Day 203 Internal management

Internal management

Accounting is a subject dealing directly with money, therefore there is high possibility for participants use their position and opportunity to commit a fraud. In order to prevent that as well as the employee’s theft, most companies implemented the internal control system, as to safeguard its asset and enhance the quality of its financial reports. 

There are six major principles of establishing internal control in the company. Firstly, is the determination of responsibility. In this section, each employee should be assigned with a specific responsibility, hence if something goes wrong the person obligated to it would be clear. Other allocations of responsibility includes the authorization and approval of transactions. For instance, the manager should be given the authority to record sales return, so it would prohibit employees to unfaithfully use this opportunity to gain personal benefit. In addition, the segregation of duty is also a important factor. It is also named as the separation/division of work, since the principle is generally carried out with following two procedures: related activities should be assigned to different people, and the recording of assets should not be assigned to the same individual who is responsible to safeguard it. Furthermore, the company should introduce a systematic documentation procedure, which provides evidence of transactions and events. Techniques such as pre-numbering the documents, immediate transfer the source document to accounting department, and using different color for copied files will contribute on reducing the chance of error or irregularities by employees. Moreover, the physical, mechanical and electronic controls seem to be one of the best options for company to safeguard their asset and controlling employees’ misbehavior. In fact, the employee monitoring system is a good example for these controls. Besides that, the independent internal verification on periodically or surprise basis can efficiently improve the internal control inside a company. This person who is taking the evaluation should be separated from the duty being inspected. Any exceptions found under scrutiny should be reported to the manager, so correction procedure can be performed. 

At last, there are still plenty other control methods such as: job rotation, proper training about the internal control or adequate wages corresponding to duties. We should comprehend it not only because it is a crucial part as management accounting, but also it is examinable material!!!   

Day 202 Managing environment

Managing environment

Similar to individuals, the organization’s performance is heavily affected by the environment. Generally, it is referred as the forces and conditions that operate beyond boundaries. Therefore, the manager should not only consider the internal factors within an organization, but also the task and general environments. Due to the rapid competition and technology innovation in the modern market, it has become crucial for managers to be able to perceive, interpret, and respond to different situations. 

As mentioned above, there is both internal and external environment for the organization’s operation. The external environment can be divided into two segments: the task and general environments. Firstly, the task environment comprises the forces that originate with suppliers, distributors, customers and competitors. So basically these participants will affect the organization’s ability to obtain inputs and distribute outputs. The management strategy will focus on each element, in order to establish the advantage in rivalry. On the other hand, the general environment is probably what ordinary people recognize as environment. It is a broader definition, which determines the drivers of the organization and its task environment. For instance, economic, technological, sociocultural, demographic, political, legal and global forces have a dramatic impact over the institution’s performance. These factors require close attention since they are beyond manager’s control, they 

Besides all the external conditions, the internal environment is also called the organizational culture. It is the set of values, norm, standards for behavior and shared expectations that influence the ways employees interact with each other and cooperate to achieve organizational goals. With a strong organization culture, members share an intense commitment to cultural values, beliefs and routines. This culture will improve the efficiency and effectiveness of work, so researchers were conducted to establish the attraction-selection-attrition(ASA) framework, which is the model to interpret the fundamental factors of cultural creation. To illustrate, these factors are: the value of the founder, organizational socialization, ceremonies and rites, stories and language. 

In conclusion, these forces and conditions will immensely influence the acquirement and utilization of organization resources. Consequently, the manager must understand the environment for making appropriate decisions.   

Day 201 The AGLC referencing style

The AGLC referencing style

As a university student, it is important for us to understand different styles of referencing. Since the university requests us to disclose full details of materials used in our assignment, which is the basic requirement of plagiarism. In addition, we have to list the source of information . Therefore, readers may check the facts’ validity. The department of laws and legislation asked us to use the Australian Guide to Legal Citation (AGLC) referencing method. 

The most common instrument that utilized by us when using AGLC is the footnotes. We must acknowledge relative information that we quoted, paraphrased or applied other people’s idea. The information includes the author of the material, the title, journal name, page numbers and publication information. It is the compulsory requirement for us to properly cite the resources. 

