploitative wages”.
So the price of helping Cheapkit achieve its low cost position in its own market (the
customer), is paid for in part by the poor terms and conditions of Cornflower’s
employees in Athland. Were Cornflower’s employees to receive improved terms and
conditions, including working in a safe environment, extended job security and higher
rates of pay, these increased costs could make it more difficult for Cornflower to retain
its low prices to Cheapkit and hence to Cheapkit’s customers.

34 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

(b) Corruption

Corruption can be loosely defined as deviation from honest behaviour but it also
implies dishonest dealing, self-serving bias, underhandedness, a lack of transparency,
abuse of systems and procedures, exercising undue influence and unfairly attempting
to influence. It refers to illegal or unethical practices which damage the fabric of
society. In the case of Cornflower, the Fusilli brothers seemed to have few ethical
problems with attempting to influence a number of activities and procedures in their
perceived favour. There was seemingly little attempt to allow processes to take their
course or to comply in detail with regulations.

Corruption at Cornflower

The case describes Athland as a country with weak regulatory controls. It is evident
from the case that Athland did have the requisite regulation in place over such
important matters as building construction, escape routes and building occupancy.

1
The problem was the effectiveness of the state in enforcing that regulation.
73
The first incidence of corruption in the case was the employment of inferior building
materials. The motivation behind this was to achieve a lower total capital outlay for
the building and also a quicker completion time on the project. In both cases, the
36

intention was to make the capital investment lower, presumably to reduce the debt
created by the construction and hence the debt servicing costs. Where building
regulations specify a certain quality of material, it is usually because that grade or
49

quality is necessary to ensure the safety and integrity of the building when used and
under stress.

Likewise, bribes were offered to persuade officials to provide a weak level of inspection
(effectively to ignore the regulations) when the building work was being carried out. It
is common for building inspectors to be present during construction to ensure that
relevant regulations are being adhered to. The Fusilli brothers corrupted these officials
to the point where they did not adequately perform their duties. In doing so, the officials
failed in their duty to the public interest and were complicit in the weak construction
that, in turn, contributed to the building’s collapse.

Because of the pressure on internal space in the new building, as well as the additional
costs involved, the Fusilli brothers were able to have the building completed without
the requisite number of escape routes. In the event of an emergency such as a fire or
similar, the ability of people to leave the building quickly and safely would be a major

35 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

determinant of casualty and death statistics. Because each escape route takes up a
physical amount of space (with the door itself and the pathway needed to allow
passage to the door), the space available for machines and other value-adding activity
would be reduced and the building would be more costly to construct. This explains
the Fusilli brothers’ motive to make this illegal change to the plans. More people may
have been able to evacuate the building were such regulations adhered to and a safe
number of escape routes provided.

Finally, the occupancy rules were not enforced by officials. The number of occupants
in a building is a legal constraint intended to ensure that over-occupation does not lead
to accidents or other safety hazards. The number of people in the building is also a
determinant of the evacuation time and, in turn, the risk to the safety of the occupants
in the event of collapse. The fact that three times the regulated number of people
worked in the building meant that escape plans were rendered much less effective and
this would have significantly contributed to the casualties.

(c) Press statement from the board of Cheapkit

1
73
For immediate publication and/or broadcast

Cheapkit’s response to recent events

36

This statement is issued by the board of Cheapkit to address several issues of interest
to shareholders and which have been raised in the aftermath of the tragic collapse of
49

the Cornflower building in Athland. Cheapkit extends its sincere condolences to the
victims and their families.

In response to criticisms made of Cheapkit and other areas of discussion made in the
media, Cheapkit would like to make several points to clarify its position on these issues.
This is to ensure that stakeholders have full confidence in the company and continue
to lend their full support. Cheapkit is a legal and legally-compliant company,
conducting its business in a responsible and diligent manner. It wishes to reassure
investors and others that it takes the criticisms made by the PWR leader, Miss Jess
Lui, very seriously. We would like to respond to points made in her well-publicised
public letter to the board and also to comment on points raised by several financial
journalists about the company’s stance on the relatively recent integrated reporting
initiative. Any media questions over and above these remarks can, of course, be made
to the investor relations department as usual.

36 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

(i) Citizenship

The company resents and strongly refutes any allegations that it has been a poor or
irresponsible corporate citizen. Cheapkit recognises its role as a citizen, both here in
its home country but also in Athland and elsewhere in the world in which it transacts.
The board accepts two aspects of citizenship:

(1) Any company such as Cheapkit, with its substantial footprint in society, has
to acknowledge its responsibilities. Just as an individual has the responsibility
to obey the law, fit in with the social and ethical norms of society and behave
in an appropriate way, so does a business. Cheapkit is a major employer in
its home country and, through its supply chains into countries such as
Athland, has a large social and economic impact. Its responsibility is to
always comply with the laws and social norms which apply in each country it
deals with. This extends to being a good employer, maintaining prompt

1
payment of payables accounts, encouraging good working conditions at
supplier companies and similar good business practice.
73
(2) The exercise of rights. Cheapkit is a business conducting legal contracts with
suppliers and selling legal products. As such, it has the right to be protected
36

by the law in the pursuit of its normal business activities. In addition, it has
the right to receive the support of society in the pursuit of business in terms
of its investors, employees and customers. It has the right, in other words, to
49

have customers free to purchase products without feeling bad about it and to
have employees happy to work for the company without fear of criticism from
people believing themselves to be in a superior moral position.

The Cheapkit board would remind people that it was not us who occasioned the tragic
collapse of the Cornflower building in Athland. As the negligence and corruption was
of parties outside our control, it is unfair to implicate Cheapkit in any criticism directed
at Cornflower.

(ii) Integrated reporting

The Cheapkit board would also like to take this opportunity to respond to some
comments made on the usefulness of the relatively recent IIRC initiative and how this
might affect the company and its reporting. Like many of the large companies on the
world’s stock exchanges, Cheapkit is an enthusiastic supporter of integrated reporting
(IR).

37 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

We see it having a number of potential benefits to the company and its shareholders,
but importantly, for many of its other stakeholders also. Designed to be an approach
to reporting which accurately conveys an organisation’s business model and its
sources of value creation over time, the IR model recognises six types of capital, which
are consumed by a business and also created as part of its business processes. It is
the way that capitals are consumed, transformed and created which is at the heart of
the IR model.

As readers of the business press will be aware, the six capital types are financial
capital, manufactured capital, intellectual capital, social and relationship capital,
human capital and natural capital. Cheapkit sees three substantial advantages of
measuring and reporting performance against these types of capital:

(1) The need to report on each type of capital would create and enhance a system
of internal measurement at Cheapkit which would record and monitor each

1
type for the purposes of reporting. So the need to report on human capital,
for example, would mean that Cheapkit and other companies adopting IR
73
must have systems in place to measure, according to the IIRC guidelines,
“competences, capabilities and experience and their motivations… including
loyalties [and]… ability to lead, manage and collaborate”. These systems
36

would support the company’s internal controls and make the company more
accountable in that it would have more metrics on which to report.
49

(2) The information disclosed, once audited and published, would create a fuller
and more detailed account of the sources of added value and threats to value
(i.e. risks), for shareholders and others. Rather than merely recording
financial data in an annual report, the IR guidelines would enable Cheapkit to
show its shareholders and other readers, how it has accumulated, transferred
or disposed of different types of capital over the accounting period. So it
would have to report, for example, on the social capital it has consumed,
transformed and created and this could include issues of relevance to Miss
Lui and others. It might include, for example, the jobs it has created or
sustained in its supply chain and the social value of those jobs in their
communities, or how it might operate a system of cultural values for its
employees. In addition and in the same way as for added value, IR would
help Cheapkit to identify, assess and manage its key risks, with this bringing
further benefit to shareholders and others.

38 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

(3) A fully-developed IR account would show how Cheapkit has created value for
many of the company’s stakeholders and not just for the shareholders. This
extends the whole notion of who benefits from a business’s activities and it
uses the different types of capital to convey this information. So a beneficial
increase in social and relational capital, for example, may be of benefit to
Cheapkit’s communities and suppliers. The requirement to report on this
change ensures that those stakeholders who wish to value a particular type
of capital from their own perspective can assess the value of the company in
that regard and can also assess how the company’s value has changed in
favour or against their own specific interest in a reporting period.

Marking Scheme
Marks Marks
(a) 2 marks each for explanation of the two claims 4
2 marks for discussion of conflict 2
–––
6

1
Professional skills marks for analysis up to a maximum of 2
73
(b) 2 marks for explanation of corruption 2
2 marks each for example of corruption at Cornflower up to a maximum of 6
–––
8
36

Professional skills marks for commercial acumen up to a maximum of 2

(c) (i) 2 marks for explanation of citizenship in terms of rights and responsibilities2
2 marks for explaining each in context of the case, to a maximum of 4
49

–––
6
(ii) 2 marks for explanation of the basic framework of IR 2
2 marks for each advantage explained to a maximum of 6
–––
8
Professional skills marks for communication up to a maximum of 4
–––
Total 36
–––

39 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

Professional Not at all Not so well Quite well Very well

skills:
(a) Analysis 0 marks 0.5 marks 1 mark 2 marks

No attempt has Limited A reasonable Excellent

been made to application of attempt to professional
consider the knowledge of consider analysis skills
conflicting claims stakeholder conflicting claims when considering
of Cornflower’s claims to the by reference to the conflicting
employees and case. the specifics of claims of
customers. the case. Cornflower’s
employees and
customers.
(b) Commercial 0 marks 0.5 marks 1 mark 2 marks
acumen
Does not Some limited A reasonable Excellent
demonstrate any awareness, in attempt to commercial
awareness of general terms, of explain the acumen with
how corruption the influence of contribution of strong
contributed to corruption – but corruption to the awareness of
the collapse of makes no collapse of the how corruption
the building. reference to the building. contributed to the
case.

1 collapse of the
building.
73
(c) 0 marks 1 mark 2-3 marks 4 marks
Communication
Fails to use Basic Good Excellent
appropriate tone communication communication communication
36

and format for a skills using the skills using the skills in clearly
press statement required format required format informing the
and fails to apply (a press and an public about
knowledge to the statement) but appropriate tone. Cheapkit’s role
case. language Most relevant as a corporate
49

solution is not issues included citizen and the

very clear or in answer. potential benefits
concise. of integrated
reporting, using
an appropriate
tone and format
(press
statement).

40 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

ANSWER 10 P&J

(a) Social footprint

The term “footprint” is used to refer to the impact or effect that an entity (e.g. a
commercial organisation) can have on a given set of concerns or stakeholder interests.
A “social footprint” is the impact on people, society and the well-being of communities.

Effects can be positive (e.g. providing jobs and community benefits) or negative (e.g.
when a plant closure increases unemployment or when people become sick from
emissions from a plant or the use of a product). Professor Kroll’s findings have both
positive and negative impacts on society and communities in the case of P&J.

Potential implications

The discovery by Professor Kroll will lead, whether by a tightening of controls or by a

1
reduction in P&J’s activities, to lower exposures to X32 in Aytown and Betown; hence,
over time, there will be less X32-related disease. Therefore, fewer people will suffer
73
and there will be less misery for the affected families and friends. A lower mortality
from X32-related disease will benefit communities and families as well as those
individuals directly affected. However, as they are continuing to manufacture the
36

product, if Professor Kroll’s findings prove correct, larger numbers of people using the
product will ultimately be affected worldwide.
49

The forecast loss of jobs in the various stages of the P&J supply chain, even in the
best case scenario, would be likely to involve fewer jobs and lower employment levels
at P&J plants and its suppliers. The worst case scenario, in which the company itself
would be lost, would involve the loss of the 45,000 P&J jobs plus many more among
suppliers and in the communities supported by the P&J plants (e.g. in local businesses
in Aytown and Betown).

The loss of, or serious damage to, communities in which the operations are located
includes the economic and social benefits in the developing countries and a very high
level of social loss in Aytown and Betown (in Emmland), where both towns are highly
dependent on a single employer. It is likely that Aytown, effectively a “company town”
with 45% of the jobs at P&J, will be very badly affected and the good causes in Betown
(e.g. the nursery and adult education classes) will no longer be able to be supported.
The loss of a major employer from a town can lead to a loss of community cohesion,
net outward migration and a loss of, or deterioration in, community facilities.

41 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

There will be a loss of economic value for shareholders and a reduction in the
standards of living for those depending on the company’s value for income or capital
growth. This might result in a reduction in pension benefits or endowment values,
where P&J shares are a part of the value of such funds. Individuals holding P&J shares
may lose a substantial proportion of their personal wealth.

• Tutorial note: Other relevant effects such as loss of taxes to fund states services,
increases in state funding to support unemployed/sick workers, would earn marks.

(b) Letter to Hannah Yin

Hannah Yin

Finance Director, P&J

Emmland

1 17 December 20X7
73
Dear Ms Yin

I am writing due to concerns over your recent professional and ethical behaviour in
36

your role as finance director of P&J.

May I remind you that there are five fundamental principles that apply to all
49

professionals including professional accountants: integrity, objectivity, professional

competence and due care, confidentiality and professional behaviour. As a member
of our accountancy body you appear to have breached the fundamental principles of
integrity, objectivity and professional behaviour.

Integrity

I believe that you betrayed the trust of P&J’s shareholders, making a disclosure about
“X32” precisely because you knew you would be believed. This shows a lack of
integrity and is also very unprofessional behaviour.

Your status as a professional had built up a stock of trust in you. It was your
responsibility to maintain and cultivate this trust and to continue to give shareholders
good reason to trust you as a professional accountant. To make biased and partial
disclosures is cynical and a betrayal of your duty as a company director and as a
professional.

42 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

As a professional with integrity, you should have the highest levels of probity in all
personal and professional dealings. Professionals should be straightforward and
honest in all relationships and never take part in anything that might undermine, or
appear to undermine, the trust which society has placed in them.

Objectivity

You accepted inducements to comply with your CEO’s wishes. A significant increase
in share options made you disproportionately concerned with the short-term
maintenance of the company share price and this appears to have clouded your
judgement and reduced your objectivity as a professional. You may have reasoned
that it would have been against economic self-interest to disclose the worst case
scenario for X32 because it would reduce the value of your share options in the short
term.

You should not have allowed bias, conflicts of interest or undue influence to cloud your

1
judgements on professional decisions. This means, for example, that you must not
73
allow the possibility of particular personal gains to over-ride the imperative to always
uphold the public interest and represent the best interests of shareholders.

Professional behaviour
36

You knowingly and intentionally misled shareholders by only reporting the most
optimistic risk forecasts for X32. This is a clear breach of the integrity and professional
49

behaviour required of a person in your position. The principles of transparency and

fairness require companies to be truthful and complete in their disclosures to
shareholders, especially when price-sensitive information (e.g. the health risks of X32)
is involved. Professionals such as yourself should comply with all relevant laws and
regulations, but at the same time avoid anything that might discredit the profession or
bring it into disrepute. This involves complying with the spirit as well as the letter of
whichever regulations apply.

I expect to receive a prompt response from you with regards my findings above.

Yours sincerely

Peter Barlow

Head of professional ethics

43 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

(c) Trouble at P&J – draft article by A.N. Journalist

These must be difficult times to be a director at P&J, Emmland’s largest producer of

X32. What does a board do when it is faced with having caused a large number of
terrible health problems for employees and users of X32, while at the same time having
no strategic alternative but to carry on and try to manage what are sure to be enormous
long-term liabilities?

Where was the Board?

Readers will be alarmed to hear of the decision by CEO Laszlo Ho to impose a limited
tightening of X32 process controls that only involved doing so where the company was
visible to the Emmland public, a compromise he called “Plan B”. The board’s
responsibilities for internal control are detailed in the COSO guidance on this subject
and are very clear. Mr Ho’s and the P&J board’s responsibilities for effective internal
controls include, in this case, control over X32 fibres in the working environments of
each stage in the X32 supply chain.
1
73
The board’s responsibilities include establishing a control environment capable of
supporting the internal control arrangements necessary. This includes a suitable “tone
from the top” and a high level commitment to effective controls. It also involves
36

conducting risk assessments to establish which risks need to be controlled by the

internal control processes (health risks, perhaps?). The introduction of relevant control
activities is especially important when a hazardous material like X32 is being
49

considered. This, of course, applies to all of the company’s employees and not just
those based in Emmland.

It is also the board’s responsibility to provide information and maintain relevant

communications with those affected by the control measures and to ensure that
important measures are implemented and understood.

In addition, the COSO guidelines specify that all controls should be monitored for the
degree of compliance and for their effectiveness. This should be a continuous,
ongoing process, capable of immediately highlighting any weaknesses or breaches in
the implemented controls.

• Tutorial note: Other models can be employed rather than COSO.

44 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Mr Ho’s “Plan B”

In the case of P&J, Mr Ho has taken a deliberate and premeditated decision to ignore
the health needs of some of the company’s employees on the basis of cost. X32 has
been clearly shown to be a health risk and Mr Ho is knowingly allowing employees to
be exposed to the material in the course of their normal jobs. The people in the mines
and processing facilities will still be exposed to X32 and will presumably continue to
get ill and die in the full knowledge of the company management. This is a failure of
the fiduciary duty that the P&J board owes to its employees.

Mr Ho is implementing an upgrade to internal control, not on the basis of need but on

the basis of how visible the changes will be to investors, most of whom will be based
in the developed world. So residents of Aytown and Betown can look forward to a
tightening of controls to limit their X32 exposure whereas those in countries with no
health and safety legislation cannot. This could be seen as a cynical move to manage
the company’s image in Emmland.

1
They are taking advantage of the relative
weakness of their developing countries’ host governments and being selective in whom
73
they extend the necessary X32 process controls to.

