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Summary CIMA E1 Notes
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Chartered Institute of Management Accountants Operational Level E1E1 Managing Finance in a Digital World
Structure
A. Role of the finance function (20%)
1. The roles of the finance function in organisations
2. The activities performed by finance professionals to fulfil the role
D. Shape and structure of the finance function (20%)
3. The structure and shape of the finance function
4. What each level of the finance function does
B. Technology in a digital world (20%)
5. Technology affecting business and finance
6. How the finance function uses digital technologies
C. Data and information in a digital world (20%)
7. Data and the finance function
8. Data to create and preserve value for organisations
E. Finance interacting with the organisation (20%)
9. How the finance function interacts with operations
10. How the finance function interacts with sales & marketing
11. How the finance function interacts with human resources
12. How the finance function interacts with IT
The Operational Level
• P1: ‘what’ the finance function does
• F1: ‘what’ the finance function does, and its implications
• E1: ‘how’ the finance function is organised
• Emphasis on remembering and understanding, but some insight on specific problems is required;
using data and technology to translate medium-term decision into short-term actionable plans
Jack Gould 1 of 52
,Chartered Institute of Management Accountants Operational Level E1
E1A1: The roles of the finance function in organisations
Change: the new norm
• The age of technological advancements and innovation are transforming the way we work and
live. This 4th industrial revolution (The Economic Forum) is having a huge impact on the finance
function and on the skillset of the management accountant
• Rapid and unpredictable evolution causing huge disruption: seismic shifts in level of competition,
customer expectations and the global political outlook, combined with rapid technological change
has led to a new norm of change:
• Change presents both risks and opportunities: firms must plan for new ways of doing business
• Change impacts the organisation and has meant the role of the finance function has evolved
INTRODUCTION TO THE FINANCE FUNCTION
Different types of organisation
• Profit-seeking organisations: regard their main objective as maximising the wealth of owners/
shareholders, ie:
• Sole traders (sole proprietors)
• Partnerships
• Limited liability companies: private limited companies (Ltd) or public limited companies (plc)
• Not-for-profit organisations (NFPOs): do not regard profitability as their main objective; instead
seek to maximise the benefit for the sector of society they are set up to assist (to beneficiaries), ie:
• Public sector organisations: concerned with provision of basic services, thus controlled by
government organisations; such as hospitals, schools, police, military, public transport, etc.
• Private sector organisations:
• Third sector organisations: aim to make a societal difference; such as charities, community
groups, clubs and social enterprises
• Non-governmental organisations (NGOs): local, national or international voluntary groups
aiming to address issues or promote change for public benefit; such as charities
The functions of an organisation
• Businesses use three basic resources - material, labour and money - to produce goods and
services which generate profit. Resultantly, the main functions of an organisation are:
• Operations; Sales & marketing; Human resources (HR); IT; and… Finance
• The finance function’s role in managing financial resources of an organisations and providing
information to assist decision making are integral to its effectiveness
The roles of the finance function in organisations
• The finance function ENABLES an organisation to create and preserve value through…
• Planning: formulating strategies to assist the organisation in achieving objectives, ie budgeting
• Forecasting: such as of future sales or material prices
• Resource allocation: confirming which resource the organisation requires to achieve objectives
• The finance function SHAPES HOW an organisation creates and preserves value through…
• Performance management: in order to achieve the organisation’s plans and budgets. For
example helping to prepare information for internal management such as quantitative or
qualitative performance measures to assist in monitoring the organisation’s performance
• Control: actual performance compared to planned performance in order to identify variances,
which may result in reassessment or amendment of the original plans, strategies or budgets
• The finance functions NARRATES HOW an organisation creates and preserves through…
• Financial reporting: preparing comprehensive reports intended to give information regarding
the organisation’s activities and performance to shareholders or other interested parties
THE ROLES OF ETHICS IN ROLE OF THE FINANCE FUNCTION
The ethical responsibilities of the organisation and individuals
• Ethics are a fundamental underpinning factor in an organisation’s sustained value creation; the
professional accountant has a special role in performing ethical behaviour throughout the firm
• Ethics: system of moral principles that govern a person’s behaviour; concept of right and wrong
• Business ethics: application of ethical values in a business setting
• Ethical dilemma: where a decision-maker has unclear choices about what is ‘right’ and wrong’
• Accounting issues: creatives accounting, director’s pay arrangement, bribes, insider trading
• Production issues: production of certain products, environmental damage, animal testing
• Sales & marketing issues: price fixing and anti-competitive behaviour, junk mail or spam email
• Personnel (HRM) issues: employee favouritism or discrimination, unsafe or unhealthy workplace
Jack Gould 2 of 52
,Chartered Institute of Management Accountants Operational Level E1
CIMA’s ethical guidelines
• The International Federation of Accountants (IFAC) published the Code of Ethics for Professional
Accountants (prepared by IESBA), to develop and issue global high-quality ethical standards for
professional accountants. The IFAC Code is mandatory for all member firms or bodies of IFAC.