There are two major sources of facts, and each of them corresponds to different citation format. The first source is the primary source, which is considered reliable and people often prefer to use it. It comprises cases, statutes, treaties and books. For example, the case will be quoted respectively to the source of information, which can be reported legal journals or court judgment not being reported. The formation for reported case should be: Party names (Italian form) [Year] Volume number if applicable Law report abbreviation First page, Cited page and/or [paragraph number], which in actual application should be Victorian Lawyers RPA Ltd v X [2001] 3 VR 601. On the other hand, the unreported judgment will switch the law report abbreviation to the specific court abbreviation. 

The other one is the secondary source, where books, the Internet and journal articles are the most common examples. When we have to cite paragraphs from a book, the authors name must be listed and the book’s information has to be revealed. Which brings out the following format: Chisolm, Richard and Nettheim, Garth, Understanding Law: An Introduction to Australia's Legal System (LexisNexis Butterworths, 7th ed, 2007). 

We must fully comprehend this style in order to meet the academic requirement.

Day 200

Measure the volatility

The risk and returns are probably the most common concepts acknowledged by financial decision makers. These two factors are contrary evaluations but work mutually on the assessment of financial assets. As a matter of fact, the trade-off between risk and return would normally reflect a positive pattern. Where the riskier the investment is, the higher return can be expected by the investor to receive. Hence it is the fundamental knowledge for financial participants on balancing the risk and return over a financial asset.

So how do we define the term ‘ risk’ in finance? In my opinion, the risk is the uncertain difference between the expected outcome and the actual result. It should be the deviation that diversifies the output. The risk itself must be uncertain, has a considerable impact over the outcome and may generate either positive or negative effect. Therefore, it is crucial for financial decision-makers to understand the actual influences of the risk. People may react differently corresponding to the severity of the risk. Generally, all of us are risk averse, since no one would prefer to lose control on the outcome. However, the correlative better return induced many groups to be risk takers. For instance, the average real return for the 10-year bond during 1999 to 2009 was 4.43%. On the other hand, the mean return on share market investment provided by the All Ords index was 9.95%. Thus that risk premium at 5.67% was sufficient for many financial participants to take the risk. In fact, this risk premium is the compensation for investors to accept that level of volatility.

The tricky part is how do we ‘hedging’ it with the return in order to achieve the maximum efficiency on our fund's utilization? It involves the study of statistics. We should calculate the standard deviation on the return, and consequently, we will be able to identify the extent of the possible return. For example, there are 68% of probability that the actual return will occur between the sectors of expected return plus/minus the standard deviation value. The investors can easily observe the possible return distribution, thereby the measurement over risk and return will be amplified for following decisions.

Day 199 The controlled entity and subsidiary defined by law

The controlled entity and subsidiary defined by law

In legal practices, we may often see the term ‘controlled entity’ and ‘subsidiary’. Generally we consider the holding company has certain influence over its related body corporate. The only differences between these two definitions are the extend of scope. Where a company controls the subsidiary business, but being subsidiary does not necessarily means that the holding company has the control over it. 

The Corporations Act (2001) Section 50AA identifies the detailed definition of the controlled entity. It states that the first body controls the second one only if it has the capacity to determine the outcome of the decisions about the financial and operational policies of the second entity. To be concise, when the second entity’s financial and operational decision is practically influenced by the first entity, we could say it is under the control. In addition, this capacity is also represented by the pattern of behavior that may be reasonable considered as having the impact over the controlled entity. However, if more than one party jointly carries this capacity, then the second body is not controlled by the first entity. That distinguishes the controlled entity with subsidiary entity, since the subsidiary may have shareholders, which also have an immense impact over the company decisions. 

On the other hand, the section 46 Corporations Act (2001) explained the three validity tests of subsidiary company. Therefore, the entity must pass either following conditions in order to be classified as the subsidiary of the holding company. To illustrate, the specific body must control the composition of the first body’s board, obtain more than half of the voting rights or hold more than half of the issued shares. Actually, the second and third terms are the preconditions of the first one. That is because both of these two conditions will grant the entity with the power of majority of shareholders. As a corollary to the 51% of voting/ownership, the holding company is able to unanimously appoint/remove all or majorities of the board members. Hence it acquired the power of board composition. 