Recent events have raised a number of very serious issues for P&J. It is difficult to
36

know what the future will hold for the company, with such a substantial external threat
and with management so determined to act unethically in managing that threat. I do
not predict an easy time ahead for P&J shareholders.
49

End of article

Marking Scheme
Marks Marks
(a) 2 marks for definition of social footprint 2
2 marks for each implication identified and discussed, up to a maximum of8
–––
Total 10
Professional skills marks for communication up to a maximum of 2

(b) 2 marks for identification of which fundamental principles were breached 2

2 further marks for explanation of how each
(integrity, objectivity, professional behaviour) was breached 6
–––
Total 8
Professional skills marks for scepticism up to a maximum of 2

45 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

(c)
1 mark for each control responsibility to a maximum of 3
2 marks for each relevant criticism to a maximum of 4
–––
7
Professional skills marks for communication up to a maximum of 2
Professional skills marks for scepticism up to a maximum of 2
–––
Total 33
–––

Professional Not at all Not so well Quite well Very well

skills:
For each part 0 0.5 1 2
(a) Analysis No attempt has Knowledge of A reasonable Excellent
been made to “social footprint” attempt to professional
investigate the has only limited investigate the analysis skills
potential social application to the potential social when
implications of case. implications of investigating the
the health risks the health risks of potential social
of X32. X32. implications of
the health risks of

(b) Scepticism Does not make Some limited

1 A reasonable
X32.
Excellent
73
any challenge to challenge made attempt to professional
the professional to Yin’s challenge Yin’s scepticism in
and ethical behaviour. behaviour, but critically
behaviour of fails to clearly challenging the
36

Hannah Yin. identify the professional and

fundamental ethical behaviour
principles of of Hannah Yin.
professionalism
she has failed to
49

meet.
(c) Fails to use the An attempt was Good Excellent
Communication correct format made to use the communication communication
and tone for a correct format (a skills in using the skills in clarifying
magazine article. magazine article) right tone for a why Professor
but the writing magazine article Kroll’s findings
style was not which explains are a strategic
clear or focused reasonably risk to P&J, using
on why clearly why an appropriate
Professor Kroll’s professor Kroll’s tone and format
findings are a findings are a (article).
strategic risk to strategic risk to
P&J. P&J
(c) Scepticism Does not Limited Good scepticism Excellent
question Mr Ho’s scepticism skills in professional
decision to applied in questioning most scepticism in
choose Plan B. identifying Plan aspects of Plan B critically
B’s weakness and questioning questioning Mr
but fails to Mr Ho’s reasons Ho’s decision to
question Mr Ho’s for choosing it. choose Plan B.
reasons for
choosing it.

46 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

ANSWER 11 XULAND OIL

(a) Roles of Chairman and CEO

An effective non-executive chairman would bring scrutiny to Mr Tong and his corrupt
activities. Having to report to a chairman would mean that he would have to justify his
behaviour if challenged by the chairman and this would make corruption less likely.
The chairman usually needs to report in a chairman’s letter to the shareholders on the
state of the board and the company’s governance, and in so doing, needs to be a
trustworthy figure, capable of chairing an effective board, and holding other directors
to account. An effective chairman could stop Mr Tong’s corrupt payments by
establishing a transparent tendering process and insisting that all supply contracts are
subject to that process.

Mr Tong’s behaviour is completely unacceptable and represents an ethical failure of

1
leadership on his part. If others see Mr Tong receiving corrupt payments, the “tone
from the top” may mean that other managers lower down the organisation may also
73
seek corrupt payments and this militates strongly against the efficiency of internal
processes. It means that contracts are awarded on the size of the bribe and not on
the basis of the value for money for shareholders. Companies and countries which
36

tolerate corruption are self-selecting for themselves a lower efficiency and poorer value
for money for shareholders (or taxpayers in the case of governments).
49

The shareholders are receiving poor value for money from Mr Tong’s leadership
because not only is he paid a “substantial” reward, he also accepts corrupt payments
for the award of contracts. This means that the tendering process is unlikely to be fair
and transparent as he is likely to award contracts on the basis of how much of a bribe
he will receive from the supplier. An effective chairman could ensure he gave his
energies to pursuing value for money for the shareholders and not concentrating on
his own corrupt forms of income.

An effective chairman could encourage the establishment of internal controls and an

internal audit function for the monitoring of all activities related to the tendering and
allocation of contracts. By making these functions report to a nonexecutive audit
committee, the transparency and integrity of these processes can be assured and this
is in the interests of shareholders because it ensures that all supply contracts are
based on best value for money and not on the size of the bribe paid to Mr Tong.

47 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

(b) Directors’ remuneration

The agency problem is reduced when the interests of directors and shareholders are
aligned. One way of doing this is to make the rewards of directors linked to the
performance of the business they are managing. Shareholders tend to prefer this
approach for several reasons.

It motivates the directors in that they make more income (usually in performance
bonuses or share options) when the company does well. Typical measures upon
which performance bonuses are based include return on equity or performance based
on the nature of the company’s operations such as sales, internal control compliance
or other, context-specific measures. In each case, improvement is in line with the
interests of shareholders in creating shareholder value.

It encourages directors to think about creating shareholder value, as it is this which

provides directors with higher bonuses or the maximisation of the value of share

1
options. This includes retaining talent, operating efficiently in resource markets and
73
innovating to produce efficiencies and controlling internal activities. Any increase in
organisational efficiency or effectiveness will serve the interests of shareholders and
also potentially add to the bonus for the director and, accordingly, performance-related
36

rewards serve the interests of both shareholders and directors.

It makes directors more accountable to shareholders. The issue of how directors

remain strongly accountable to shareholders is one of the key challenges in corporate
49

governance. By forcing directors to create shareholder value, the accountability link is

strengthened as they are motivated to think in terms of maximising shareholder value.
Directors are less likely to behave in ways which reduce shareholder value, and are
more likely to think about how to maximise their own value to shareholders.

(c) Article on corruption

(i) Barriers to improving corruption in Xuland

Corruption, of which the offering and acceptance of bribes is an example, is a serious

departure from the highest standards of integrity in the operation of an organisation.
Mr Tong has shown himself to be corruptible in his pursuit of irregular payments in
exchange for the offering of supply contracts. The effect of this is to reduce the
efficiency of company operations and to undermine the confidence shown in Mr Tong
by the shareholders of the company.

48 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

It is likely that Mr Tong and other senior officials in Xuland will resist any attempts to
improve the situation for the following reasons:

(1) There is a culture of offering and accepting corrupt payments in Xuland. The
case scenario explains that there is corruption among police officers, among
public servants and others. Once corrupt practices become normalised and
embedded in a culture, and are seen to go unpunished, it is very hard to
challenge them. If people grow up in a climate in which bribes are offered
and accepted, they may begin to feel that this behaviour is normal and then it
becomes a taken-for-granted part of the culture in Xuland. As with any
cultural norm, it can be hard to challenge it in public.

(2) Mr Tong and others in senior positions in business can make a lot of money
in what is seen in Xuland society to be normal business activity. Mr Tong
does not seem to accept the argument that his personal enrichment is at the

1
expense of shareholder value and so it seems unlikely that he will see the
case for change. He may see his personal enrichment as a right, associated
73
with his position as chief executive of Xuland Oil, and this is manifestly part
of the problem: he has no right to additional money other than the pay
allocated to him by the remunerations committee. So, it is a moral failure on
36

his part if he sees his personal enrichment as a right.

(3) The senior members of society on Xuland are often highly interconnected,
49

and there is a culture of making facilitation payments (bribes) for the award of
public sector contracts and other capital investments. If contracts are offered
to friends and allies among government supporters, new entrants to the
provision of services are unlikely to be successful and this further
concentrates power in the hands of a relatively small group of people in senior
positions in government and industry.

(ii) Measures to defeat corruption

When it comes to defeating corruption in any society such as in Xuland, a complete

change in culture is required in the country. This would involve a radical change in
Xuland including among public servants, and a change in expectations, in the same
way that some beliefs have been changed in some countries in line with changed
values. There needs to be recognition in Xuland, that all forms of corruption are wrong;
this would require a change in what are seen as ethical norms in the country.

49 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

The change in culture should include support for anybody challenging corruption,
whether in the public sector or in public companies. Those willing to challenge
corruption or the taking of bribes should be supported by senior management in
whatever organisation they are working in. This would also help with the “tone from
the top” ensuring that corruption is not tolerated and that management is always
supportive of those challenging corruption at any level.

It seems appropriate to open up public sector vacancies to all ethnic groups in Xuland
and not to concentrate appointments to one ethnic group. By making appointments
competitive from any ethnic group, diversity in the public sector will be encouraged and
wider range of opinions will be given on matters of public policy. By encouraging
diversity, it will be more difficult to condone corrupt behaviour and greater scrutiny will
be present. By allowing and encouraging conversation and more intense inter-
relationships in this way, all public sector activities will enjoy greater public scrutiny.

1
Legislation could be introduced, in which any form of corruption is outlawed. There
would need to be high profile prosecutions of officials, and public servants, so that the
73
intolerance of corruption is recognised by those able to offer and accept corrupt
payments. If people are seen to be punished for corrupt practice, then this will help to
facilitate the change necessary. This could be accompanied by a tone from the top of
36

society (government ministers and business leaders), stating that government and
business contracts are all awarded based on transparent and public tendering
processes. If these tendering processes could be made available to the public (such
49

as on government websites), it would create more confidence in the processes.

It could be explained in public places (such as the media) that it is unlikely that Xuland
will develop into a developed country if it continues to tolerate large and small
examples of corruption. Corruption creates inefficiencies in society and it is
fundamentally undemocratic, and, in each case, an ethical failure. It also costs
businesses and, in government corruption, taxpayers, a great deal of money in lost
earnings as contracts are awarded based on the size of the bribe rather than value for
money for the taxpayer or shareholder. It needs to be explained that corruption, as
Alice Tuesday said, keeps people in poverty and excludes Xuland from becoming a
developed country with all the benefits of that.

50 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Marking Scheme
Marks Marks
(a) Up to 2 marks for describing each way in which an independent chairman
would benefit the company 2
Up to 2 marks for describing how CEO’s behaviour is harming the company 2
––– 4

(b) 2 marks for each point relating to why shareholders support a link between
rewards and performance up to maximum of 6

(c) (i) Up to 2 marks for clear explanation of corruption 2

Up to 2 marks for each barrier to improvement discussed 6
––– 8

(ii) Up to 2 marks for each measure discussed 6

Professional skills marks for communication up to a maximum of 6
–––
Total 30
–––

Professional Not at all Not so well Quite well Very well

skills:
(c)(ii)
Communication
0 marks 1-2 marks

1 3-4 marks 5-6 marks

73
No Limited Correct format Excellent
communication communication makes clear the communication
skills. Fails to skills. Correct meaning of skills in the
use required format but the corruption and required format
36

format meaning of discusses some make clear the

(newspaper corruption and of the barriers to meaning of
article) and tone the barriers to improving it. corruption and
inappropriate. improving it are discusses most of
unclear. the barriers to
49

improving it.

51 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

ANSWER 12 CARE SERVICES

(a) Corporate governance

Corporate governance is the system by which organisations are configured, co-

ordinated and controlled. This usually involves the characteristics of leadership, the
structures, particularly at board level, to help facilitate desirable outcomes, and the
behaviours of senior management in the pursuit of those outcomes.

Agency relationships underpin any governance situation, in which there is a separation

of ownership and control of an organisation. Agency involves two parties: the principal
and the agent. In most situations, the agency is the director responsibility for the
performance of the organisation and this party reports to the principal in a fiduciary
relationship. The principal is the shareholder in the case of a public company but this
is less straightforward in public sector organisations, involving taxpayers and a
hierarchy of public sector servants who intermediate on behalf of the state and the
taxpayer.
1
73
Contrast public and private sector corporate governance

In private sector businesses, corporate governance is partly about delivering

36

acceptable long-term economic returns to investors. In a public listed company, these

shareholders are separated from the agents (directors) and so an agency issue may
arise. In a private company, agency problems are less likely to exist.
49

In pursuit of these returns, corporate governance is also concerned with the alignment
of agency rewards with shareholder priorities, the enforcement of professional
behaviour to maximise investor confidence, and the ethical behaviour with those
entrusted with the management of the company’s assets. The value of the company
is, in part, contingent upon the competence of its governance; the market is capable
of punishing behaviour or attitudes it finds unacceptable. This might include non-
compliance with regulations or the pursuit of strategies considered sub-optimal or
unacceptable to shareholders.

In the public sector, corporate governance is similarly concerned with the configuration
and co-ordination of activities but it is usually less likely to be concerned with the
delivery of long-term shareholder returns. Because public sector organisations usually
deliver public services, the strategic focus of management is likely to be about
balancing the quality and effectiveness of service delivery with cost constraints.

52 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Because the success of Care Services Co’s (CSC) bids for contracts is likely to be
based on the commissioning bodies’ perceptions of its service delivery quality and the
general competence of the organisation, there is likely to be a continuing concern for
the experience of service users and the perceived robustness of its governance
structures. Accordingly, strategic management is primarily concerned not with
maximising returns but rather with effective service delivery within the cost constraints
imposed by the commissioning bodies. Gaining and maintaining the full confidence of
these bodies and the service users is thus likely to be the focus of corporate
governance in CSC. As the long-term goal for the shareholders of CSC is to sell the
company to help fund their retirement, being successful in winning contracts will impact
the value of the company. Thus, even with this relatively small, privately-owned
company, the public sector governance drivers are important.

(b) CEO’s rewards

1
73
36
49

Accompanying notes

It is likely that market rates for chief executives of smaller companies delivering public
services will be lower than those for large listed companies for a number of reasons.

Private sector business organisations can generate income with many customers,
resulting in large turnovers and variable pricing strategies. Public sector organisations
and those, such as CSC, delivering public sector contracts are constrained by
government spending budgets. Because public sector spending is often funded by
taxation, there is a lot of political and economic pressure to get best value from this
revenue and so budgets are often limited. Accordingly, senior salaries in the public
sector tend to be substantially below those in large private sector listed companies.
Companies such as CSC, delivering public services on behalf of governments, are
similarly constrained by public sector budgets and so there will be less money to pay
Natasha Mbana a high salary, even if the board wanted to.

53 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

It is often the case that smaller organisations are less able to pay high salaries
compared to larger organisations. CSC is relatively small (the case mentions 180
employees, making it a small or medium-sized enterprise) with revenues capped by
the values of the government contracts undertaken. Large businesses with many
activities arguably require more skilled management than smaller organisations based
more around a “role-based” culture and the market values reflect that. Higher degrees
of risk awareness and risk taking require different skills than in a smaller business
where the main skill is person management and the scheduling of care visits. Role
management is a prominent skill in public sector organisations and, although
important, requires a different set of skills than entrepreneurial private sector
management.

It is likely that, because of the lower rewards on offer, the supply of willing labour is
likely to be lower. This means that applicants for each senior position will be likely to
accept lower levels of reward than their private sector counterparts. They are also

1
likely to have different motivations in applying for public sector positions in line with
73
what is sometimes referred to as the “public sector ethos”. With lower salaries on offer
and accepted, applicants for the positions will normally have different skills than those
who possess the skills and experience of working in the private or corporate sector
36

and whose reward expectations will inevitably be higher.

In some countries, there may be government regulation and legislation which limits
public sector incomes with the same applying to those delivering public services such
49

as CSC. With limited budgets and political pressure to get value for money on all public
sector contracts, public sector employers are sensitive to what senior management is
paid, perhaps fearing that the public may react negatively if they feel the amount to be
too high. In some countries, public sector salaries are set by statute and this obviously
places a limit on what can be earned by people in those positions.

All these factors combine to justify the salary which Natasha Mbana is paid and the
reasons it is lower than would be paid to the CEO of a large, listed company.

(c) Benefits of a code of ethics for CSC

There are several benefits to a corporate (as distinguished from a professional) code
of ethics. Although not implicated by the scandal and not cited by the health minister,
CSC feels the need to maintain and cultivate its reputation and Dr Tan believes that
the publication of the code might assist with this. CSC’s reputation is likely to be a
strategic asset in its industry. To the government departments from whom it accepts

54 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

contracts, CSC’s reputation for competence and integrity underpins its credibility as an
outsource company. Its reputation is also important for its service users who rely on
the professionalism and competence of its carers. In addition, society, which indirectly
pays for the services, needs to have confidence in those delivering care to its most
vulnerable members. Accordingly, the reputation of CSC is important in maintaining
the confidence of several stakeholders in delivering its services.

A corporate code of ethics is capable of addressing the reputation problems of CSC in

several ways:

The drafting of a code of ethics helps to establish and promote the organisation’s
values and provides an opportunity for considering and debating its ethical priorities.
If these are contestable, the drafting of the code is a good opportunity for directors to
debate their respective opinions and an agreed position to be taken. For care
providers such as CSC, there may be a debate, for example, between the need to

1
provide high quality care and the need to be profitable given the values of the contracts
it receives from government departments and the regulatory regime it must work within.
73
When there is a conflict between these two pressures, which should take priority?

A code of ethics also promotes the company’s responsibilities towards its stakeholders.
36

By recognising the various stakeholders who can affect and be affected by the
achievement of CSC’s objectives, the relative importance of each can be discussed
and, within certain constraints, prioritised. This is likely to be relatively complicated
49

with, for example, the company’s responsibilities to its service users sometimes
coming into conflict with its responsibilities to its caring staff. The insistence of a
minimum duration of visit to each service user may, on occasions, inconvenience
caring staff or make other service users wait for attention. Accordingly, a balance may
need to be struck between these conflicting claims.

A code of ethics has the ability to control and regulate individual behaviour and guide
the actions of employees. Although much of the work of a carer is underpinned by
regulation, the company might propose voluntary measures to maximise its advantage
among government departments outsourcing the care and this might also be of benefit
to service users benefitting from the care provision. This might, for example, concern
the behaviours and attitudes of carers.

Codes of ethics can sometimes form an important part of the company’s strategic
positioning with regard to ethical issues. A company’s ethical reputation, formed in
part by its corporate social responsibility activities, can be a significant part of the way

55 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

a company such as CSC is strategically positioned in its environment. A company

believed by many to be ethical and with a high degree of integrity is likely to have an
advantage in some market situations over those with less of a reputation. In the care
provision sector in which CSC competes, the cultivation of a strong ethical reputation
is likely to be a strategic advantage in gaining and maintaining government care
contracts. This, in turn, will enhance company value and provide increased security of
employment for CSC’s carers.

Codes of ethics can be an effective way to communicate the company’s values to

stakeholders. Many codes are published on websites or in annual reports and so are
publicly visible. This means that those who want to know about the company’s
postures or policies on certain ethical issues (e.g. suppliers, employees, service users)
can do so and hold the company to account for those stated positions. For CSC, the
publication of its codes of ethics would allow it to distinguish itself from competitors
without the benefits of such a code. In a situation in which the performance of CSC

1
carers is questioned, the company could point to the relevant section of its code of
73
ethics and remind the public that all of its carers comply with its code. This may have
the effect reducing the efficacy of criticisms made against practice.

The proposed corporate code of ethics may serve as a barrier of entry for companies
36

who wish to enter a lucrative and growing market in many developed economies. If
barriers of entry are sufficiently high, a limited number of companies in the sector, such
as CSC, might be able to improve their profit margins as they may be able to accrue
49

the well-documented economic advantages of being oligopolies in any industry. With

contracts being awarded to responsible companies, the ethical performance of a
company and its ability to convey that through a code, may keep some potential
competitors out and be a discriminator between companies within the industry.