• CIMA’s Code of Ethics is therefore heavily based on the IFAC Code, reflecting IFAC’s
fundamental principles and conceptual framework
• The CIMA Code of Ethics: applies to all CIMA members/students and reflects its status as a
Chartered Institute. CIMA is committed to upholding the highest ethical and professional
standards, to ensure the public confidence in CIMA, management accounting, its members/
students, as accountants have a duty to observe the highest standards of conduct and integrity.
• The Code of Ethics aims to:
• Identify the nature of personal responsibility the management accountant takes on
• Provide guidance on identifying areas where potential ethics pressures may arise
• Provide guidance on action to resolve ethical issues; and raise concern of unethical behaviour
CIMA Code of Ethics: five fundamental principles
• The CIMA Code of Ethics outlines five fundamental principles all members and students must
comply with, which are the foundations of reasoning and professional practice to guide their work:
• Integrity: be straightforward, honest and truthful in all professional and business relationships
• Objectivity: not allow bias, conflict of interest or undue influence of others to override business
or professional judgement; make decisions on their own merit
• Professional competence and due care: professional competence must first be attained, and
then there is an ongoing commitment for an appropriate level of professional knowledge and
skill to be maintained; a commitment to continuing professional development (CPD)
• Confidentiality: to respect the confidentiality of information acquired as a result of professional/
business relationships or provision of services, thus resulting in two key considerations:
• Not to disclose confidential information to a third party without specific authority or permission
to do so; or unless there is a legal or professional duty to do so. Reasons for disclose may be:
• Permitted by law and authorised by the client
• Required by law or requested by a regulator
• Professional duty or right to dislocate
• Professional behaviour: compliance with all relevant laws and regulations; also avoiding action
that could negatively affect the reputation of or discredit the profession
Why business ethics are important
• Society expects individuals to behave properly and for businesses to operate certain standards:
• Pay staff decent wages and pensions • Source supplies carefully
• Provide good working conditions • Use sustainable or renewables resources
• Pay suppliers according to agreements • Be open and honest with consumers
• Aside from a moral duty to be ethical, ethical behaviour increases a company’s likelihood to
maximise shareholder wealth, because:
• Ethical behaviour is likely to be favoured by customers, employees, and business collaborators
• Ethical behaviour reduces risk and provides access to cheaper funds which increase profitability
• Unethical behaviour is inevitably discovered, causing reputation damage and even legal issues
• Fair-trade: guarantees disadvantages producers in the developing world are paid a fair price that
covers sustainable production and a premium that is invested in local develop projects. Hence,
consumers in the developed world may be willing to pay extra for more ethical Fair-trade products
Corporate codes of ethics
• Most companies create a written code of ethics (set of internal policies), which may be broad
generalisations (a corporate ethics statement) or contain specific rules (a corporate ethics code)
• Ethics Officers appointed to monitor the application of the policies and to discuss ethical dilemmas
Stakeholders
• Stakeholder: a group/individual with an interest in, or expectation of, what an organisation does
• Internal stakeholders: intimately connected to the organisation; their objectives are likely to have
strong influence on how it is run
• Employees: seek pay, working conditions, job security
• Managers/Directors: seek pay, bonus, status, job security
• Connected stakeholders: invest in or have dealings with the organisation
• Shareholders: seek dividends, capital growth, confutation of the business
Jack Gould 3 of 52
,Chartered Institute of Management Accountants Operational Level E1
• Customers: seek value-for-money goods and services
• Suppliers: want to be paid promptly
• Finance providers: want repayment of finance
• External stakeholders: do not typically have a direct link to the organisation but can influence or
be influenced by its activities
• Community: seek no negative impact on their lives due to the company and its decisions
• Environmental pressure groups: seek no negative on the environment due to the company
• Government: seek provision of taxes and jobs, and compliance with legislation
• Trade unions: expectation to take an active part in decision-making process
• Stakeholder needs: organisations should understand who the most important stakeholders are
and determine their needs; commonly the most dominant stakeholder
• Mendelow’s power-interest matrix: use when difficult to decide on the dominant stakeholder
• Stakeholder conflict: expectations of different stakeholders may conflict, with solutions requiring
compromise and prioritisation to meet the needs of dominant stakeholders yet considering others:
• Employees vs managers/directors: jobs/wages vs bonus
• Customers vs shareholders: product quality vs profits/dividends
• Community vs shareholders: environmental impact vs profits/dividends
• Managers vs shareholders: revenue growth vs profit growth
• To resolve stakeholder conflict, firms will assess the degree of a stakeholder’s interest, and their
respective influence on the business. While one stakeholder’s objectives might take preference,
(ie maximising shareholder value for a company) this does not mean others are ignored.