On legislation perspective, this related body corporate is closely linked on the entity’s goal. Thus it is automatically assumed to perform on the best interest of each other. Consequently, we need to comprehend the diversification between these two concepts and apply them corresponding to appropriate situations.  

Day 198 The formation and contract of a company

The formation and contract of a company

The company as the most preferred investment vehicle faces more formal regulations than other types of business. In Australia, the formation of a company is not very complicated. The Corporations Act (2001) s.117 outlines the lodgment of a company, which requires the filling in the application form 201 from ASIC and pays the relevant fees. Once the process is completed, the company will be granted an ACN and the certificate of registration by ASIC. Section 119 clarifies at this point, the company comes into existence as a separate legal entity (body corporate). Prior of the business registration, the company is not treated as an entity, therefore it does not have the ability to enter a contract. However, the formation progress of the company requires making various contracts with third parties. For instance, the contract of payments to office location or the purchase of furniture. To solve this problem, the company normally would authorize a promoter to be bind into pre-incorporation contracts on behalf of the company. The common law imposes fiduciary duties on the promoters in order them to act as the company’s interest. S.131 determines the certain obligations of promoters and pre-registration contracts. The company becomes bond by the contract once it is registered and ratifies the contract. If the company refuses to ratify the contract, then the liability lies on the promoters, exceptions applied. 

Speaking of entering a contract, the company may do so directly or indirectly. To bind the company directly with a contract, there must be at least two directors, a director and a secretary or the sole director involved. On the other hand, the board may also appoint an agent to act on behalf of the company. Which incur the issues of authority. In most cases, the argumentations between both parities are about does the agent has the authority to sign the contract? On the purpose of protecting the third parties, the common law allows them to make assumptions of implied actual authority apparent authority and indoor management rules. The company would be held liable if either the common law assumption or the statuary assumption is sufficient. 


The formation and contract regulations of a company are strongly supported by the Corporations Act (2001) (Cth). Hence it requires us to do more study to compensate it.  

Day 197 The commercial banks

The commercial banks 

Obviously, commercial banks play the most essential role in the financial markets. It ensures the active flow of funds from surplus units to deficit units, so without commercial banks it is impossible to keep the wheel of commerce circulating. We can easily observe this effect through the economic equation of output, where money supply times velocity of money equals to price level times output. Therefore, the velocity of money, in other words, the flow of funds will be able to determine the output in an economy when the money supply and price level remain constant. In fact, as the most crucial participants, these commercial banks hold more than 50% of assets in the financial market. If we want to fully understand the mechanism of this market, the operation of banks is an important subject. 

Generally, there are two major parts of commercial banks’ business: those appear on the balance sheet and other off-balance sheet activities. Most of the commercial banks adopt liability management strategy, where the bank actively manages its sources of funds in order to meet future demand of loans. Although it leads to several prudential supervision problems and capital adequacy issue, this method still generates incredible liquidity to the financial market. For example, the deposits in different accounts, negotiable certificate of deposit, and debenture secured by the collateralized floating charge are typical sources of funds for commercial banks. On the other hand, these funds are used to finance loans to various parties. To illustrate, personal and housing finance instruments such as mortgage, investment loan and credit card take the most proportion of it. Interestingly, commercial banks prefer not holding these loans on hand, but sell them to trust in order to obtain funds for other loans. Then the trusts would issue securities and use these non-liquid assets as a guarantee. This process is named as securitization, which provides a common view of how did commercial banks operate. Other borrowers are companies and government, where treasury notes/bonds are often held by the banks as cash equivalent items. 

In addition to the activities recorded on the balance sheet, there is a substantial proportion of off-balance-sheet business. According to the statistics, these OBs create about seven times more than regular business. These activities are comprised of bank providing a guarantee of financial obligations (direct credit substitutes), promising financial compensation of non-performance of commercial contracts (trade and performance-related items), giving commitments like underwriting, and market rate-related contracts. This is because the commercial bank utilizes many derivative products to manage potential risks in the market. 