56 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Marking Scheme

Marks Marks
(a) 1 mark for explanation of corporate governance and 1 mark for agency 2
Up to 3 marks for discussion of private sector as contrasted with public sector 3
Up to 3 marks for discussion of governance specific to CSC 3
–––
Total 8
Professional skills marks for commercial acumen up to a maximum of 2

(b) Up to 2 marks for presentation slide 2

Accompanying notes – 2 marks for each explanation of reward difference
to a maximum of 6
–––
Total 8
Professional skills marks for communication up to a maximum of 2

(c) 1 mark for explanation of each advantage of a corporate code and

1 mark for context to a maximum of 8
Professional skills marks for scepticism up to a maximum of 2

–––
Total

1 30
–––
73
36
49

57 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

Professional Not at all Not so well Quite well Very well

skills:
For each part 0 0.5 1 2
(a) Commercial Does not Knowledge of A reasonable Excellent
acumen demonstrate corporate attempt to commercial
any insight governance apply acumen with
into the and agency knowledge to insightful
differences in relationships the specifics references to
corporate has only of the case. the
governance limited circumstances
objectives. reference to in the case.
the case.
(b) Fails to inform Limited A reasonable Excellent
Communication the explanation attempt has communication
remuneration provided, been made to skills in clearly
committee of focusing provide a informing the
the reasons merely on variety of remuneration
for lower company size reasons for committee of
rewards in the as opposed lower the reasons for
public sector. to CSC’s rewards. lower rewards in
specifics (e.g. the public
pressure to sector, using an
provide value
for money on
1 appropriate tone
and format
73
public (slide with
contracts). accompanying
notes).
(c) Scepticism Does not Some limited A reasonable Excellent
36

question the questioning attempt to professional

potential of the question scepticism in
benefit of the potential some of the critically
proposed code benefits of a potential questioning the
of ethics. code, but the benefits of a potential for the
49

answer code. code of ethics to

mostly improve SCS’s
describes the reputation.
benefits
without
questioning
them.

58 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

ANSWER 13 HAYHO

(a) Ethical decision making

• Tutorial note: The model answer below uses Tucker’s 5 question approach, as
this is the only ethical decision-making model specifically mentioned in the SBL
syllabus.

Introduction
1
73
Tucker’s “five question” model has been used to assess the ethical dimensions of the
decision whether to invest in Jayland or Pealand. The model requires all five questions
36

to be answered in the affirmative before a decision can be judged to be “ethical “.

(1) Profitable?
49

Both options have a positive expected net present value and should therefore increase
shareholders’ wealth. Although the Jayland project has twice the NPV of Pealand, it
is considerably riskier (due to Jayland’s potential for political instability) and it is not
clear whether this higher risk was reflected for in a higher discount rate. However
either project would appear to be acceptable on financial grounds.

(2) Legal?

The investment in Jayland would require a facilitation payment in the form of “royalties”
to the president of that country. In fact these are not genuine royalties (as the president
does not own any intellectual capital associated with the project) and are simply a
bribe. Although bribery may be common, and perhaps not illegal in Jayland, Hayho is
based in a European country. Most European countries have introduced laws similar

59 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

to (or even stronger than) the US “foreign corrupt practices act”. Therefore, under
European law, it would be illegal for Hayho to pay bribes overseas.

Hayho should be aware that in 2017 Rolls Royce, a UK-based manufacturer, was fined
£671 million for paying bribes to win export contracts.

• Tutorial note: Candidates are not expected to know the specific legislation of any
particular country or specific examples of companies charged with paying bribes.

There is no evidence of bribery or corruption in Pealand.

(3) Fair?

There are concerns whether the Jayland investment would be fair to all stakeholders.
Jayland has few labour regulations which raises concerns about the treatment of
workers, particularly as Hayho has been exposed in the past for having factories with
poor working conditions.

1
73
There are no such concerns regarding Pealand which appears to have strong labour
regulations.

(4) Right?
36

The ethical issues here concern the potential complicity of Hayho in supporting a
corrupt regime in Jayland. Another issue to consider is that it is alleged the president
49

of Jayland maintains order by abusing the rights of the people. Hayho is very sensitive
to allegations of human rights abuses after criticisms of Hayho were made in Arrland
recently and it must not expose itself to similar criticisms again.

There are no concerns regarding Pealand which is a well-governed democracy.

(5) Sustainable?

There are concerns whether the Jayland investment would be sustainable as Jayland
has few environmental regulations which raises concerns particularly as Hayho has
been exposed in the past for having factories with high levels of pollution.

There are no such concerns regarding Pealand which appears to have strong
environmental regulations.

60 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Conclusion

As all five questions must be answered in the affirmative to pass Tucker’s test, the
investment in Jayland cannot be considered acceptable on ethical grounds. By
contract, the investment in Pealand does appear potentially ethical. In all cases Hayho
should follow the stricter of the ethical standards of its home country and any overseas
country it does business in.

(b) Briefing Paper

Subject: Issues surrounding Watching Business (WB)

Prepared by: Emily Baa
Date: XX/XX/XXXX

(i) Accountability of the Hayho board

1
The two letters received raise important issues of accountability and, more specifically,
the issue of to whom the board of Hayho is accountable. In reflecting on how to deal
73
with this and how to frame our response, it may be helpful to consider the accountability
situation we face as a board.
36

Accountability is a key relationship between two or more parties. It implies that one
party is accountable to, or answerable to, another. This means that the accountable
entity can reasonably be called upon to explain its actions and policies.
49

This means that the accountable party can be held to account and may be required to
actually give an account. This has the potential to influence the behaviour of the
accountable party, in this case Hayho, because of the knowledge that they will have to
answer for it when they give that account.

Although it is clear that the board is accountable to the shareholders as stewards of

their investment, the board may need to account to Watching Business (WB) because
of its influence among politicians and in wider society, as outlined below.

Influence of Watching Business

The Mendelow framework is a way of mapping stakeholders with regard to the two
variables of interest and power. The combination of these is a measure of any given
stakeholder’s likely influence over an entity such as Hayho. The framework is dynamic
in that stakeholders move around the map as their power and interest rise and fall with

61 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

events. WB has a moderate degree of power and a variable degree of interest.

Because its interest (in Hayho) has recently increased, its overall influence has risen.
Our response to WB must be responsive to this.

WB’s power derives from its ability to conduct research and mobilise opinion, including
among policymakers and trade organisations, against businesses like Hayho. We do
not need to agree with its agenda to appreciate its power. Its power is expressed as
influence when its interest is also increased.

It was news of our possible investment in Jayland that increased WB’s interest in
Hayho. This, combined with its evident power, increases its net influence over Hayho.
This makes WB difficult to ignore in our decision over whether to invest in Jayland or
Pealand.

(ii) Agency and demands from WB

1
The board of Hayho exists in an agency relationship with its shareholders, who
collectively own the company and have the legal and moral right to determine
73
objectives. As agents of our shareholders and appointed by them, we have a fiduciary
duty to seek to manage the company’s resources for their overall economic benefit. In
the case of Hayho, as for most business organisations, this involves maximising
36

returns consistent with our complying with relevant laws, regulations and norms.
Quark Investments, as one of our major shareholders, has every right to remind us of
this duty and we should take its reminder very seriously.
49

Although well-meaning, the lobby group WB is against one of the investment options
we have at this time. It claims that an investment in Jayland would be damaging to
human rights in that country. Without commenting on the accuracy or validity of that
claim, we should remind colleagues why we might think carefully about the investment,
as it would bring us into conflict with WB. The matters to note are:

• WB is respected and its views are trusted by many people. In terms of

reputation, it has highlighted our problems in Arrland and, as a result of that, has
been monitoring our activities. We may need to consider public opinion before
going ahead with a potential Jayland investment as we need the general support
of society to operate.

• WB has influence among politicians and policymakers both in this country and
abroad. We risk the censure of influential people and increase the pressure for

62 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

increased regulation if we disregard or act against the lobby group’s demands.

Our reputation in international markets is one of our strategic assets and it may
compromise our commitment, given the Arrland incident, if we were not to
uphold the highest standards of integrity, human rights and environmental
protection from now on.

• WB is very adept at mobilising public opinion through the media. This means
that it can stimulate interest in conditions in Jayland and we would be likely to be
heavily scrutinised on an ongoing basis were this investment to be made. This
could attract public anger and risk disruptions (e.g. boycotts of our products).

Because of these issues, it would seem prudent to consider these issues as a part of
our investment appraisal between the Jayland and Pealand options.

Marking Scheme
Marks Marks
(a) 3 marks for presentation slide
1 mark for introduction to Tucker’s model
1 3
1
73
1½ marks for analysis of each of Tucker’s 5 questions to a maximum of 7
1 mark for a justified conclusion 1
–––
Total 12
Professional skills marks for scepticism up to a maximum of 2
36

(b) (i) 1 mark for each relevant point on accountability to a maximum of 2

2 marks for evidence of understanding of Mendelow framework 2
2 marks for discussion of WB’s power, interest and influence 2
49

–––
Total 6
Professional skills marks for analysis up to a maximum of 2

(ii) 1 mark for each relevant point on agency to a maximum of 2

2 marks for each argument on WB’s demands to a maximum of 4
–––
Total 6
Professional skills marks for communication up to a maximum of 2
–––
Total 30
–––

63 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

Professional Not at all Not so well Quite well Very well

skills:
For each part 0 0.5 1 2
(a) Scepticism Does not make Some limited A reasonable Excellent
any attempt to scepticism attempt to probe professional
probe the shown towards the ethical scepticism in
decision to the ethical aspects of each clearly probing
select the aspects of each option but not the ethical
Jayland option option. presented in a aspects of each
or the Pealand structured option, using an
option. manner (e.g. appropriate
using Tucker’s 5 framework and
question model). format
(presentation
slide with
notes).
(b)(i) Analysis No attempt has Knowledge of A reasonable Excellent
been made to stakeholder attempt to analysis of the
consider the influence has analyse the influence of the
influence of the only been influence of the Watching
Watching applied in a Watching Business
Business limited way to Business pressure group,
pressure group. the case.

1 pressure group,
but not
using an
appropriate
73
presented in a framework and
structured format (briefing
manner (e.g. paper).
Mendelow).
36

(b)(ii) Poor Correct use of Good Excellent

Communication communication briefing paper communication communication
skills. Answer format, but fails skills. Correct skills clarify the
does not make to clarify most of briefing paper agency
clear the agency the issues in a format and a relationship and
49

relationship or concise and good attempt to why the

why the clear way. clarify most of demands from
demands from the relevant Watching
Watching issues in a Business should
Business should concise and be considered,
be considered, clear way. using an
and fails to use appropriate tone
correct format and format
(briefing paper). (briefing paper).

64 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

ANSWER 14 WEST & LEROI

Rules based vs principles based approaches

(i) Rules-based approach

In a rules-based jurisdiction, corporate governance provisions are legally binding and

enforceable in law.

Non-compliance is punishable by fines or ultimately (in extremis) by delisting and director

prosecutions.

There is limited latitude for interpretation of the provisions to match individual circumstances (“one
size fits all”). Some have described this as a “box ticking” exercise as companies seek to comply
despite some provisions applying to their individual circumstances more than others.

Investor confidence is underpinned by the quality of the legislation rather than the degree of
compliance (which will be total for the most part).

1
73
(ii) Advantages of a principles-based approach

The rigour with which governance systems are applied can be varied according to size,
36

situation, stage of development of business, etc. Organisations (in legal terms) have a choice
to the extent to which they wish to comply, although they will usually have to “comply or explain”.
Explanations are more accepted by shareholders and stock markets for smaller companies.
49

Obeying the spirit of the law is better than “box ticking” (“sort of business you are” rather than
“obeying rules”). Being aware of overall responsibilities is more important than going through a
compliance exercise merely to demonstrate conformance.

Avoids the “regulation overload” of rules based (and associated increased business costs). The
costs of compliance have been a cause of considerable concern in the United States.

Self-regulation (e.g. by Financial Services Authority in the UK) rather than legal control has
proven itself to underpin investor confidence in several jurisdictions and the mechanisms are
self-tightening (quicker and cheaper than legislation) if initial public offering (IPO) volumes fall
or capital flows elsewhere.

65 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

Context of developing countries

Developing countries’ economies tend to be dominated by small and medium sized

organisations (SMEs). It would be very costly and probably futile, to attempt to burden small
businesses with regulatory requirements comparable to larger concerns.

Having the flexibility to “comply or explain” allows for those seeking foreign equity to increase
compliance while those with different priorities can delay full compliance. In low-liquidity stock
markets (such as those in some developing countries) where share prices are not seen as
strategically important for businesses, adopting a more flexible approach might be a better use
of management talent rather than “jumping through hoops” to comply with legally-binding
constraints.

The state needs to have an enforcement mechanism in place to deal with non-compliance and
this itself represents a cost to taxpayers and the corporate sector. Developing countries may
not have the full infrastructure in place to enable compliance (auditors, pool of NEDs,

1
professional accountants, internal auditors, etc) and a principles-based approach goes some
73
way to recognise this.

Marking Scheme
Marks Marks
36

(a) (i) 1 mark for essential features of rules-based approach to a maximum of 3

–––
Total 3

(ii) 5 marks for advantages of principles-based approach 5

49

5 marks for application to developing countries 5

–––
Total 10
Professional skills marks for communication up to a maximum of 3

–––
Total 16
–––

Professional Not at all Not so well Quite well Very well

skills:
Communication 0 marks 1 mark 2 marks 3 marks

Does not Some general A reasonable Excellent

structure an discussion but attempt to professional
argument in little structure to structure an communication in
support of the the argument. appropriate structuring an
Professor’s argument argument in
comment. support of the
Professor’s
opinion.

66 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

ANSWER 15 MIDSHIRE HEALTH

(a) Report to board

Introduction

This report aims to explain how an understanding of organisational culture and

configuration would have anticipated the problems encountered in introducing a
strategic planning system and an associated information system at MidShire Health.

(i) Organisational culture

Johnson, Scholes and Whittington suggest that the culture of an organisation consists
of four layers:

(1) Values which are often written down as statements of the organisation’s
mission. The visionary objective of the CEO might be an example of a value.

1
The “mission is to deliver health to the people of Midshire and, by that, I don’t
73
just mean hospital services for the sick, but a wider vision, where health is a
state of complete physical, mental and social well-being and not merely the
absence of disease or infirmity”.
36

(2) Beliefs are more specific and concern issues which people in the organisation
can talk about. The hospital doctors appear to firmly believe that the visionary
objective of the CEO is unobtainable. “You have to realise that poor health is
49

often caused by poverty, poor housing and social dislocation. You cannot
expect MidShire Health to solve these problems. We can advise and also
treat the symptoms, but prevention and cure for these wider problems are well
beyond us.”

(3) Behaviours are the day-to-day way in which the organisation operates.
Certain aspects of these become clear in the scenario describing the strategic
planning project.

(4) Taken-for-granted assumptions that are at the core of an organisation’s

culture. In the scenario there is a contrast between the CEO’s vision of
delivering health and the perception of hospital doctors and nursing staff that
the real work is really about treating the ill.

The behaviours of the organisation can be explored further through selected facets of
the cultural web.

67 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

The stories told by the hospital doctors are primarily concerned with belittling the role
of the professional administrator. “As we know”, stated one of the doctors, “we all
agree that efficiency can only be achieved through giving control and budget to the
doctors, not to the administrators who are an unwanted overhead. This is the first step
we should take.”

We can assume that the chief administrator (the CEO) present at the meeting could
not have missed this slight. Secondly, the planning process does not appear to be
perceived as real work. During one of the meetings the hospital doctors stated that
they had to leave to get back to their real job of treating patients. It almost appears
that the hospital doctors have agreed to participate in the planning process as a
damage limitation exercise, trying to protect their power and status, rather than
because they have any real interest or belief in the planning process and its goals.

A definite hierarchy in the power structures appears to exist during meetings. When

1
the senior hospital doctors are present, the nursing representatives side with them and
provide a powerful block to any of the initiatives proposed by the CEO. When the
73
hospital doctors are not present, the nursing representatives appear to be more
conciliatory, agreeing to actions and objectives that they renege on in subsequent
meetings. The opinions of the support staff are clearly not valued by the hospital
36

doctors. The hospital doctors showed their disdain by leaving one of the meetings
when the objectives and role of the support staff were discussed. Their ideas, for
example for preventative care, are quickly dismissed by the powerful coalition of the
49

hospital doctors and the nursing managers.

The activities of MidShire Health are affected by the hospital doctors who, through their
powerful professional organisation, have negotiated very favourable terms of
employment. Not only do they enjoy high salaries for full-time positions, but they also
have the right to undertake private practice where they deliver services for private
hospitals to fee-paying patients. This almost unprecedented degree of freedom is
tolerated by the government and is a parameter that the CEO has to work within. As
Mintzberg observed, such organisations are “the one place in the world where you can
act as if you were self-employed yet regularly receive a pay check (cheque)”. Such
flexibility does not seem to stretch to the nursing staff, but long-term loyalties seem to
bond them to the hospital doctors. In contrast, the support workers appear to work
under difficult circumstances, expected to serve the whims of professionals, but with
little recognition of their contribution and little autonomy in undertaking their work.

68 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Probably as a result of this, they appear to be the most receptive group to the changes
proposed by the CEO.

The lack of control the organisation has over the powerful hospital doctors is shown by
the fact that one of the doctors perceives that it is perfectly acceptable to criticise his
employer in public, disclosing private information from meetings to the press. This
behaviour is excused as being in the “public interest” and the doctor receives support
from his colleagues. The CEO, although appalled by the behaviour, cannot pursue
any disciplinary action because of threats from nurses and doctors.

(ii) Organisational configuration

Organisations tend to configure in a number of ways. The attributes or building blocks

of the organisation relate to each other in different ways.

Terry Nagov was formerly the CEO of a company making mobility appliances. As well

1
as having a profit motive (unlike MidShire Health), the company developed its business
strategy through a centralised management structure, with line managers given the
73
power and responsibility to achieve defined objectives and targets. Production itself
was heavily automated, administered and controlled through semiskilled employees
who followed standards and procedures defined by senior managers. In terms of
36

Mintzberg’s configurations, the company appears to exhibit many aspects of a machine

bureaucracy. The work it undertook appears to be routine, with much of it being simple
and repetitive, allowing the company to establish efficient highly standardised
49

processes. Within machine bureaucracies much of the power resides with the
managers at the top of the organisation.