Corporate social responsibility (CSR)
• CSR is the idea that organisations should be sensitive to the needs of all stakeholders, not just
shareholders; companies are under pressure to have a positive and contributory role in solving
social/environment issues, support stakeholders and the community through policy and practices
• Traditionalists: argue that companies should operate solely to generate shareholder profit and
that it is not within a company’s remit to concern itself with social responsibilities.
• Milton Friedman: “the business of business is business”
• Modern view: aligning the company’s core values with those of society can improve reputation
and ensure long-term future profit:
• Attracting customers by differentiation and brand strengthening: CSR may act as a basis for
market differentiation by enhancing reputation and brand warmth, thus attracting customers
• Customers typically prefer to trade with ethical firms, thus corporations perceived as ethical
are rewarded with extra customers whereas those perceived as unethical are boycotted
• High calibre staff and wider human resource base: with staff more committed to, and attracted
to work for, ethical firms, CSR policies can both retain and attract employees
• Lower costs: such as through use of less packaging or avoiding pollution tax charges
• Identification of new market opportunities and of changing social expectations
CORPORATE GOVERNANCE
• Meaning: corporate governance is the set of processes and policies by which a firm is directed,
administered and controlled, including the roles of the board of directors and company auditors
• Financial Reporting Council (FRC): “the purpose of corporate governance to facilitate effective,
entrepreneurial and prudent management that can deliver long-term success of the company”
• Aim: Corporate governance aims to ensure companies are run in the interests of shareholders
and the wider community; so objectives are achieved in an acceptable manner by all stakeholders
• Why: Corporate governance regulations developed largely in response to a series of major
accounting scandals and corporate failures:
• 1991 UK: Polly Peck International collapse due to theft (1991), The Mirror Group collapse due to
pension fraud (1991), BCCI collapse due to fraud (1991)
Jack Gould 4 of 52
,Chartered Institute of Management Accountants Operational Level E1
• 2001/02 USA: Enron (and Arthur Andersen) collapse, WorldCom bankruptcy protection
• 2008/09 crisis: Lehman Brothers, Northern Rock, Bradford & Bingley (and others) collapses
• Symptoms of poor corporate governance:
• Domination of the board by a single individual/group
• No board involvement: ie meeting irregularly or failing to consider the firm’s activities and risks
• Inadequate control function: ie lack of adequate technical knowledge, high accountant turnover
• Lack independent scrutiny by external or internal auditors
• Lack of employee supervision
• Lack of contact with shareholders
• Emphasis on short-term profitability, leading to concealment of issues
• Misleading financial statements and information, or manipulation of them
• Separation of ownership and control: where those who own the company (shareholders) are
not the same people as those who run its day-to-day business (board of directors/managers)
• Principal-agent problem: separation of ownership and control can lead to a conflict of interest,
as the principals (shareholders) must ensure appointed agents (board of directors/managers)
act in their interests; as there is a risk they instead act in their own interests. Areas of conflict:
• The need for corporate governance therefore arises because of the separation of ownership and
control; management need encouragement to act in the best interests of all stakeholders
• Approaches:
• Rules-based approach (ie US enshrined Sarbanes-Oxley (SOX) Act 2002): instils the code into
law with appropriate penalties for infringement
• Principles-based approach (ie UK Corporate Governance Code): requires the company to
adhere to the spirit of the code rather than the letter of the law; it must comply or explain why it
has not, through its reports to appropriate bodies and shareholders.
Features of the UK Corporate Governance Code
• FRC is responsible for promoting high standards of corporate governance in the UK; all publicly
traded companies quoted on the London Stock Exchange must apply principles of the Code
• Comply and explain: UK firms must comply with Financial Conduct Authority (FCA) Stock
Exchange Listing Rules, which statutorily require public companies to produce a disclosure
statement confirming how they complied with Code recommendations, or explain why not
• Smaller listed firms (not FTSE 350) can take a more flexible approach in applying the Code
• Positive relationships: UK Corporate governance code emphasis the importance of strong
relationships between the company, its shareholders and its stakeholders
• Annual general meeting (AGM): board should use AGM to construct dialogue with shareholders
• Board of directors: a company should have an effective board - with a balance of skill,
experience, independence and knowledge - that meets regularly. The annual report should identify
the Chairman, Deputy Chairman, CEO, senior independent directors, chairs and members of the
board committees, as well as disclose number of meetings held and directors’ attendance.