In conclusion, the banks are the pillars of our financial system, thus regulation and prudential supervision to them has become a critical issue for the government.   

Day 196 Company features

Company features

In Australia, there are currently more than two millions of companies. With the population around twenty-three millions, it literally means every eleventh of us is the owner of a company. Compare to other forms of business such as sole proprietor, partnership and trust, the company is definitely the most favorable investment vehicle where people invest their money. What are the reasons behind this phenomenon? Today I would like to discuss this topic refer to the commercial law’s perspective.

As we know, the company has five distinct features that differentiate it from other types of ownership. To illustrate, these features are the limited obligations, liquidity, access for pooling of funds, perpetual life and separation of ownership and management. The first and probably the most well known one is limited liability. Which means the shareholders will not be held liable for the companies' debt. So even if the company becomes insolvent, the debtors cannot make the shareholders compensate their losses using personal assets. It is also referred as the company veil which protects its employees and shareholders. In addition, the company’s owner ship can be easily transferred through the trading of shares. Therefore, it provides a broader source of capital pooling and obtains the potential of the high liquidity. Moreover, the company will keep operating regardless the change of its ownership. Furthermore, a company is managed by the directors, hence it is separated from the ownership. Although these features create immense advantage for the company as an investment vehicle, the most important characteristic is that a company is treated as a separate legal entity. The Corporations Act (2001) s.124 defines the legal capacity of a company. It states that the company has both the powers of a natural individual and the body corporate. For example, it has the power to issue shares, to be bind by a contract or do anything that is authorized to do by any other law. As a separate legal entity, the company is treated as a separate person with its participants. Like the Salomon V Salmon & Co. Ltd. [1987] AC 22 case, where Mr. Salmon held 99% of the share in the company and acted as the actual controller. When the business went insolvency, it was not possible for the company to pay both Mr Salmon’s previous company charges and the debtors. However, the high court decided that despite Mr.Salmon was the controller of the company, the separate entity policy makes the company charge between Mr. Salmon and the company still valid. Even though the company were not able to pay its debts after this payment, Mr. Salmon was still entitled to be paid. Other case like Lee V Lee’s Air Farming Ltd. also provides insight of the separate legal entity feature. In this case, Lee’s family were still able to claim for the worker’s compensation insurance, although Lee was the controlling shareholder and director of the business. Which indicates the company can contract with its controlling participants.

In Australia, the companies are regulated under the Corporations Act (2001) introduced by the Commonwealth government. I believe the robust and adequate relations minimize the risk to invest on companies, and consequently, contributes a lot to this perfect investment vehicle

Day 195 The structure of financial market

The structure of financial market

Finance is a discipline divided from economics, and to be conclusive, the four fundamental concepts of finance are profit/loss and risk/return. Similar to the economics, the core guideline for this subject is still the cost/benefit analysis. As a financial manager, either the investment decision, finance decision or dividend decision share one common goal. Which is to maximize the value of the company, and consequently, maximize the shareholder's wealth.

Rather than real asset, finance deals with the intangible asset. These financial assets are traded in the financial markets.  There are many several different types of financial market. Distinguished by the term of maturity, there are money and capital market. Where short-term financial assets such as commercial paper, bills of exchange and banker’s acceptance are circulating in the money market. On the other hand, the long-term financial instruments are traded in the capital market. Stocks, bonds and debentures are the typical instruments in the capital market, since they have either unlimited or long maturity term over one year. Moreover, the financial market may also be divided by the scale of dealing quantities. The wholesale financial market and the retail financial market are differentiated by the extent of the transaction. Furthermore, various forms of the financial products create different financial markets. The equity market is where shares/stocks are traded; The debt market trades debts securities, including bonds and debentures; The property market is where the land and property are purchased/sold; The foreign currencies are transited in the foreign market; At last, the derivatives, which can be generally summarized as the agreement to purchase a financial asset on a specific date with the acknowledged price. And the derivatives like the forward and future contract are traded in the derivative market.