To outsiders such organisations can often appear to be an example of a focused,

structured organisation which, as Mintzberg himself concedes, “can be enormously
efficient and provide an unmatchable reliability of service”. To a government struggling
with rising costs in an economic recession, such organisations contrast starkly with, as
the government minister put it, “the anarchy of the health service”. To an outside
agency, such as the government, appointing a CEO such as Terry Nagov to bring order
and control must have seemed an attractive step. Nagov had an excellent record in
the private sector and bringing such skills to the public sector would seem to have self-
evident benefits.

In Mintzberg’s terms, MidShire Health is probably a professional bureaucracy.

Although the work is still relatively standardised, its complexity means that judgements

69 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

are usually required. The type of work undertaken in the professional bureaucracy is
quite different to that of the machine bureaucracy. Considerable discretion is required
in the application of skills that have been gained over years of training. MidShire Health
depends on its professional staff and, consequently, like all professional
bureaucracies, gives them considerable control over their own work. A machine
bureaucracy generates its own standards internally and enforces them through its line
managers. This is the approach that the CEO is familiar with. However, in contrast,
the standards for a professional bureaucracy originate from self-governing
associations that the professionals belong to. Hence the intervention of the Institute
of Hospital Doctors (IOHD) would be viewed legitimately by the hospital doctors, who
believe that authority comes through expertise, not through a management hierarchy.
In questioning the legitimacy of such advice, the CEO failed to recognise the central
role that professional associations play in such bureaucracies. It was bound to cause
offence to the professional staff on the working party.

1
A recognition of MidShire Health as a professional bureaucracy should also have
73
helped the CEO predict the hospital doctors questioning the value of having support
staff on the working party. In such organisational configurations, such employees are
seen as largely subservient to the professionals delivering the fundamental activities
36

of the organisation. In fact, many support staff are managed in a machine, top-down
way, and so their enthusiasm for the formal planning initiative might be expected. It
closely matches their experience, as well as providing an opportunity to potentially
49

undermine what they consider to be the comfortable, capricious existence of the

powerful professionals.

Similarly, the request of the CEO for the doctors to consider the “good of MidShire
Health and its image within the community” is likely to fall on “deaf ears”. As Mintzberg
comments, “most professional focus their loyalty on their profession, not on the place
where they happen to practice it”.

The problem of introducing change in professional bureaucracies is explicitly

considered by Mintzberg. He states that “change in the professional organisation does
not sweep in from new administrators taking office to announce wide reforms or from
government officials intent on bringing the professional under technocratic control”.
This, of course, exactly describes the situation at MidShire Health. Rather, he sees
change as seeping in through a slow process of changing the professionals
themselves, through altering recruitment policies and training. In the short term, he
would probably suggest that the government would be better off placing pressure on

70 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

the professional associations that influence their member (such as the IOHD), rather
than tamper with the professional bureaucracies directly.

Finally, it has to be recognised that MidShire Health is a public sector organisation

funded by general taxation, rather than by its specific users or customers. In principle
the provider of the funds (government) provides resource inputs into a service that is
competing with other services funded by general taxation – such as national security.
Thus health services, in principle, need to show that they are providing value for money
so that politicians support further funding. Such an approach appears to give the
government a lot of power.

However, the existence of powerful professions and the willingness of press and public
to defend health service principles dilute this power, leading to the kind of frustration
explicitly articulated in the case study scenario.

Conclusion

1
Although mistakes were made when introducing the strategic planning system and the
73
associated information system, this report has highlighted how an understanding of
organisational culture and configuration could avoid such mistakes from being
repeated in future.
36

Report prepared by: A.N. Consultant

49

XX/XX/XXXX

Marking Scheme
Marks Marks

(i) 1 mark for each relevant point up to a maximum of 10

Up to 2 professional skills marks for communication skills 3

(ii) 1 mark for each relevant point up to a maximum of 10

Up to 2 professional skills marks for commercial acumen skills 3

–––
Total 26
–––

71 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

Professional Not at all Not so well Quite well Very well

skills:
For each part 0 marks 1 mark 2 marks 3 marks
(i) Poor Correct format Reasonable Excellent
Communication communication (report) used, communication communication
skills – does not but lacks clarity skills in clearly skills in clearly
use the required or uses an informing the informing the
format (report) inappropriate board of most of board, using an
and uses an tone for the issues, appropriate tone
inappropriate informing the using an and format
tone. Lack of board. appropriate tone (report).
clarity in and format
language. (report).
(ii) Commercial Does not Limited A reasonable Excellent comm-
acumen demonstrate application of attempt has ercial acumen
any awareness knowledge of been made to with strong
of how an organisational link knowledge awareness of
understanding configuration to the specifics how
of organisational (e.g. of the case. understanding
configuration Mintzberg) to of organisational
would have the case. configuration
helped the CEO. would have

1 helped the CEO.

73
36
49

72 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

ANSWER 16 HAPPY AND HEALTHY

(a) Accountants as professionals

Society accords professional status to those that both possess a high level of technical
knowledge in a given area of expertise (accounting, engineering, law, dentistry,
medicine) on the understanding that the expertise is used in the public interest. The
body of knowledge is gained through passing examinations and gaining practical
expertise over time. Acting in the public interest means that the professional always
seeks to uphold the interests of society and the best interests of clients (subject to legal
and ethical compliance).

Fundamental principles (responsibilities) of professionalism

Society has reasonable expectations of all professionals. The major professional

responsibilities of any professional are as follows:

1
Integrity. The highest levels of probity in all personal and professional dealings.
73
Professionals should be straightforward and honest in all relationships. This has clear
implications for Mr Shreeves in his dealings with Ken and Steffi.
36

Objectivity. Professionals should not allow bias, conflicts of interest or undue

influence to cloud their judgements or professional decisions. In this case, Mr
Shreeves should not allow his friendship with the Potters to affect his judgement as an
49

auditor.

Professional competence and due care. Professionals have a duty to ensure that
their skills and competences are continually being updated and developed to enable
them to serve clients and the public interest. This includes continuing to study and
scrutinise ethical guidance from Mr Shreeves’ own professional accounting body and
also IFAC.

Confidentiality. Professionals should, within normal legal constraints, respect the

confidentiality of any information gained as a result of professional activity or entrusted
to them by a client.

Professional behaviour. Professionals should comply fully with all relevant laws and
regulations and avoid acting in any way that might discredit the profession or bring it
into disrepute.

73 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

(b) Professional and ethical dilemma facing Mr Shreeves

The normal behaviour for the auditor, regardless of the options available in this
situation, would be to initially seek representations from Ivan to establish whether there
is an explanation that has so far been overlooked or not known about. Following that,
Mr Shreeves’ options are: to tell or not tell Ken and Steffi about Ivan’s behaviour.

Mr Shreeves is clearly in a difficult situation but he must be aware of his duty as a

professional accountant which includes, in his role as auditor, a duty to the public
interest. He has a duty of due care and diligence to society and government as well
as the shareholders of a company being audited. Being complicit in Ivan’s activity is
clearly not an option as this would be incompatible with his duties to the shareholders
and to society in his role as auditor. Furthermore, he has realised a disclosure of such
transactions is required and it would be unprofessional not to discuss this with his
clients.

1
He feels he owes a debt to the Potter family as a long-standing family friend and this
73
has the potential to cloud his judgement as the company’s auditor. The effect of Ken
and Steffi finding out about Ivan’s theft could be “devastating” and this is bound to
weigh heavily on Mr Shreeves’ mind. In getting too close to the family, Mr Shreeves
36

has compromised his duty as auditor as he is probably less objective than he should
be. He should probably have chosen between being a family friend and being the
auditor some years ago and that would have made his resolution of the dilemma
49

somewhat easier.

Ivan has been unprofessional and has acted fraudulently in his dealings with “Happy
and healthy”. In such a situation, the auditor does not have latitude in how he or she
deals with such a discovery. It is a very serious breach of trust by Ivan, regardless of
whether he is the Potters’ son or not, and it would be inexcusable to withhold this
information from the owner-managers of the business.

Advice

Given that the auditor has a duty to the public interest and the company shareholders,
he should inform the majority shareholders (Ken and Steffi) what he has found during
the audit. To do anything other than this would be to act unprofessionally and
irresponsibly towards the majority shareholders of the company. Family relationships
or friendships must never be allowed to interfere with an auditor’s professional duty
and independence. This approach need not be in the form of a blunt confrontation,

74 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

however, and it would not be unprofessional to speak with Ivan before he spoke to his
parents in order to convey to him the potential seriousness of his actions.

Marking Scheme
Marks Marks
(a) 2 marks for explanation of why an accountant is a professional 2
1 mark each for description of principles of professionalism 5
–––
Total 7

(b) 6 marks for description of dilemmas 6

2 marks for most appropriate course of action 2
–––
Total 8
Professional skills marks for evaluation up to a maximum of 4

–––
Total 19

1
73
Professional Not at all Not so well Quite well Very well
skills:
(b) Evaluation 0 marks 1 mark 2-3 marks 4 marks
36

No assessment Limited A reasonable Excellent

of the most application of attempt to apply professional
appropriate knowledge of knowledge of evaluation with a
course of action. ethics and ethics and clear assessment
professionalism professionalism of the most
49

to the case. to the case. appropriate

course of action.

75 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

ANSWER 17 LODGE

Related party

That Lodge’s finance director sits on the board of Chapman, one of Lodge’s major suppliers, is
a potential related party issue which is covered in IAS 24 Related Party Disclosures. As a
member of the key management personnel of Lodge, the finance director is a related party of
Lodge. However, as he only sits on the board of Chapman, it is assumed that he does not
control or have joint control over Chapman; Chapman is not a related party to Lodge although
IAS 24 is clear that it is the substance of a relationship that is important rather than whether it
falls within the definition of a related party. Therefore, although in strict accordance with IAS 24
there is no related party (and therefore no need to disclose the relationship), it could be argued
that the relationship should be made known to the users of the financial statements as a matter
of transparency. The relationship creates a potential conflict of interest, as the finance director
is in a position to manipulate transactions between the two companies. The fact that the supplier

1
offers better deals does not remove the conflict of interest due to the finance director’s role in
each of the companies. One could argue that “better deals” is a very subjective statement, as
73
this could mean any number of things. The finance director may be using the ambiguity of the
statement to avoid having this relationship brought to the attention of investors.
36

Executive compensation tied to financial measures raises potential ethical issues. All
accounting decisions have to be evaluated within the framework of what affect they may have
on these measures. The incentive automatically exists to show better performance measures
49

in order to earn higher compensation. Bailey has identified a concern that could ultimately lead
to higher management compensation while sacrificing ethical requirements. Management
should evaluate the issue raised in order to truly assess whether there have been ethical
violations, and if so, should take action to remedy the issue. If management will not make
changes, Bailey should take it to the board of directors or audit committee, if applicable, for
assistance. A final consideration for the accountant, if matters cannot be satisfactorily resolved,
would be resignation.

76 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Marking Scheme
Marks Marks
5 marks for thorough discussion of related party issue and disclosure 5

–––
Total 5
Professional skills marks for scepticism up to a maximum of 2

–––
Total 7
–––

Professional Not at all Not so well Quite well Very well

skill:
Scepticism 0 marks 0.5 marks 1 mark 2 marks

Does not make Limited Some challenge Thorough

any challenge to challenge to the made to FD’s challenge of
the FD’s ethical FD’s ethical and ethical and FD’s ethical and
and professional professional professional professional
behaviour. behaviour. behaviour and behaviour, and
reference to exploration of

1 related party
issues.
related party
issues.
73
36
49

77 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

ANSWER 18 NETTE

Importance of the Conceptual Framework

The Conceptual Framework for Financial Reporting (Conceptual Framework) describes the
objective of, and the concepts for, general purpose financial reporting. Its purpose is to assist
the IASB in developing IFRS Standards that are based on consistent concepts and assist
preparers in developing consistent accounting policies when no Standard applies or a Standard
allows a choice. It deals with several areas including:

• the objective of general purpose financial reporting;

• financial statements and the reporting entity;

• the qualitative characteristics of useful financial information;

1
the elements of financial statements;
73
• recognition and derecognition; and

• measurement bases.
36

The Conceptual Framework builds corporate reporting around the definitions of an asset and a
liability and the criteria for recognising and measuring them in the statement of financial position.
This approach views accounting in a different way to most companies. The notion that the
49

measurement and recognition of assets and liabilities is the starting point for the determination
of reported profit may seem strange when, in practice, the recording of transactions underpins
the preparation of financial statements.

In many jurisdictions, the financial statements form the basis of dividend payments, the starting
point for the assessment of taxation, and often the basis for executive remuneration. The
Conceptual Framework’s “balance sheet approach” and use of fair values has a major impact
on legal and business requirements and constraints. Very few companies take into account the
principles embodied in the Conceptual Framework unless those principles themselves are
embodied in a Standard. Some Standards are inconsistent with the Conceptual Framework
primarily because they were issued earlier than the Conceptual Framework (which was revised
in 2018). Since its revision, the Conceptual Framework does recognise, for example, that there
may be legal constraints on distributions which has a bearing on the classification of
components of equity and reserves.

78 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

IAS 8 Accounting Policies, Changes in Accounting Estimates and Errors makes reference to
the use of the Conceptual Framework in the absence of an applicable Standard or
Interpretation. In developing and applying an accounting policy, management must refer to,
and consider the applicability of, the following sources in descending order:

• the requirements and guidance in Standards and Interpretations dealing

with similar and related issues; and

• the definitions, recognition criteria and measurement concepts for assets,

liabilities, income and expenses in the Conceptual Framework.”

Marking Scheme
Marks Marks
3 marks for explanation of the importance of the Conceptual Framework 3
3 marks for examination of whether it takes into account constraints 3
–––
Total 6
Professional skills marks for communication up to a maximum of 2

1 –––
73
Total 8
–––
36

Professional Not at all Not so well Quite well Very well

skill:
Communication 0 marks 0.5 marks 1 mark 2 marks

No attempt to Knowledge of A reasonable A clear and

49

persuade the the Conceptual attempt to thorough

directors of the Framework has explain the examination of
importance of been repeated, importance of the importance
the Conceptual but without the Conceptual of the
Framework. strong reflection Framework. Conceptual
on its Framework.
importance.

79 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

ANSWER 19 FOODIE

Briefing paper

To: Board of directors

From: General manager
Re: Mission statement

Mission statement

A mission statement is effectively a statement of intent, and sets out the basic rationale
for the company’s existence. If this is understandable, and accepted, it can provide a
clear focus for the activities of each sector of the company as well as individuals in the
company. It also acts as a clear statement of intent for suppliers, customers and
investors.

1
By clarifying the overall intent of the organisation, a mission statement can provide
freedom for individuals to take action that will achieve the overall objective.
73
It will also provide the framework within which operational plans will be prepared and
a standard against which performance can be judged. By setting such a framework a
36

mission statement can play an important part in defining the culture of an organisation.

Benefits that may arise from developing a mission statement

49

• Clarity – the expression of intent ensures that objectives are clear.

• Goal congruence – by providing a focus for activities, the mission statement can
help to ensure that all activities are directed towards a common objective.

• Improved motivation – the sense of purpose, combined with the freedom

discussed above will tend to produce a better-motivated workforce.

• Benchmark – an initial assessment of initiatives in terms of how they will

contribute to achieving the overall objective is facilitated by the existence of a
mission statement. This will avoid wasting resources on the investigation of
initiatives that do not fit with the existing strategy.

Problems that may be experienced

However, mission statements are not universally accepted; problems can include:

80 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

• Not understood – if the mission statement is not understood, it can lead to

confusion, rather than clarity.

• Not accepted – the mission statement may be seen as a top management

initiative, and as such may lack widespread support.

• Out-dated – external changes may lead to the mission statement becoming out-
dated, although if revisions are too frequent, this may lead to confusion.

• Viable initiatives rejected – an initiative that may be perfectly viable, and might
even open up a new area of activity may be rejected because it does not fit with
the existing mission.

Marking Scheme
Marks Marks
2 marks for explanation of the purpose of a mission statement 2

mission statement to a maximum of

1
1 mark each for explanation of expected benefits and problems with a
6
73
–––
Total 8
Professional skills marks for communication up to a maximum of 2

–––
36

Total 10
–––

Professional Not at all Not so well Quite well Very well

49

skill:
Communication 0 marks 0.5 marks 1 mark 2 marks

Failure to explain Very little Some A clear

the purpose of a explanation of explanation of explanation of
mission the benefits and the benefits and the purpose of a
statement in an problems to the problems with a mission
understandable company. mission statement and its
way statement application to
this company

81 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

ANSWER 20 HEALTHY EATING GROUP

Critical success factors

Product quality

The fact that the production staff has no previous experience in a food production
environment is likely to prove problematic. It is vital that a comprehensive training
programme is put in place at the earliest opportunity. HSC needs to reach and
maintain the highest level of product quality as soon as possible.

Supply quality

The quality of delivery into SFG’s supermarkets assumes critical significance. Time is
critical since 90% of all sandwiches are sold before 2 pm each day. Hence supply chain
management must be extremely robust as there is little scope for error.

Technical quality

1
Compliance with existing regulations regarding food production including all relevant
73
factory health and safety requirements is vital in order to establish and maintain the
reputation of HSC as a supplier of quality products. The ability to store products at the
correct temperature is critical because sandwiches are produced for human
36

consumption and in extreme circumstance could cause fatalities.

External credibility
49

Accreditation by relevant trade associations/regulators will be essential if nationwide

acceptance of HSC as a major producer of sandwiches is to be established.

New product development

Although HSC has developed a range of healthy eating sandwiches it must recognise
that consumer tastes change and that in the face of competition there will always be a
need for a continuous focus on new product development.

Margin

Although HSC needs to recognise all other critical success factors, the need to obtain
the desired levels of gross and net margin remain of the utmost importance.

• Tutorial note: Only five critical success factors were required. Alternative relevant
discussion and examples would be acceptable.

82 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Marking Scheme
Marks Marks

2 marks for explanation of each critical success factor to a maximum of 10

–––
Total 10
Professional skills marks for analysis up to a maximum of 3

–––
Total 13
–––

Professional Not at all Not so well Quite well Very well

skills:
Analysis 0 marks 1 mark 2 marks 3 marks

No reasonable Some analysis A reasonable Excellent and

attempt has been into possible attempt to thorough analysis
made to identify critical success analyse the of possible critical
critical success factors, but information for success factors.
factors. lacking in detail. possible critical

1 success factors.
73
36
49

83 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

ANSWER 21 ROCKINGHAM HOSPITAL

(a) Discussion of the behavioural effects of the performance report

The following features of the way in which the budget was prepared, and the form
and content of the performance report, might give rise to an adverse response from
the laundry supervisor.