• Chairman and Chief Executive Officer (CEO):
• Chairman: leads the board and is responsible for its effectiveness; independent on appointment
• CEO: ensures effective company operation, separate to Chairman to ensure no single individual
wields too much power
• Executive directors: responsible for day-to-day management decisions and running of the firm
• Non-executive directors (NEDs): employed as independent overseers that monitor executive
directors, scrutinise management decisions, and contribute to overall strategy. Recommendations:
• Must not have been company employee in previous 5 years
• Must not have material business interest in the company for previous 3 years
• Must not participate in company’s share options, performance related pay or pension schemes
• Must not have close family ties with directors or senior management
• Must not serve as a NED for more than 9 years with the same company
• Must not hold cross directorship or have significant links with other directors via other firms
• Large listed firm: at least 50% of board as NEDs; whereas smaller listed firm: at least 2 NEDs
• 1 NED should be appointed a senior independent director who other shareholders can contact
• Nomination committees:
• Predominantly NEDs (at least 50%): none of which sit on other FTSE 100 boards
• Responsible for: effective succession planning and for reviewing structure, size, diversity and
balanced composition of the board; ensures appointments to the board are based on merit
• Remuneration committees:
• 100% NEDs: at least 3 for FTSE 350 companies and at least 2 for smaller listed firms, the chair
must be a committee member for at least 12 months, no director sets their own renumeration
Jack Gould 5 of 52
,Chartered Institute of Management Accountants Operational Level E1
• Responsible for: setting pay and incentives for chairman and all executive directors (including
pension/compensation), clearly report on remuneration and how it helps the firm to achieve aims
• Renumeration should be sufficient to attract, retain and motivate directors to achieve interests of
shareholders; but shouldn’t be more than necessary and a significant proportion should be
performance related, ensuring rewards for individual contributions and overall business success
• Advantages: avoids agency problem; leaves board free to make strategic decisions
• Disadvantages: risk that NEDs recommend high remuneration in hope of reciprocation; cost
involved in preparing and holding meetings
• Audit committees:
• 100% NEDs: at least 3 for FTSE 350 companies and at least 2 for smaller listed firms
• Responsible for:
• Internal controls: monitoring and reviewing the company’s internal financial controls and risk
management, integrity of financial statements, effectiveness and work agenda of internal audit
• External audit: liaising with external audit, monitoring external auditor’s independence and
objectivity, recommending appointment/removal of auditors
Jack Gould 6 of 52
, Chartered Institute of Management Accountants Operational Level E1
E1A2: The activities performed by finance professionals to fulfil the role
INFORMATION TO IMPACT FRAMEWORK
• The basic activities that finance professionals perform can be summarised using the 5 A’s of the
‘information to impact framework’
Finance activity Assembling Analysing for Advising to influence Applying for impact Acumen
the 5 A’s
information insights
Explanation Collates data to Provides insight to Communicates Supports the Connects the
prepare information users by analysing insight to influence implementation of different activities
about the information users decisions to achieve to each other
organisation the desired impact
What finance Finance Finance Finance Finance professionals Finance professionals
professionals do
professionals collect professionals professionals apply the information prepare valuable
data from various analyse a range both communicate to create value for the information - such as
internal and external financial and non- insights and organisation through reports and analysis -
sources, but in order financial information contribute an their impact on (for on the outcomes
to be useful to the to draw out patterns, objective perspective example) strategic achieved from
organisation, data trends and relevant to influence the plans, budgeting, different initiatives to
must be turned into insights for users of organisation’s performance help inform future
meaningful the information planning, decision measures and proposals and
information. making and control reviews, etc. decisions
Broad role Reporting Questioning Developing solutions Deploying solutions
Shift in emphasis Accounting and governance: Guidance and management:
from left to right
Such as financial reporting, management Such as helping the organisation to forecast
accounting, regulatory compliance, risk and analyse trends to reach profitable growth
management goals
Data
• Data: numbers/facts/figures/symbols in a raw and unprocessed form
• Internal sources: • External sources:
• Accounting records: including sales or • Suppliers
purchase ledger data, and fixed asset data • Customers
• Payroll data • Newspapers, journals, the internet
• Production data • Banks
• Sales and marketing data • The government
• Externally generated data may however be limited in its usefulness as it might: be inaccurate; be
out of date; not be from a reputable source; not meet exact business needs; be difficult to obtain
Information
• Information: the result of processing of data in such a way that is meaningful to the user, such as
cleaning the data or connecting different sources of data. This information must be good quality…
• The ‘ACCURATE’ acronym illustrates the attributes of good information
• Accurate: degree of accuracy depends on the information purpose; it should be sufficiently
accurate given time/cost constraints, with managers should be aware of the degree of accuracy
• Complete: decision-making managers should have all necessary information, but not excessive
information; should be communicated to the correct person; and be aligned to overall objectives
• Cost effective: the cost of providing information should not exceed its value or benefit
• Understandable: recipients of information must understand its contents and be able to use the
contents to fulfil their needs; such as by limited - or explained - use of technical language/jargon
• Relevant: information should be relevant to its purpose; avoid overload, as redundant
information can detract from usefulness
Jack Gould 7 of 52
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