• Lack of participation – the supervisor was not consulted over the preparation of
the budget and did not know that one was being prepared.

• Unflexed budget – no attempt has been made to adjust budgeted costs in the
light of the increase in volume, presumably because the fixed and variable
elements of costs have not been established.

• Uncontrollable costs included – the memorandum’s references to “responsibility

1
accounting” and “expenses of running your department” have been ignored
when producing the report which includes “allocated administration costs” and
73
“equipment depreciation”.

• Fixed percentage for investigation – this may not be an ideal system for deciding
36

which variances should be investigated and which should not. It seems an

arbitrary figure and one which is being applied to all costs.
49

• Aggressive style – the memorandum has been presented in a somewhat

authoritarian style based solely on accounting information.

The effects that this might have on the behaviour of the supervisor include the
following.

• Creating a negative attitude – a phrase which encompasses a whole range of

behavioural problems, such as dampening initiative (possibly leading to wrong
decisions such as not recruiting staff when needed), reducing co-operation and
communication between departments (particularly with the hospital
administrator), reducing morale within the department and giving rise to a lack of
commitment to the hospital.

• Reduced performance – with the lack of co-operation mentioned it is less likely

that the supervisor will try to control or reduce costs. More effort will be put into

84 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

finding excuses for poor cost control or even attempting to falsify data where
possible.

• Budget pressure – management could be said to be adopting a style of

management where obsession with the quarterly targets could lead to impaired
performance. Steps might be taken to ensure not that costs do not exceed a
budget, but rather to ensure that they do not fall below the budget – lest the
budget is pruned in the next quarter.

• Wrong decisions – the possibility of wrong decisions due to “dampened initiative”

has already been mentioned. However, a fixed percentage rule for investigating
variances could also lead to wasted time looking at variances. Such variances
might be small in absolute terms, caused by a poor budget, poor recording of
costs or due to random fluctuations, and such variances might not be worth
investigating.

1
Research into these various behavioural effects and their possible causes has grown
73
over the years following earlier papers based more on surmise and opinion. It has
been a feature of much of the empirical work into the relationship between accounting
and behaviour that the results have produced conflicting conclusions on matters such
36

as management style, budgetary pressure, design of accounting measures and

participation.
49

85 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

(b) Redrafted report and memorandum

Rockingham Private Patients Hospital

Memorandum

To Mrs A Brown, Laundry Supervisor

From BC Smith, Hospital Administrator

Date 30 April 20X1

As you know, the hospital has adopted a responsibility accounting system in order to ensure
that each department runs as efficiently as possible. To help the operation of such a system it
will be useful for you to receive some form of performance report each quarter, and I have

1
attached my version of such a report for the first quarter.
73
This first report is something of a trial run, since the first quarter was expected to be a settling-
in period and as such not typical, and this report, having been produced without consultation
with department heads or supervisors, may need modification. It will, when fully operational,
36

act as a useful aid to cost control and I am very keen that we should meet as soon as possible
to discuss the form and content of future reports.
49

This report shows the actual costs of running the department together with a budget based on
the weight of laundry processed. Variations from budget have been calculated and some
marked as requiring your attention. Such variations will be those which are large in terms of
the total cost of the department and of the actual cost incurred, bearing in mind expected
variations in certain costs.

I will expect a quick response to such reports by way of an explanatory memorandum but any
queries over this or subsequent reports could be most easily sorted out by coming to my office.

86 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Performance report – Laundry department

Three months to 31 March 20X1

Actual Flexed Variation Action

budget (over)/ needed
under
Patient days 8,000
———–
Weight of laundry processed (kgs) 101,170
———–

$ $ $
Wages (W1) 4,125 3,833 (292) None
Supervisor salary 1,490 1,495
1 5 None
73
Washing materials (W2) 920 959 39 None
Heating and power (W3) 560 573 12 None
Equipment maintenance 10 45 35 None
36

——— ——— ——–

7,105 6,905 (201)
——— ——— ——–
49

Comment: Congratulations on coping with the unexpected rise in volume. However, we must
sort out these budgets properly, particularly the wages budget.

The memorandum has been toned down a little, made more personal and an attempt made to
justify the purpose of the report and encourage co-operation in establishing a system of cost
control.

The report itself has been modified by eliminating uncontrollable elements (budgeted activity
levels and certain costs). The budget has been flexed by assuming that:

(i) Wages are variable subject to staff being employed for whole months;

(ii) Materials are variable, and

(iii) Heating and power are 50% fixed and 50% variable (these arbitrarily proposed figures
would need to be established properly).

87 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

The report could have been less formally drawn up with the original budget shown, together
with calculations to indicate how it was flexed to take into account the actual weight of laundry
processed and variations laid out. In either case the hospital administrator should highlight
which variations are to be investigated and, with the flexed budget, no such investigation is
needed for the first quarter.

The performance report could also show various figures to assess efficiency, such as total
labour hours and number of washing loads. With additional information, price and usage
variances could be found for washing materials. Details of the use of laundry capacity could be
established by noting how much laundry was presented and how much processed, rather than
sent outside.

WORKINGS

(1) Wages: $3,450 × /9 = $3,833, where 10 represents three staff working for three
10

months, and one member of staff working for one month

1
73
101,170
(2) Materials: $770 × = $959
81,250

101,170
(3) Heating and power: $255 (fixed) + $255 × (variable) = $(255 + 318) = $573
36

81,250

Marking Scheme
49

Marks Marks
(a) 1 mark for explanation of behavioural effects to a maximum of 5
1 mark each for points on the form and content of report 5
–––
Total 10
Professional skills marks for commercial acumen up to a maximum of 3

(b) 2 marks for each relevant point of critical evaluation to a maximum of 8

–––
Total 8
Professional skills marks for communication up to a maximum of 2

–––
Total 23

88 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Professional Not at all Not so well Quite well Very well

skills:
(a) Commercial 0 marks 1 mark 2 marks 3 marks
acumen
Does not Some awareness A reasonable Excellent
demonstrate any demonstrated, attempt, commercial
awareness of but undeveloped covering most of acumen with
how the report arguments only. the key points. strong awareness
might affect the of how the report
behaviour of the might affect the
supervisor. behaviour of the
supervisor.
(b) 0 marks 0.5 marks 1 mark 2 marks
Communication
No attempt to re- Limited attempt A reasonable Excellent re-
draft documents to re-draft attempt to re- drafting of
in appropriate documents in draft documents. documents and
formats. appropriate explanations.
formats.

1
73
36
49

89 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

ANSWER 22 THERE 4 U COMPANY

(a) Six Sigma

The Six Sigma approach to making improvements in existing processes involves a

five-stage approach represented by the acronym DMAIC. The five stages are as
follows:

Define an opportunity

A problem with quality is identified and then a problem statement is prepared. This
statement will describe the nature of the problem, which must be defined in specific,
quantifiable terms.

A mission statement is then prepared. This is a statement of what will be done in order
to address the problem. Like the problem statement, the mission statement should

1
also be expressed in specific quantifiable terms using the same units of measurement
that are used in the problem statement.
73
A project team is set up and given the required resources in order to address the
problem and make an improvement. The team should comprise personnel from each
36

of the areas in the organisation that will be affected by the Six Sigma project.

Measure performance
49

At this stage in the project, the project team should undertake a preliminary analysis in
order to measure how well the process is working and obtain data that could be
analysed in order to identify what seems to be causing the problem. Where there are
a number of factors causing the problem, the project team should focus their attention
on what appear to be the main causes of the quality problem.

Analyse the opportunity

At this stage, the project team will investigate in greater detail the preliminary concerns
about what might be causing the quality problem. The project team will test different
theories in an attempt to discover the main cause (or causes) of the problem.

Each theory is then tested in order to establish whether it might be correct. Theories
are rejected when it is decided that they cannot be correct.

90 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

The root cause (or causes) of the problem is identified when all of the theories have
been tested.

Improve performance

The cause (or causes) of the problem will be removed as a consequence of re-
designing that part of the process that is causing the problem. Alternative methods of
improving the process should be evaluated in order to determine which would be the
most effective method to achieve the mission statement for the project. The chosen
improvement is then designed in detail and implemented after tested to prove its
effectiveness.

Control performance

New controls are designed and implemented to prevent the re-occurrence of the
problem and to make sure that the improvements to the process are sustained.

1
Controls will include regular measurements of output from the process, and a
comparison of actual performance with targeted performance. The controls should be
73
audited periodically in order to confirm their effectiveness.

(b) T4UC problem analysis using Six Sigma

36

The DMAIC framework can be applied to T4UC as follows:

(1) Define
49

The apparent problems are:

(i) A decrease in the number of contracted clients;

(ii) An increase in the number of visits per client;

(iii) Very few clients are gained via recommendation;

(iv) An increasing number of unanswered telephone calls for product support;

(v) A lower percentage of issues resolved by telephone;

(vi) A lower customer satisfaction rating than the industry average and much
lower than that of Appliances R Us.

91 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

(2) Measure

The primary source of information available to measure the issues is the customer
survey undertaken by Ken. Other relevant information to assess performance could
come from include:

• Measuring the response times of T4UC staff to telephone calls made by clients;

• Measuring the reliability of the website (e.g. downtime, booking appointments);

• Identifying the reasons why service engineers failed to arrive at customers’

premises;

• Identifying the reasons why engineers do not have appropriate spare parts
available;

1
Measuring the rate of problem resolution via telephone;
73
• Measuring the incidence of remedial visits to clients.

(3) Analyse
36

Analysis should assist in providing an explanation for the following problems:

• Why is it difficult to contact T4UC at weekends?

49

• Why are remedial visits necessary?

• Why are there significant variations in the time taken by different service
engineers to service central heating systems?

(4) Improve

Suggesting solutions to the problems identified measured and analysed might include:

Issues Remedy

Remedial visits Staff training

Specialisation of staff in certain products (i.e.
central heating systems)

92 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Problem resolution by telephone Staff training to increase the knowledge levels of

those staff who receive telephone calls on behalf of
T4UC

Weekend access Staff contractibility at weekends

Availability of parts Inventory management of delivery vehicles

The project team in T4UC should analyse each possible solution paying particular
attention to the costs and benefits that would result from their selection.

(5) Control

The final phase would involve further monitoring of the relevant problem variables, in
particular the number of clients, client recommendations, weekend accessibility, staff
training, availability of items in inventory, and finally overall customer satisfaction with

1
a view to exceeding the industry average as soon as possible and aspiring to similar
results achieved by Appliances R Us.
73
Marking Scheme
Marks Marks
36

(a) 2 marks for explanation of each of DMAIC to a maximum of 10

–––
Total 10

(b) 1 mark for application of each of DMAIC to a maximum of 5

49

1 mark per additional activity suggestion to a maximum of 4

–––
Total 9
Professional skills marks for analysis up to a maximum of 3

–––
Total 22
–––
Professional Not at all Not so well Quite well Very well
skills:
(b) Analysis 0 marks 1 mark 2 marks 3 marks

No attempt has Some limited A reasonable Excellent

been made to attempt to apply attempt to professional
apply Six Sigma Six Sigma but analyse the case analysis skills with
to the case. with little depth or using Six Sigma a thorough
structure. methodology. analysis of the
case using Six
Sigma, and
recommendations
for additional
activities.

93 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

ANSWER 23 ASTRODOME SPORTS

(a) Performance measurement problems

• Tutorial note: Candidates were required to choose just FOUR problems.

Tunnel vision may be seen as undue focus on performance measures to the detriment
of other areas. For example, “There is no point whatsoever in encouraging staff to
focus on interaction with customers in efforts to create a user-friendly environment.
What we need is to maintain the quality of our grass surfaces at all costs since that is
the distinguishing feature of our business.”

Sub-optimisation may occur where undue focus on some objectives will leave others
not achieved. For example, “We should focus our attention on maximising the opening
hours of our facilities. Everything else will take care of itself.” This strategy ignores

1
the importance of a number of other issues, such as the possible need to increase the
availability of horse riding and bowling equipment for hire.
73
Misinterpretation involves failure to recognise the complexity of the environment in
which the organisation operates. Management views have focused on a number of
36

performance measures such as “spend the money on increased advertising of our

facilities which will surely attract more customers.” This fails to recognise the more
complex problems that exist. The town is suffering from high unemployment, which
49

may cause population drift and economic decline. This will negate many of the
initiatives suggested by management. This may to some extent be offset by the good
transport links to the 365 sports complex.

Myopia refers to short sightedness leading to the neglect of longer-term objectives.

An example would be “We should reduce the buildings maintenance budget by 25%
and spend the money on increased advertising of our facilities which will surely attract
more customers.”

Measure fixation implies behaviour and activities to achieve specific performance

indicators that may not be effective. For example, “Buy more equipment which can be
hired out to users of our facilities. This will improve our utilisation ratios which will lead
to increased profits”. Problems of unemployment and lack of complaints from
customers may mean that more equipment will not improve profit levels.

94 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Misrepresentation refers to the tendency to indulge in “creative” reporting to suggest

that a performance measure result is acceptable. For example, “Recent analysis of
customer feedback forms indicates that most of our customers are satisfied with the
facilities. In fact, the only complaints are from three customers – the LCA University
who use the cricket pitch for matches, the National Youth Training Academy who hold
training sessions on the tennis courts, and a local bowling team”. This ignores the
likely size of capacity share occupied by these three customers. In this regard, it
should be acknowledged that complaints represent a significant threat to the business
since “bad news often travels fast” and other customers may then “vote with their feet”.

Gaming is where there is a deliberate distortion of the measure to secure some

strategic advantage. This may involve deliberately underperforming to achieve some
objective. For example, “We should hold back on our efforts to overcome the shortage
of bowling equipment for hire. Recent rumours are that the National Bowling
Association is likely to offer large financial grants next year to sports complexes who

1
can show they have a demand for the sport but have deficiencies in availability of
73
equipment.”

Ossification refers to an unwillingness to change the performance measure scheme

once it has been set up. An example could be “Why change our performance
36

management system? Our current areas of focus provide us with all the information
that we need to ensure that we remain a profitable and effective business”. This
ignores issues/problems raised in the other comments provided in the scenario.
49

(b) Remedies for performance measurement problems

(i) Focusing on and improving the measurement of customer satisfaction

This is a vital goal. Without monitoring and improvement of levels of customer

satisfaction, an organisation will tend to underachieve and is likely to have problems
with its future effectiveness. Positive signals from performance measures made earlier
in the value chain are only relevant if they contribute to the ultimate requirement of
customer satisfaction. Tunnel vision and sub-optimisation are examples of
measurement problems that may be reduced through recognition of the need for a
management focus on customer satisfaction. For example, undue focus on the
importance of maximising opening hours may lead to lack of focus on other quality
issues seen as important by customers.

95 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

(ii) Involving staff at all levels in development and implementation

People should be involved in the achievement of performance measures at all levels

and in all aspects of an organisation. It is important that all staff are willing to accept
and work towards any performance measures that are developed to monitor their part
in the operation of the organisation and in the achievement of its objectives. This
should help, for example, to reduce gaming. At the sports complex, an example of
gaming might be a deliberate attempt to understate the potential benefits of
maintaining the buildings to ensure that funds can be used for other purposes such as
an increased advertising budget. The directors of Astrodome Sports must recognise
that leisure facilities that appear dated and in a poor state of repair will cause
customers to look for more aesthetically appealing alternatives.

(iii) Being flexible in the extent to which formal performance measures are
relied on

1
A performance measurement may give one or more signals about performance but
73
some (or indeed all) may be misleading. For example a percentage increase in the
quantity of bowling equipment purchased could imply an increased demand for use of
the bowling greens but might actually be due to a belief that having more equipment
36

will drive demand. It is therefore important not to interpret measures at face value. This
flexibility should help to reduce measure fixation and misrepresentation.

(iv) Giving consideration to the audit of the performance measurement

49

system

Actions that may be taken may include:

• Seeking expert interpretation of the performance measures in place. It is

important that any audit is “free from bias” and conducted independently on an
“arm’s length” basis. It is therefore essential that such audits should be “free
from the influence” of those personnel involved in the operation of the system.

• Maintaining a careful audit of the data used. Any assessment scheme is only as
good as the data on which it is founded and how this data is analysed and
interpreted.

The above actions should help, in particular, to reduce the incidence and impact of
measure fixation, misinterpretation and gaming.

96 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

For example, an audit may show that the directors of Astrodome Sports are fixated on
equipment availability and misinterpret this to be the key to customer volume and high
profitability. The audit may also provide evidence of gaming such as a deliberate
attempt to underplay the benefits of one course of action to release funds for use on
some alternative.

Marking Scheme
Marks Marks
(a) 2 marks for explanation of each of four problems to a maximum of 8
1 mark for discussion of its application in the case 4
–––
Total 12
Professional skills marks for commercial acumen up to a maximum of 3

(b) 1 mark each for relevance of each action to a maximum of 4

1 mark each for which problems each action addresses to a maximum of 4
–––
Total

1
Professional skills marks for evaluation up to a maximum of
8
2
73
–––
Total 25
–––
36

Professional Not at all Not so well Quite well Very well

skills:
49

(a) 0 marks 1 mark 2 marks 3 marks

Commercial
acumen Does not Some awareness A reasonable Excellent
demonstrate any demonstrated, attempt, covering commercial
awareness of but fails to make most of the key acumen with
how the thorough points. strong awareness
directors’ views analysis. of how directors’
illustrate any views illustrate
performance any performance
management management
problem. problem.
(b) Evaluation 0 marks 0.5 marks 1 mark 2 marks

No assessment Limited A reasonable Excellent

of the impact of application of attempt to professional
each course of knowledge of the assess the evaluation with a
action. impact of each impact of each clear assessment
action to the action. of the impact of
circumstances in each action on the
the case. performance
management
problems.

97 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

ANSWER 24 BETTER GARDENS CO

(a) Memorandum

To: The board of directors

From: Senior management accountant

Date: X June 20X6

Subject: Factors to be considered in the implementation of a reward scheme

Further to your recent request concerning the above please see detailed below the factors for
your consideration:

(a) Potential benefits from the implementation of a reward scheme

1
Rewards and incentives can make a positive contribution to strategy
implementation by shaping the behaviour of individuals and groups. A well-
73
designed reward scheme will be consistent with organisational objectives and
structure.
36

• There is evidence that suggests that the existence of a reward scheme provides
an incentive to achieve a good level of performance. Moreover, the existence of
effective schemes also helps not only to attract but also to retain employees who
49

make positive contributions to the running of an organisation.

• Key values can be emphasised by incorporating key performance indicators in

the performance-rewards mechanisms that underpin the scheme. This helps to
create an “understood environment” in which it is clear to all employees what
performance aspects precipitate organisational success.

• An effective reward scheme will create an environment in which all employees

are focused on continuous improvement.

• Schemes that incorporate equity share ownership for managers and employees
alike can encourage behaviour that is in the longer-term interests of the
organisation by focusing on actions aimed at increasing the market value of the
organisation.

98 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

(b) Factors to be considered in design of a reward scheme

• Whether performance targets should be set with regard to results or effort. It is

more difficult to set targets for administrative and support staff since in many
instances the results of their efforts are not easily quantifiable. For example,
sales administrators will improve levels of customer satisfaction but quantifying
this is extremely difficult.

• Whether rewards should be monetary or non-monetary. Money means different

things to different people. Some people will prefer increased job security that
results from improved organisational performance and adopt a longer term-
perspective. The attractiveness of employee share option schemes will appeal
to such individuals. Well-designed schemes will correlate the prosperity of the
organisation with that of the individuals it employs.

1
The size and time span of the reward. This can be difficult to determine
especially in businesses such as BGC that are subject to seasonal variations
73
(i.e. summerhouses will invariably be purchased prior to the summer season).
Hence activity levels may vary and there remains the potential problem of
assessing performance when an organisation operates with surplus capacity.
36

• Whether the reward should be individual or group based. This is potentially

problematic for BGC since the assembly operatives comprise some individuals
49

who are responsible for their own output and others who work in groups.
Similarly with regard to the sales force, the setting of individual performance
targets is problematic since sales territories will vary in terms of geographical
spread and customer concentration.

• Whether the reward scheme should involve equity participation? Such schemes
invariably appeal to directors and senior managers but should arguably be open
to all individuals if “perceptions of inequity” are to be avoided.

• Tax considerations need to be taken into account when designing a reward

scheme.

99 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

(c) Statement of manufacturing director

“If we implement a reward scheme then it is bound to be beneficial for BGC”.

The statement of the manufacturing director is not necessarily correct. Indeed there
is much evidence to support the proposition that the existence of performance-related
reward schemes can encourage dysfunctional behaviour. This often manifests itself
in the form of budgetary slack which is incorporated into budgets in anticipation of
subsequent cuts by higher levels of management or to make subsequent performance
look better.

Marking Scheme
Marks Marks
(a) 1 mark for explanation of each potential benefit to a maximum of 5
–––
Total 5

1
(b) 1 mark per factor in designing a reward scheme 6
–––
73
Total 6

(c) 1 mark per point made on whether the statement is correct 3

–––
36

Total 3

Professional skills marks for evaluation up to a maximum of 4

49

–––
Total 18
–––

Professional Not at all Not so well Quite well Very well

skills:
Communication 0 marks 1 mark 2-3 marks 4 marks

No nuance to Limited A reasonable Excellent

points given and application of attempt to apply professional
no attempt to knowledge to the knowledge to the evaluation with
relate them to circumstances of case and give well-reasoned
the case. the case. reasoned arguments
arguments. specifically
applied to the
details of the
case.

100 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

ANSWER 25 UNIVERSAL UNIVERSITY

(a) Lecturing staff

(i) Agency theory

Agency theory considers the relationship between a principal and an agent. The
problem is how the agent can be motivated and monitored. The key requirements are
that the agent must have to account for his/her performance to the principal and that
the principal must be able to hold the agent to account. The agent performs a task
through the application of judgement and skill. The outcome depends on the efforts
and methods adopted by the agent.

In the context of Universal University, the lecturer is the agent in using his/her skill and
judgement in the creation, delivery and assessment aspects of the learning process
on behalf of the university (the principal). The lecturer may be seen as adopting a risk-

1
seeking stance in using new/innovative approaches to the teaching/learning process
or a risk adverse stance where he/she continues with currently used approaches to
73
teaching and learning.

(ii) Expectancy theory

36

Expectancy theory is the view that an individual's motivation to do something depends

on two factors:
49

1. The expectation that something may happen (Y) as a result of doing

something (X); and

2. The strength of preference of the thing that will happen – i.e. the outcome (Y).

The relationship may be expressed by the equation:

Strength (force) of motivation to do X = (Strength of preference to outcome Y) x

(Expectation that doing X will lead to Y)

Considering the example of new course design, if a lecturer is keen to be promoted

(Y) and expects his efforts to get him that promotion, his motivation will be high. But if
a lecturer is indifferent to promotion, but knows he will be promoted anyway, he will be
less motivated.

101 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

(b) Hard accountability

Hard accountability may be viewed in the context of three specific areas; (i) accounting
for the numbers, (ii) ensuring the numbers are accounted for and (iii) being held
accountable for the events and circumstances leading to the numbers. In the context
of the application of hard accountability to the lecturing staff:

(i) “Accounting for the numbers” may be implemented by monitoring the

number of articles published, role in new courses developed or innovations in
methods applied. Feedback from students and the number and type of
comments received about the lecturing quality and lecturer support to
students could also be used.

(ii) “Ensuring the numbers are accounted for” may be addressed by reporting
on the reasons “how” and “why” the figures have occurred. For example, will
the publication of a specific quality of articles lead to the achievement of a

1
high choice of a module by students (i.e. HOW?)? Will a high level of student
73
complaints occur through an inability to achieve the desired quality of lecturing
when it is implemented and lead to a lower level of attendance or uptake of a
module (i.e. WHY?)?
36

(iii) “Being held accountable for events and circumstances leading to the
numbers”. For example, where the lecturer is deemed responsible after
attendance at lectures is poor or student pass rates achieved are unduly low.
49

It may be deemed that the quality of the lecturing is inadequate. Senior staff
may be held accountable where there is a failure to ensure that all lecturers
are adequately trained, briefed, motivated.

The motivation and application of lecturing staff may be monitored on an on-going

basis to determine whether the work structure/environment is ensuring that the team’s
accountability is equitably reflected in areas such as rates and levels of publication or
student numbers enrolling for, and achieving success, in a module.

• Tutorial note: Alternative discussion points and illustrations would be accepted.

102 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Marking Scheme
Marks Marks
(a) (i) Marks for explanation of agency theory to a maximum of 4

(ii) Marks for explanation of expectancy theory including all mentioned facets
to a maximum of 4
–––
Total 8
Professional skills marks for analysis up to a maximum of 2

(b) 2 marks for each area up to a maximum of 6

Professional skills marks for evaluation up to a maximum of 2

–––
Total 18

Professional Not at all Not so well Quite well Very well

skills:
For each part
(a) Analysis
0 marks
No attempt has
0.5 marks
Some limited
1 1 mark
A reasonable
2 marks
Excellent
73
been made to application but attempt to apply professional
apply theory to with little depth or theory to the analysis skills with
the case. structure. case. a thorough
application of
36

theories to the
specific aspects of
the case.
(b) Evaluation No attempt has Some but little A reasonable An excellent and
been made to attempt at attempt to critical evaluation
49

critically evaluate evaluating the evaluate the of the approach to

the approach to approach in the approach in the performance
performance scenario. context of the measurement in
measurement. scenario. the context of the
scenario.

103 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

ANSWER 26 COD

(a) Key features of performance measures

• They should measure the effectiveness of the business and its processes in
meeting the organisation’s objectives in order to link to the overall strategy.

• They should measure the efficiency of resource utilisation within the

organisation.

• They should contain internal and external measures of performance.

• They should comprise a mix of financial and non-financial (quantitative and

qualitative) methods.

• They must make clear the different dimensions of performance so that

1
judgements on trade-offs between them are explicit (e.g. quality and cost).
73
• They will link to the targets set for employee motivation.

• They should cover both the short-term and long-term performance of the
36

organisation.

• They should be flexible to respond to changes in the business environment.

49

The key performance indicators (KPIs) at Cod fail to have many of these key features.
The KPIs at present are purely focused on financial performance and do not address
issues of quality, customer service and product innovation which are all mentioned in
the mission statement. The KPIs have no strong external features (e.g. customer
satisfaction or share price performance). It is unclear how they will link to employee
motivation and indeed, the board recognise this fact and intend to use the performance
pyramid to address it. The overall picture of the performance measurement system is
a traditional one which will lack the flexibility to address the concerns of the key
stakeholders of Cod.

104 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

(b) Use of the performance pyramid at Cod


Corporate
vision
Objectives
Market Financial Business Measures
units
Business
Customer Flexibility Productivity operating
satisfaction
systems

Quality Delivery Cycle time Waste Departments

Operations

External effectiveness

1
Internal efficiency
73
At the top of the pyramid is the organisation’s mission or vision.
36

The mission or vision will be achieved through measures of "internal efficiency" which
lead to better financial performance and "external effectiveness" which lead to better
49

customer satisfaction and therefore better market position.

The third level of the pyramid focuses on business operating systems – it is here that
the work is actually performed. Performance measurement at this level is on three
areas – customer satisfaction, flexibility in order to meet changes in business
requirements and customer needs and, finally, productivity, which means trying to find
the most cost-effective method of meeting the other two needs.

At the bottom of the pyramid are the departments that actually perform the operations.
Here it is necessary to measure quality and delivery, and to reduce cycle time and
waste.

There is a vertical link between all levels within the pyramid – the objectives are
cascaded down to the lower levels, and performance measures ensure that all levels
work to achieve the goals set higher up, feeding into the achievement of the corporate
objectives.

105 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

There are also horizontal links. For example, in the third level, increased flexibility
internally may lead to greater productivity, while externally it may lead to greater
customer satisfaction.

This will help Cod to achieve the coherence that the board desires in the performance
measurement systems.

(c) Evaluation of current system and suggested use of performance pyramid

The driving forces, according to Lynch and Cross, that are appropriate to meeting an
organisation’s objectives are customer satisfaction, flexibility and productivity. At
present Cod’s KPIs do not address these as they lack any mention of areas of
customer satisfaction (quality and service standards), flexibility (innovation and the
ability to adapt to change in the external business environment) and productivity
(efficiency and waste). It could be argued that some of these are more appropriate at
the tactical and operational levels of the management hierarchy but the existing

1
measures have only a tenuous link to them and hence the board is right to be
73
concerned by the current KPI system.

The additional performance information provided would allow the calculation of various
indicators appropriate to these driving forces. For example:
36

Customer satisfaction
49

Percentage of orders generating a complaint (5.4% in current year compared to 5.0%

in prior year) measures customer satisfaction.

Preferred supplier status (58% of market in current year and 50% in prior year
[assuming that there are only 24 possible customers that offer this status])

Flexibility

New products launched in the year (one each in current and prior year) measures
innovation.

Productivity

Quality costs ($4.35m in current and $3.46m in prior year) measures inefficient
production.

These should be added to the current KPIs used by the board.

106 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

The operational performance measures suggested by the pyramid will involve the four
areas of quality, delivery, cycle time and waste.

Quality: The existing measures of failure costs supply a measure of quality, although
variances to budget may be a more helpful presentation. The customer complaint
numbers also address this issue, although they are a weak measure as no indication
of the strength or ease of resolution of the complaint is given. It should be noted that
the complaint category of “other” is unacceptably large compared to the other
categories and it should be broken down into further subcategories. The level of
training days and long-term unfilled posts indicates the employee environment that will
also affect quality and delivery. It would be helpful to have industry benchmarks for
these figures to better understand them.

Delivery: The preferred customer status indicates customer satisfaction and is fed by
the complaint numbers on delivery and service. As before, it is worth noting that the

1
severity of the complaint is not being measured (e.g. by discounts offered or orders
lost as a result).
73
Cycle time: There is no useful information currently collected to allow measurement
of the cycle times of processes. Possibly the indicative numbers on products under
36

development may give an idea of time to market, however, an average measure of this
in months would be more useful.

Waste: No figures are collected that indicate waste in production. Variance analysis
49

of idle time for employees and materials usage would be helpful in measuring this area.

• Tutorial note: Part (c) of this question did not ask you to assess the performance
of Cod. It asked you to evaluate the system of performance measures used, and
to suggest additional KPIs based on the performance pyramid.

107 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

Marking Scheme
Marks Marks
(a) 4 marks for outlining key features of a performance management system 4
3 marks for assessing Cod’s current PM system against these 3
–––
Total 7
Professional skills marks for analysis up to a maximum of 2

(b) 6 marks for explanation of the performance pyramid 5

–––
Total 5

(c) 6 marks for evaluation of the current system using the performance pyramid 6
1 mark for each for suggested performance measures 6
–––
Total 12
Professional skills marks for evaluation up to a maximum of 4

–––
Total 30
–––

1
73
Professional Not at all Not so well Quite well Very well
skills:
(a) Analysis 0 marks 0.5 marks 1 mark 2 marks
36

No analysis of Limited analysis A reasonable Excellent and

Cod’s current PM of Cod’s current attempt to thorough analysis
system. PM system. analyse Cod’s of Cod’s current
current system performance
and assess it measurement
49

against the system against

expected the expected
features of a features of a
modern modern PM
performance system.
measurement
system.
(c) Evaluation 0 marks 1 mark 2-3 marks 4 marks

No attempt to Limited A reasonable Excellent

apply the application of attempt to apply professional
performance performance the performance evaluation of
pyramid to Cod. pyramid to Cod. pyramid and Cod’s
develop performance
performance measures and
measures. suggestion of
appropriate
measures using
the performance
pyramid.

108 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

ANSWER 27 RM BATTERIES

(a) Quantitative and qualitative models for predicting corporate failure

Quantitative models such as the Altman Z-score use publicly available financial
information about a firm in order to predict whether it is likely to fail within the two-year
period. The method uses a model equation into which the financial data is input and
a score obtained. The advantages of such methods are that they are simple to
calculate and provide an objective measure of failure. However, they only give
guidance below the danger level of 1.8 and there is potential for a large grey area in
which no clear prediction can be made. Also, the prediction of failure of those
companies below 1.8 is only a probabilistic one, not a guarantee. The model is based
on a statistical analysis of historic patterns of trading by a group of companies and may
not be relevant unless the company under examination falls within the same economic
circumstances and industry sector as those used to set the coefficients in the model.

1
These models are open to manipulation through creative accounting which can be a
feature of companies in trouble.
73
Qualitative methods are based on the realisation that financial measures are limited in
describing the circumstances of a company. Models such as Argenti’s rely on subjective
36

scores to certain questions given by the investigator. A score above a certain level
indicates potential disaster. The advantage of the method is the ability to use non-
financial as well as financial measures and the judgement of the investigator but this
49

is also a weakness as there is a danger that the investigator will give scores to ensure
the conclusion agrees with first impressions.

(b) Commentary on the results in the junior analyst’s spreadsheet

The Z score of RMB in 20X2 is 1.452 which is below the threshold level of 1.81 and so
indicates that RMB is in danger of becoming insolvent within the next two years. The
Z score has been falling for the last two years through the grey area between the safe
zone (greater than 2.67)3 and the distress zone (less than 1.81).

During this period, the variables in the model have been roughly static or shown
significant declines. About half of the decline of the Z-score from 2.746 to 1.452 can
be explained by the deterioration of X4 which measures the market value of equity
(Mve) to its debt. Debt has been building due to the investment programme and the
share price (and so the market value) has fallen by 14% over the last year. It would
be helpful to identify the relative performance of the share price against RMB’s

109 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

competitors to see if this is related to the company’s specific problems or is due to

general market conditions. The other significant reduction is in variable X3 which
shows a failure to derive profit from the assets available. However, this could be a
timing effect as the profits from the new product will occur over many subsequent
accounting periods but the asset value will increase immediately in line with the
investment programme.

(c) Qualitative problems in the company

The qualitative problems can be broken down according to the Argenti model into three
broad areas: defects, mistakes made and symptoms of failure. RMB exhibits the
following defects – a domineering CEO, a failure to split CEO/Chairman roles and a
passive senior management. These are structural problems within the company that
will obstruct any effort to change direction if that direction is leading the company
downwards.

1
It appears that RMB may also be making mistakes (in fact, the company illustrates all
73
three of the classic errors noted by Argenti). It is overtrading as revenue rises and this
is mainly funded by debt. As a result, gearing has risen from 107% to 197% and
interest cover has fallen from 8.8 to 2.0. Additionally, the future of the company seems
36

to depend on one big project.

The higher gearing increases the financial risk that the company will fail to make its
loan repayments. The dependence on the single new product demonstrates a lack of
49

diversification which also signals greater risk.

Finally, symptoms of failure are not yet apparent from the information to hand. This
may imply that there is still time to correct matters as these are often the final signals
of failure (e.g. creative accounting being employed to “massage” the financial
statements).

(d) Assessment of results of parts (b) and (c)

The outlook for RMB appears bleak when only looking for the bad points, but the
company is still making profits ($65m in 20X2) and its revenues are growing (by 23%
over the last year). This suggests that customers are taking up the new product. It is
not surprising that in the early stages of this project that the capital expenditure is high
and returns have yet to materialise.

110 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Overall, the company is clearly showing signs of financial strain from the project but
more work is required before coming to a final conclusion. Further data required would
include a cash flow projection to ensure that as the product matures there will be funds
to pay the new borrowings. The decline in operating margin from 21% to 10% requires
explanation and action as this indicates problems in control of the business. Detailed
cost information would assist in identifying the source of margin problems. The share
price movement should be compared to the change in the market as a whole to identify
if the fall in price is due to problems unique to RMB or if this is due to general economic
conditions.

Marking Scheme
Marks Marks
(a) 3 marks for benefits and weaknesses of quantitative methods 3
3 marks for benefits and weaknesses of qualitative methods 3
–––
Total 6

(b)

1
5 marks for commentary on junior analyst’s spreadsheet 5
–––
73
Total 5

(c) 5 marks for qualitative problems and how they relate to possible failure 5
–––
Total 5
36

Professional skills marks for analysis in (a)-(c) up to a maximum of 3

(d) 2 marks for critical assessment of analysis 2

2 marks for additional data required 2
49

–––
Total 4

Professional skills marks for evaluation up to a maximum of 2

–––
Total 25
–––

111 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

Professional Not at all Not so well Quite well Very well

skills:
(a)-(c) 0 marks 1 mark 2 marks 3 marks
Analysis
No analysis of Some limited A reasonable A detailed and
RMB’s position, attempt to attempt to well considered
just repetition of analyse RMB’s analyse RMB’s analysis of RMB’s
scenario. position from the position and the position including
information analyst’s interpretation of
given. spreadsheet. the analyst’s
spreadsheet.
(d) Evaluation 0 marks 0.5 marks 1 mark 2 marks

No assessment Limited A reasonable Excellent

of the results of assessments of attempt to professional
earlier sections. the results of critically assess evaluation with a
earlier sections. the results. clear assessment
of the results of
earlier sections.

1
73
36
49

112 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

ANSWER 28 METIS

Report

To: J Sum
From: A Accountant
Date: June 20X4
Subject: Performance reporting and management at Metis

This report assesses the existing performance reporting at Metis and considers the impact that
performance measurement has on management activity.

(a) Current performance report

The existing performance report has some good elements and many weaknesses.
The current report shows clearly the calculation of profit and the profit margin from the

1
business and shows how this has changed over the past three years along with a
forecast of the next year. There is also a breakdown of the performance in the last two
73
quarters which gives a snapshot of more immediate performance. The report breaks
revenue and costs into product categories and so might allow a review of selling and
procurement activities.
36

However, there are a number of weaknesses with the existing report:

• The report only clearly answers the question “what was the profit?” The owners
49

have indicated that their aim is to “make money” and it is possible that making
money and profit may not be entirely compatible in the short term. For example,
there are no cash measures of performance on the report. These are likely to
assume greater importance given the planned improvements and any long-term
expansion of the business. The owners might wish to consider refining their
long-term goal in order to make it a more precise statement.

• The current report does not present its information clearly. There is too much
unnecessary information (e.g. the detail on operating costs). The style of
presentation could easily be confusing to a non-accountant as it shows a large
table of numbers with few clear highlights. The use of more percentage figures
rather than absolute numbers may help (e.g. gross margins, change on
comparative period percentages). Also, the numbers are given to the last $
where it would probably be sufficient to work in thousands of dollars.

113 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

• The current report does not break down conveniently according to the functional
areas over which each owner-manager has control. It summarises the overall
build-up of profit but, for example, it cannot be easily used to identify
performance of the service staff except indirectly through growth in total revenue.
To improve this aspect of the report, the critical success factors associated with
each functional area will need to be identified and then suitable performance
measures chosen. For example, Sheila’s area is customer-facing and so a
measure of customer satisfaction based on number of complaints received or
changes over time in average scores in customer surveys would be helpful.
Bert’s area is kitchen management and so staff efficiency (measured by number
of meals produced per staff hour) and wastage control (measured by gross
margin) may be critical factors. In your own financial and legal areas, costs are
mostly fixed and so absolute measures such as the cost of capital may be
helpful. In the area of procurement, purchasing the appropriate quality of food
and drink for the lowest price is critical and so a gross margin for each product
category would aid management.
1
73
• The timescales reported in the current format are possibly not helpful for
quarterly meetings. The existing report shows evidence of seasonality in the
36

large change between Q3 and Q4 performance (42% fall in revenue). The

figures for two years ago may not be particularly relevant to current market
conditions and will not reflect recent management initiatives. It may be useful to
49

consider reporting the last quarter’s monthly performance giving comparative

figures from the previous year and drop the use of the detailed 20X2 and 20X3
figures in favour of just supplying net profit figures for those years to give an
overview of long-term performance.

• The current report does not give much benchmark data to allow comparisons to
better understand the results. It would be helpful to have budget figures for
internal comparison and competitor figures for an external comparison of
performance. Such external data is often difficult to obtain although membership
of the local trade association may give access to a suitably anonymised
database provided Metis is willing to share its data on the same basis.

• Finally, the current document only reports financial performance. I have already
indicted that this may not be sufficient to capture the critical factors that drive the
business. A restaurant will be judged on the service and quality of its products
as well as its pricing. It would be an improvement to include this style of

114 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

reporting although gathering reliable data on these non-financial areas is more

demanding.

• Tutorial note: It would be possible to also base a criticism on a framework such

as Fitzgerald et al’s “Results and determinants” or the Balanced Scorecard.

(b) “What gets measured, gets done”

The idea behind the quote, “What gets measured, gets done” is that the staff and
management will only react to the performance measures chosen by the owners. In
other words, poor performance measurement can lead to inefficient management. If
an area is not measured then there is a danger that it is not efficiently managed and
equally, if an area is measured then there is the danger that it is over-managed. For
example, the current report has annual revenue and the previous two quarters’
revenues reported which might promote the idea that quarterly growth is critical.
However, it is likely that the business is seasonal and so it would be more helpful to

1
have a comparison of each quarter with the equivalent quarter in the previous year.
73
Otherwise, the owners may react to a fall in revenue when this is not controllable.

Further examples of the quote are given in the areas that the owners are complaining
36

about in their meetings. Sheila has complained that the staff are not smiling enough
but there is no measure of customer satisfaction available in the current report and so
no way to quantify or substantiate this concern. This has resulted in Bert’s dismissive
49

comment.

However, the control of electricity costs can be seen in the slowing growth of the utilities
cost on the current report (the annual increase has fallen from 3% to 0.5% pa in the
last two years) and so the effectiveness of Sheila’s actions can be demonstrated,
although the use of monetary totals and lack of these trend figures would mean that
this is not immediately obvious. Bert’s criticism of her work can at least be partially
answered and so she can be encouraged to continue with these ideas.

115 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

Bert has complained that there is too much wastage of food and that he is devoting
considerable staff time on inventory checking based on his instinct, rather than on solid
information. The problem is additionally complicated as it may be caused by
purchasing lower cost but poor quality produce or it could be caused by how the
produce is handled and stored in the kitchen. The first cause is an issue for
procurement, which is not Bert’s area of responsibility, and so any actions of his are
unlikely to address the problem. The report needs to identify changes in gross margin
which might indicate changes in procurement policy and it should also have a measure
of wastage such as the average actual cost of food per dish served compared to a
budgeted cost of food per dish.

The quote may not be entirely applicable as management may still take action out of
other motivations such as the results from training or personal motivation to
demonstrate their own skills. However, the quote is intended to bring into focus the
fact that many people will tend to focus effort on the explicit measures of their
performance.

1
73
In conclusion, as Metis grows it will need to refine its performance reporting so that management
become more efficient in focusing their work on areas which will achieve the business’
objectives.
36

Marking Scheme
Marks Marks
49

(a) 1 mark per point critically assessing the report to a maximum of 6

1 mark per suggested improvement to a maximum of 5
–––
Total 11

(b) 2 marks for explanation of quote anywhere in the answer 2

2 marks for each relevant point of critical evaluation to a maximum of 6
–––
Total 8
Professional skills marks for analysis up to a maximum of 5

–––
Total 24
–––

116 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Professional Not at all Not so well Quite well Very well

skills:
Analysis 0 marks 1-2 marks 3-4 marks 5 marks

No attempt has Some limited A reasonable Excellent

been made at in- investigation of attempt to professional
depth critical the information in analyse the case analysis skills with
analysis. the scenario but in light of the a thorough
with little depth or theory. evaluation of the
structure. case facts in light
of the theory.

1
73
36
49

117 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

ANSWER 29 DARGEBOARD SERVICES

Report

To: The board of DS

From: An Accountant
Date: March 20X7
Subject: Strategic performance reporting and reward systems at DS

This report assesses the coherence of the choice of key performance indicators (KPIs) with the
mission of DS, and the two proposed reward schemes.

(a) Linking the mission to the current KPIs

The mission statement can be broken into several parts. The principal aim is
maintainable, profitable growth which is supported by three further goals: developing

1
the best talent; providing world-class services; and being efficient. The KPIs are linked
to elements of this statement as follows:
73
• Operating profit margin shows how profitable the organisation is and as a
margin, it indicates efficiency in cost control.
36

• Secured revenue indicates the amount of revenue which is contracted and so

has greater likelihood of being earned. Contracts give an indication of
49

maintainability, though here only in the short term.

• Management retention links to the need for best talent though it does not
measure the development of that talent.

• Order book shows the future maintainability of the business though it does not
show the average length of the contracts.

• Organic revenue growth shows historic growth and may indicate what the
management are capable of into the future.

• ROCE demonstrates the efficiency of profit generation from the capital base of
DS.

None of the measures are external, looking at the competitive environment, and so it
is not possible to indicate if DS has “world-class services”.

118 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

(b) Design of reward scheme for operational employees

A good reward scheme should motivate employees to play their part in contributing to
the achievement of an organisation’s strategic objectives. Since DS is a services
business, the behaviour of all employees will be particularly important in contributing
to the achievement of DS’s objectives of providing “world class services with maximum
efficiency”.

A key factor in designing a reward scheme is in deciding what performance measures

to use for performance related parts. What aspects of an employee’s behaviour and
traits are important to the strategy of DS? It is not clear how the qualities of leadership
and entrepreneurship that are currently used to assess employees are relevant to the
company’s strategy, so more appropriate key performance indicators should be
identified for each employee that link to the strategic objectives.

The targets set for each employee should reflect objectives that are within the

1
employees' control. The performance indicators included in the dashboard would not
73
be within the direct control of operational employees, so indicators based on what they
do would need to be chosen.

Rewards should be sufficient to motivate individuals. The current share bonus does
36

seem to be motivational to the employees who receive it, but the majority do not.
Benchmarking against competitors to ensure that DS’s employees remuneration
remains competitive should help to achieve this.
49

Finally the calculation of rewards should be clear. Where bonuses are involved, they
should be based on a formula that does not require judgement, to ensure that
employees know that rewards are not just given to the bosses’ preferred employees ,
which is a weakness of the current scheme.

• Tutorial note: Other relevant factors (e.g. discussing the nature of remuneration)
would also be given credit.

(c) Assessment of the proposed reward schemes

Scheme 1

The scheme has the benefit that it continues with the successful policy of offering an
equity share in DS. It continues to utilise the knowledge of the line manager in
performing the appraisal. It attempts to address a problem of the current scheme

119 © ACCA. All rights reserved.

ICMAP Bridging Exam Study Question Bank

(which is that the vagueness of the categories gives the line manager scope to
continue to show favouritism to specific employees.) This is addressed as the bonus
for line management will be affected by their appraisal according to performance on
this new scheme and it will be helped practically by giving them an expectation of the
distribution of bonus shares. This will also mean that forecasting staff costs will be
simpler.

However, this scheme does not address the problem that the appraisal categories are
vague and do not reflect the KPIs of DS. It also could create a problem as line
managers will give bonuses according to the stated expectation, for example, even
where all staff are, in absolute terms, performing brilliantly only 20% will get the
maximum. Also, there is no mention of the scale of the scheme bonuses as there is
for Scheme 2, where the maximum is stated as 50% of basic salary.

Scheme 2

1
This scheme loses a key benefit of the current scheme in not rewarding in shares but
73
cash may well be a preferred option for the managers. This form of benefit also
reduces the desire to manipulate share prices. It sets standards based on the KPIs
and so should lead to greater focus by each employee on the goals of DS. Involvement
36

of both strategic and line management in this process should lead to a better set of
measures being used.

It is not clear, however, why five targets are being chosen. This seems an arbitrary
49

figure and it may be more sensible to suggest a range from three to six (the number of
strategic KPIs) to be decided by the managers in consultation. The size of the
maximum reward seems likely to motivate but the equal weighting for each heading
may not be effective. It requires that, say, operating profit margin has the same
importance as management retention.

120 © ACCA. All rights reserved.

ICMAP Pathway Exam ACCA Question Bank

Marking Scheme
Marks Marks
(a) 1 mark each for consideration of indicators to a maximum of 6
2 marks for evaluating links to mission 2
–––
Total 8

(b) 2 marks for each well-explained point on reward schemes to a maximum of 8

–––
Total 8

(c) 2 marks for each relevant critical point on proposed reward scheme 1
to a maximum of 6
2 marks for each relevant critical point on scheme 2 to a maximum of 6
–––
Total 12
Professional skills marks for communication up to a maximum of 7

–––
Total 35
–––

1
73
Professional Not at all Not so well Quite well Very well
skills:
Communication 0-1 mark 2-3 marks 4-5 marks 6-7 marks
36

Answer lacks Some attempt at A reasonable Excellent

appropriate format but attempt at professional
format, style and without style and appropriate communication
structure. structure. format, style and skills throughout,
49

structure. using an
appropriate format
(report), style and
structure.

121 © ACCA. All rights reserved.

ICMAP PATHWAY EXAM ACCA SPECIMEN EXAM

ANSWER 1 SCIENCE FIRST

(a) Report

To: Local Government Authority

From: Consultant

Date: 27 December 20X7

Introduction

This report aims to analyse the respective claims of the main stakeholders in the
Science First development and to explain how the residents’ association and
potential library users might attempt to increase their influence.

(i) Mendelow matrix

1
The Mendelow matrix is a way of analysing the relative influences of a number of
73
stakeholders in an organisation. In this case, the organisation is the new science
park named the Science First development. Influence is conceived of as the result
of an estimate of each stakeholder’s power and interest. Power is the ability to bring
36

pressure to bear over the objectives and policies of the project and interest is the
capital which a stakeholder has invested in the organisation or project (or, an
assessment of how much they care or are interested in the development). Higher
49

influence is arrived at by a combination of higher power and higher interest.

Stakeholder claims

Science First Co (SFC) is seeking to remove any obstacles for the construction of the
science park. It believes strongly that the science park is in the strategic interests of
the city of Philo and of Philo University. Kathy Wong’s report suggested that the
board has become frustrated by local opposition to the development. SFC is in a
high interest and high power situation and is probably therefore the most influential
stakeholder. Its interest is derived from the capital investment in the site and its
power is based on its shareholders including the Philo local government authority,
Philo University, both of which are prominent local organisations. The local
government authority has control over the planning process and was able to issue a
“notice to quit” notice for residents in the flats affected by Topscience’s objection to
their presence near the Science First development.

1 © ACCA. All rights reserved.

ICMAP PATHWAY EXAM ACCA SPECIMEN EXAM

The residents’ association represents the interests of local residents affected by the
development of the Science First development. The scenario does not say that the
residents’ association opposes the development of the site, but it feels that the rights
of longstanding residents near the site have not been adequately taken into account.
Although vocal and with a high degree of interest, it is likely that it has relatively low
power. Its interest is based on the fact that the Science First development affects
the lives of some residents, especially those whose homes are threatened. The
evidence for its low power is based on the observation from the case that it seems
unable to resist the proposed demolition of the flats, or any of the other infrastructure
changes around the Science First development.

The cancellation of the proposed library was necessitated by the diversion of funds
from library services to the Science First development. The loss of the planned library
means the loss of a number of community services including a library, a café and
services for parents, art students and others. It will also result in the loss of ten jobs

1
locally which would have been created had the library gone ahead. The potential
library users are likely to feel aggrieved at the loss of the planned facility quite
73
intensely and so their interest is likely to be high but, as with the residents’
association, their power is relatively low. The low power of the potential library users
36

is suggested by the fact that they were unable to resist the cancellation; the loss of
these important services will be keenly felt locally, especially if residents need to
travel away from their local areas to use library services elsewhere in the city of Philo.
49

(ii) Boosting the influence low power stakeholders

Low power but high interest stakeholders are unable to influence objectives, when
acting separately, because they are unable to move into the influential quadrant of
the map because of the structural lack of power.

A common way to increase the aggregated influence of high interest but low power
stakeholders is to act together in a type of coalition. This approach has often been
tried when stakeholders, who oppose certain developments, seek to challenge policy
changes and similar change initiatives. Stakeholders, often with little in common
except their opposition to a certain initiative, act in concert, co-ordinating their
messages to achieve maximum pressure, to influence local opinion on that which
they both oppose. If they were to include other stakeholders also opposed to the
science park, their potential influence would be maximised.

2 © ACCA. All rights reserved.

ICMAP PATHWAY EXAM ACCA SPECIMEN EXAM

In this way, many stakeholders act as one and attempt to mobilise public opinion. In
this case, highlighting the local costs of the Science First development on local media
and in the streets around the site might serve to challenge the messages conveyed
about the site by Philo University, by the Philo local government authority and SFC.
By combining to make their arguments locally, stakeholders with undecided views,
such as the local newspapers and some elected representatives, might be influenced
to recognise the wider issues surrounding the development and the need for wider
consultation. In this way, concessions might have been granted which were
favourable to the potential library users and the residents.

Conclusion

Although Science First (jointly owned by the local government authority) currently
holds the balance of power in the development, there is a risk that the residents’
association and the potential library users will join forces to increase their influence.

1
To mitigate the risk of conflict it is recommended that SFC engages into a public
consultation process to ensure the interest of all stakeholders are taken into account.
73
(b) Contribution to the public interest

With a development as large and expensive as the Science First development, there
36

are always “winners and losers” as Mr Forfeit explained. The public interest is a
prominent theme in public sector organisations such as the Philo local government
authority as well as to professional people including accountants. To act in the public
49

interest is to recognise a fiduciary duty to the benefit of society rather than just a duty
to one particular party. For Philo’s local government authority, acting in the public
interest means recognising that it serves many communities with each having rights
and responsibilities. This is not to say that all communities carry equal weight in the
local authority’s deliberations and it has apparently decided that the Science First
development is more important than the concerns of local residents. This is likely
because the Philo local government authority believes that the public interest is best
served with the development of the science site over the concerns of some of the
local residents.

The Philo local government authority can see a number of arguments in favour of the
development. The attraction of a high profile science development near the city
centre would be a way of distinguishing Philo from other cities and repositioning the
city as a high-technology city which adds value through scientists, engineers and

3 © ACCA. All rights reserved.

ICMAP PATHWAY EXAM ACCA SPECIMEN EXAM

technologists. The development might also continue the tradition of Philo as a strong
industrial and innovation location. This reputation is also likely to create wealth
through supply companies to the science development as well as on the science
development itself.

For Philo University, the development of the science park will cement its reputation
as a prestigious place to study science and it is likely to help recruit some of the
world’s top scientists and science students to Philo. Having a world-class university
will help many sectors of the local economy as well as contributing to the tax revenue
of Philo local government authority. Local business, housing developments, shops
and restaurants will also benefit, thereby increasing their own employment and
paying higher rates of tax.

Perhaps the main public benefit, though, are the jobs which the science park will
create. In addition to local jobs in other businesses, the Science First development

1
will create 500 new jobs, all of which were described by Mr Forfeit as “highly skilled
and highly paid”. As a city suffering from high unemployment, any new jobs are
73
welcome and jobs of this quality would be particularly welcome. As well as reducing
unemployment, the jobs would help individuals and families participate in society and
plan financially for their futures.
36

There are also arguments which conflict with the above advantages, and these need
to be weighed against the benefits. The case describes the outrage of the local
49

residents’ association with regard to the loss of the local government authority flats
and clearly this is a personal tragedy for the residents of those flats who are required
to remove themselves from their homes and community. Described by Ann Tang as
a “close-knit” community, the loss of their homes will be very painful for the affected
residents.

It is also the case that the local government authority budgets allocated to the science
development meant that other services had to be reduced. The loss of the proposed
local library is clearly an unfortunate example of this, with the loss of several
community services as well as the library itself. The fact that local residents did not
vote nor give their approval for the science park make the loss of the proposed library
even more painful and this, in turn, may negatively affect the reputation of the Philo
local government authority locally.

4 © ACCA. All rights reserved.

ICMAP PATHWAY EXAM ACCA SPECIMEN EXAM

(c) Accountants in society

As a qualified accountant, Kathy Wong’s analysis of the situation would have been
seen as trustworthy by many people because of her professional reputation. Her role
as a qualified accountant is seen by society as giving her membership of a
responsible and respectable profession. This means that her judgement may be
accepted without question by many people in the same way it would be for a dentist
or a medical practitioner.

This esteem received from society requires, in return, that accountants must be seen
to act in the public interest. This means that accountants need to act in accordance
with an agreed set of professional values, always maintain the highest levels of
integrity, and deal fairly with all parties they engage with. Accountants, along with
other professionals in society, are expected to demonstrate unswerving support for
these professional values and be beyond reproach and act independently at all times.

Criticisms
1
73
In her report, the local government authority asked her to produce a “balanced
assessment of the contribution of the Science First development to the city and the
region”. In producing her report, however, Kathy Wong only meaningfully
36

represented the interests of one constituency in her analysis. If she only considered
the Science First development in terms of “the creation of jobs, marginal revenues
and the reputation (of the university and the city)”, she is representing one interest
49

(that of the company) and ignoring or discounting the value of other interests. This
is the point which Ann Tang highlighted. Kathy Wong has been criticised for acting
in a factual manner and ignoring the effects on those stakeholders not represented
by accounting calculations.

The net benefits to the city include an estimation of the advantages and
disadvantages calculation including the costs to local residents and the closure of
other services in pursuit of the Science First development. Her duty to the public
interest includes recognising the diversion of funds to the Science First development
from other services including libraries and the relocation of some residents. A
“balanced assessment” would have included the social costs as well as the economic
and reputational benefits and she failed to include these.

5 © ACCA. All rights reserved.

ICMAP PATHWAY EXAM ACCA SPECIMEN EXAM

Marking Scheme
Marks Marks
(a) (i) 1 mark for explanation of the Mendelow matrix 1
1 mark for explanation of each stakeholder’s claim to a maximum of 3
2 marks for explanation of each stakeholder’s position on the Mendelow
matrix to a maximum of 6
–––
Total 10
Professional skills marks for analysis up to a maximum of 3

(ii) 2 marks for explanation of coalition arrangements 2

3 marks for application to case 3
–––
Total 5
Professional skills marks for commercial acumen up to a maximum of 2

(b) 2 marks for explanation of public interest anywhere in the answer 2

2 marks for each relevant point of critical evaluation to a maximum of 10
–––
Total 12
Professional skills marks for evaluation up to a maximum of 3

(c)

1
2 marks for each relevant explanation of the role of accountants in society
to a maximum of 4
73
2 marks for each relevant criticism of Kathy Wong to a maximum of 4
–––
Total 8
Professional skills marks for scepticism up to a maximum of 2
36

–––
Total 45
–––
49

6 © ACCA. All rights reserved.

ICMAP PATHWAY EXAM ACCA SPECIMEN EXAM

Professional Not at all Not so well Quite well Very well

skills:
(a)(i) Analysis 0 marks 1 mark 2 marks 3 marks

No attempt has Some limited A reasonable Excellent

been made to investigation of attempt to professional
investigate the the information in analyse the analysis skills with
claims of each the scenario but relative claims of a thorough
stakeholder in with little depth or stakeholders in investigation of
the Science First structure. the development the relative claims
development. using an of stakeholders in
appropriate the development
structure (e.g. using an
Mendelow appropriate tone
matrix). and format
(report).
(a)(ii) 0 marks 0.5 marks 1 mark 2 marks
Commercial
acumen Does not Some awareness A reasonable Excellent
demonstrate any demonstrated, attempt, covering commercial
awareness of but fails to make most of the key acumen with
how the library the key point that points. strong awareness
users and
residents’
these

1
stakeholders may
of how the library
users and
73
association might form a coalition. residents’
increase their association might
influence. increase their joint
influence.
36

(b) Evaluation 0 marks 1 mark 2 marks 3 marks

No assessment Limited A reasonable Excellent

of the application of attempt to apply professional
contribution of knowledge of the knowledge to the evaluation with a
49

the new Science public interest to case. clear assessment

First the of the contribution
development to circumstances of of the new
the public the case. Science First
interest. development to
the public interest.
(c) Scepticism 0 marks 0.5 marks 1 mark 2 marks

Does not make Some general A reasonable Excellent

any challenge to discussion of the attempt to professional
Kathy Wong’s role of challenge to scepticism in
assessment. accountants in Kathy Wong’s critically
society, but little assessment. challenging Kathy
specific critique Wong’s
of Kathy Wong. assessment.

7 © ACCA. All rights reserved.

ICMAP PATHWAY EXAM ACCA SPECIMEN EXAM

ANSWER 2 CONNECT

Reasons for the importance of related party disclosures

Related party relationships are a normal feature of commerce and business. Entities
frequently carry on separate parts of their activities through subsidiary or associated entities
and acquire interests in other entities – for investment purposes or for trading reasons – that
are of sufficient proportions that the investing company can control or exercise significant
influence on the financial and operating decisions of its investee.

A related party relationship could have an effect on the financial position and operating results
of the reporting entity:

• related parties may enter into transactions that unrelated parties would not enter into;

• transactions between related parties may be on different terms (e.g. prices) from
transactions with unrelated parties.

1
73
Note that the operating results and financial position of an entity may be affected by a related
party relationship even if related party transactions do not occur. The mere existence of the
relationship may be sufficient to affect the transactions of the reporting entity with other parties.
36

For example:

• A subsidiary may terminate relations with a trading partner on acquisition by the parent
49

of a fellow subsidiary engaged in the same trade as the former partner.

• Alternatively, one party may refrain from acting because of the significant influence of
another (e.g. a subsidiary may be instructed by its parent not to engage in research and
development).

Sometimes, transactions would not have taken place if the relationship had not existed. For
example, a company that sold a large proportion of its production to its parent company at
cost might not have found an alternative customer if the parent company had not purchased
the goods.

IAS 24 requires that entities disclose information about related parties and related party
transactions so that users of the financial statements can better understand its position and
performance. Information about related parties can be an important element of any investment
decision and regulatory authorities consider disclosure of such information to be of paramount
importance.
8 © ACCA. All rights reserved.
ICMAP PATHWAY EXAM ACCA SPECIMEN EXAM

The main issues in determining such disclosures are:

• the identification of related parties,

• the types of transactions and arrangements, and

• the information to be disclosed.

The following specific comments relate to the list of transactions with Connect.

Specific guidance – Overview of IAS 24 requirements

IAS 24 requires disclosure of any related party relationship where control exists irrespective
of whether there have been transactions with the related parties.

If there have been transactions between related parties, the reporting entity should disclose
the nature of the related party relationships as well as the types of transactions and the

1
elements of the transactions necessary for an understanding of the financial statements.
73
The elements of transactions necessary to understand the financial statements would
normally include:
36

• any key management personnel compensation for employment;

• amount of transactions undertaken;

49

• amount of outstanding balances, including terms and conditions, nature of consideration

and any guarantees of collateral;

• allowances for receivables in respect of outstanding balances; and

• expense in the period for bad debts.

Identification of related parties

Parties are considered to be related if one party has the ability to control the other party or
exercise significant influence over the other party in making financial and operating decisions.
IAS 24 applies to specific related parties. Based on the information provided Connect’s related
parties in the context of IAS 24 are as follows:

9 © ACCA. All rights reserved.

ICMAP PATHWAY EXAM ACCA SPECIMEN EXAM

• Mr Big. Mr Big has effective control over Connect. He holds 10% directly and controls
45% through his majority holding in BBIF. Furthermore BBIF is controlled by Mr Big,
who also has control over Connect.

• BBIF. A 45% holding gives BBIF significant influence over the group.

• All 14 of Connect’s subsidiaries. Any entity that is controlled by or controls Connect

is its related party.

• Mr Joint and all of the other directors. IAS 24 specifically includes key management
personnel as related parties and goes onto say that these are those persons having
authority and responsibility for planning, directing and controlling the activities of the
reporting entity, including directors and officers of companies and close members of the
families of such individuals.

• Mrs Joint. See above. Mrs Joint is the wife of the finance director.

1
73
• JJ Advertising. Mrs Joint is a related party of Connect and she controls JJ Advertising.

• Weld. This company is owned by the Mr Big who has effective control over Connect.
36

Transactions and disclosures

Mr Big and BBIF

49

IAS 24 requires an entity to disclose its ultimate controlling party. Connect should disclose
the fact of Mr Big’s control over the organisation. This disclosure must be made regardless of
whether there have been any transactions involving Mr Big.

Group transactions

The subsidiaries of Connect are all related parties of Connect and also to each other. IAS 24
does not require disclosure of related party transactions in consolidated financial statements
in respect of group transactions, but they are required in the separate financial statements of
the parent.

Note however that Connect will be subject to the requirements of IFRS 8 Operating Segments.
This requires analysis of revenue of the organisation from sales to external customers and to
internal customers (i.e. other members of the group). IFRS 8 also requires a reconciliation of

10 © ACCA. All rights reserved.

ICMAP PATHWAY EXAM ACCA SPECIMEN EXAM

these figures to the consolidated revenue figure. Intra-group items will therefore appear as a
reconciling item in the IFRS 8 disclosures.

Advertising contract

Mrs Joint is a related party as is her advertising agency. Connect should disclose the nature
of the related party relationship, and information necessary for users to understand the
potential effect of the relationship on the financial statements. At a minimum it should disclose
the amount of the transaction, details of any outstanding balances, any provision made for
doubtful debts and any expense recognised in respect of bad or doubtful debts.

Tutorial note: The fact that the contract was awarded through competitive tender is not
grounds for non-disclosure (as JJ Advertising might not have been invited to tender had it not
been for the relationship).

Sale of land to Weld

1
Connect must disclose the nature of the related party relationship (i.e. ownership by Mr Big
73
and his effective control of Connect), the type of the transaction (i.e. a sale of property) and
details of the transaction and outstanding amounts, as before.
36

The land sold to Weld is a related party transaction which appears to have been undertaken
at $0.7 million (4.5m + 0.1m – 5.3m) below market price. The disclosure of the facts of the
transaction alone would not reflect the reality of Connect’s position. IAS 24 also requires
49

disclosure of any elements of the transaction that are necessary for an understanding of it.

Consultancy services

The directors are all a related parties and there have been transactions with three of them who
are operating in the capacity of consultants for the company. As before Connect should disclose
the nature of the related party relationship, the type of the transaction and elements of the
transaction. In general, IFRSs require disclosure of any element of a transaction necessary for
an understanding of the financial statements to be disclosed.

Connect should probably disclose:

• the existence of the consultancy arrangements;

• the nature of the consultancy service provided;
• names of the directors involved;
• the fees paid (i.e. $2.6 million).

11 © ACCA. All rights reserved.

ICMAP PATHWAY EXAM ACCA SPECIMEN EXAM

Marking Scheme
Marks Marks
6 marks for importance of disclosing related parties and transactions 6
7 marks for disclosure required for related parties and transactions 7
–––
Total 13
Professional skills marks for analysis up to a maximum of 4

–––
Total 17
–––

Professional Not at all Not so well Quite well Very well

skills:
Analysis 0 marks 1 mark 2-3 marks 4 marks

No attempt has Some limited A reasonable Excellent

been made to identification of attempt to professional
identify related related parties identify related analysis skills with
parties and and transactions parties, a thorough
transactions. but not the
disclosures
1 transactions and
disclosures.
analysis of the
related parties
73
required. and transactions,
and the
disclosures
required for these.
36
49

12 © ACCA. All rights reserved.

ICMAP PATHWAY EXAM ACCA SPECIMEN EXAM

ANSWER 3 FLACK SUPERMARKETS

Report

To: Board of Flack

From: A Accountant
Date: June 20X4
Subject: Performance reporting and management issues at Flack

Introduction

This report evaluates the current performance report for Flack and explains how the proposed
new information system and big data can help to improve business performance at Flack.

(a) Performance reporting at Flack

The current report has a number of strengths and weaknesses. These will be
discussed according to whether the report:

1
73
• addresses the mission;
• contains appropriate information for decision making;
36

• shows signs of being short term; and

• is well presented.
The current mission can be broken down into two parts:
49

• to be the first choice for customers; and

• to provide the right balance of quality, service and price.
There are three strategies for achieving this mission, reflecting stakeholder concerns:

1. Earning customer loyalty;

2. Utilising all resources; and
3. Serving shareholders’ interests.
The report does not address the first part of the mission. This can only be measured
using external data but the report is utilising only Flack’s internal data. This part of
the mission relates to the first strategy to gain customer loyalty. Customer loyalty
could be gauged through repeat purchases or market share information but neither
is supplied. This is clearly important to a retailer and may be more easily gathered
once the data from the new information system is available for inclusion in this report.

13 © ACCA. All rights reserved.

ICMAP PATHWAY EXAM ACCA SPECIMEN EXAM

The report provides no measures of the balance of quality, service and price other
than through the historic growth in revenue. It would only be through comparison
with competitors or customer survey data that a picture of the mix of these qualities
could be gained.

The second strategy of utilising resources requires that the key resources be
identified. Clearly, the stores themselves (and the capital invested in them) are an
important resource and the introduction of the revenue and profit per square metre
(m2) and comparison with competitors will indicate the efficiency of their use.
However, there are likely to be other important resources such as staff and no
measure of their performance is offered. Staff costs are not shown in the trading
account although a more sophisticated measure such as revenue per employee is a
commonly used metric and would address this.

The report is much better on the third strategy of serving shareholder interests as it

employed.
1
supplies two helpful measures: total shareholder return and return on capital
However, most shareholders will want comparison with benchmark
73
returns within the retail sector and the market more widely, since these represent
their alternatives.
36

The criticism of the company’s management as being short term is reflected in the
performance reporting. The report only contains comparative budget information and
the previous year’s figures. There are no longer-term forecasts or information on
49

future capital investment. Also, there are few indicators which would be described
as determinants of performance. These are often non-financial and focused on the
external business environment (behaviour of customers and competitors).

As already noted, there is a significant gap in the information in the report as it

contains no external information. Also, although revenue is broken down into broad
product categories, no further information about growth within these categories or the
margins being earned is supplied. As a result, it could be questioned whether this
breakdown is worthwhile.

In terms of presentation, the data is clear and in a form which would be easily
recognisable to those used to reading accounts. However, no narrative commentary
is provided which would highlight the key features in the report such as major
deviations from the budget or performance well outside industry norms. There should
be a comment on each of the five areas within the mission and strategies as well as

14 © ACCA. All rights reserved.

ICMAP PATHWAY EXAM ACCA SPECIMEN EXAM

comments about specific, material issues arising in the period covered. The report
could be made easier to read by reducing the volume of numbers present both by
cutting out unnecessary measures (see earlier discussion of product categories) and
also by rounding all figures to millions.

(b) Improving performance using data and information

In the case of Flack, the proposed new information system will provide a valuable
source of transactional data as described below. This could potentially be
supplemented by external sources of big data.

Big data

“Big data” refers to the extremely large data sets, and the trends and other
relationships that can be gained by analysing them. It has the following
characteristics:

•
1
Volume – refers to the large volume of transactions and other data that can be
73
analysed.

• Variety – data can take many forms, including transactional and non-
36

transactional, structures and unstructured, making analysis more challenging.

• Velocity – new data arrives continuously and must be analysed quickly in order
49

to gain insights ahead of competitors.

Proposed information system

The proposed new information system will collect data from customers’ purchases
and store it for data mining purposes in a data warehouse. The capital required will
be significant at $100m. There will also be considerable annual running costs.
However, the benefits could be significant although quantifying them will be difficult
as they depend on influencing customer behaviour.

The new system will help to address the mission of Flack as it will help the board to
understand customers better and so improve their loyalty to the business. By
focusing offers on those things which customers enjoy Flack can enhance the brand
and also take the opportunity to sell greater volumes alongside the offered products.

15 © ACCA. All rights reserved.

ICMAP PATHWAY EXAM ACCA SPECIMEN EXAM

The data warehouse will allow data mining for relationships, for example,
geographical preferences for products; links between price offers and volumes sold;
products which are often bought together; seasonality of product purchases. These
relationships can then be used to address the CEO’s three target areas of
advertising, product range choices and price offers.

Potentially, there will be cost savings by more efficient advertising. The data on each
individual customer can be searched to profile customers and identify their individual
preferences. Marketing can then be targeted to groups of customers using products
which they commonly buy. Data mining will also identify associated products (those
often bought together) so that offers can be grouped, for example, with a price
reduction on buying a linked pair of products.

Analysis of big data may also identify market segments that Flack was not aware of,
based on buying behaviour. This marketing behaviour may be used to identify

1
opportunities for focused marketing and advertising.
73
Other unstructured data technology

Other types of big data that could be used and analysed include social media.
Technology can be used that searches social media to identify what customers are
36

discussing. Flack could monitor responses to its own social media messages, as
well as finding out what customers are saying about the company. If press comments
about the poor condition of Flack’s stores are correct, it might be useful to obtain
49

more details about what customers think, for example. Discussions might also
identify potential increases in demand for particular food types; if, for example,
customers are discussing particular food programmes that they have watched on TV,
there may be an increase in demand for the ingredients needed.

16 © ACCA. All rights reserved.

ICMAP PATHWAY EXAM ACCA SPECIMEN EXAM

Marking Scheme
Marks Marks
(a) 2 marks per reasoned evaluative argument around whether the report
appropriately reflects the mission, to a maximum of 14
–––
Total 14

(b) 4 marks for explanation of big data 4

2 marks for each relevant point of critical evaluation to a maximum of 12
–––
Total 16

Professional skills marks for evaluation up to a maximum of 8

–––
Total 38
–––

Professional Not at all Not so well Quite well Very well

skills:
Evaluation 0-2 marks 2-4 marks 4-6 marks 6-8 marks

No assessment
of the
Limited

1
application of
A reasonable
attempt to apply
Excellent
professional
73
contribution of knowledge of the knowledge to the evaluation with a
the existing to the case. clear assessment
report or circumstances of of existing report
proposed new the case. and proposed new
36

system. system in light of

big data.
49

17 © ACCA. All rights reserved.