Although there are many types of financial institutions, such as commercial bank, hedge funds, unit trust, finance companies and credit unions, the regulators in the market make sure these institutions perform in ethical standard. For instance, the Australian security and investment commission monitors the activities of financial participants and enforces financial service laws to protect investors. Besides that, the APRA Australia Prudential Regulation Authority takes the part to ensure financial service providers to act prudently. Which oversees these institutions will remain able to meet their financial promises and obligations to investors. Both ASIC and APRA are government departments, hence they are granted by the power to enforce actions.

Day 194 The agency issue

The agency issue

The corporate governance is the system used to manage the corporation. It determines the structure of the company. Generally, the shareholders elect a board of directors as the corporation’s controller, and professional managers are hired to participate in the business daily operations. The manager’s responsibility is to ensure that the company reaches the maximum value by achieving the commercial goals. Therefore, the owners/shareholders' wealth can be maximized as well. However, there are many factors that may prevent the manager to behave in such manner. These conflicts between the management and the owners are referred as the agency cost. 

In fact, the manager can be considered as an agent employed by the owners to monitor the company on their behalf. The shareholders entrust the management team that they will act to maximize the capital value. Although most of the managers are willing to perform in such way, their passion may be chilled-down when the decision confronts in conflict with their personal benefits. The causation can be the fear to lose the job, private wealth, perquisites and individual preference. For example, the manager may want to use the company vehicle for personal use, apply for reimbursement for their individual expense, or provide unethical financial reports to secure their position. This agency problem creates the negative effect on both the company’s profit and the trusting relationship between shareholders and management group. We all know that as a rational person, our behavior is directed by the cost-benefit principle. Hence there are two approaches to solve the agency issue, to implant cost on these misdeeds or create incentives to encourage managers to act correspond to the standards of conduct. The cost for the poor performance is the possible replacement of the management. The voting of shareholders or the take over by the competitor can induce this consequence. On the other hand, the corporations can provide incentives to prompt the manager’s enthusiasm. Which is called the management compensation or the executive compensation. This is the bonus to reward well performing managers. It gives the manager financial incentives to act in the best interest of the owner. Basically, there are two different plans to propel manager’s performance. The incentive plan binds the compensation to the company’s stock price. For example, the share option is a reward for managers to purchase company’s shares at an exercise price. Thus the manager will tend to work harder in order to increase the value of the shares. Another method is the performance plan, which the manager’s performance is evaluated by certain figures such as earnings per share. Once this goal is achieved, the manager will be granted with shares of the company or receive cash bonus. 

Even though most of the financial companies implement this manager compensation system, the argument of it has been the instrument of the executive team to create their personal benefit never ended. Nonetheless, most of these companies refuse to cancel or deduct the amount of compensations even during the recession of Australia in 2008. 

Day 193 Director’s duty

Director’s duty

As the actual controller of the company, the directors are obliged with many responsibilities. One of the basic measurements of directors’ compliance with there is the loyalty and good faith. Generally, it can be divided into four different perspective, including: retain discretion, avoid conflicts of interest, act in good faith in the company’s interest and use directors’ power for proper purpose. 

First of all, the director must retain discretion, which means the director must agree not to exercise power given to him/her is inconsistent with acting in best interests of the company. Therefore, director must always act in best interests of company. 

In addition, the director has the duty to act in good faith in the best interest of the company. This requirement is clearly stated in S.181(1)(a) of Corporations Act(2001) (cth). The term good faith means the director must act honestly. Normally, the interest is represented as the shareholders interest. In fact, the director must treat the interest of shareholders as a whole, which needs the director to balance the interest of majority and minority. However, when the company is experiencing financial difficulties, the creditors’ interests are supposed to be considered by the director beyond shareholders''' interest. 

Moreover, the director of a corporation must exercise their powers and discharge their duties for a proper purpose.(S.181(1)(b)). The power of directors are interpreted in the S 198A(s) CA(2001) general management power. When justifying where the action was done with a proper purpose, a specific test is introduced. Where the lawful purpose and actual purpose of the activity were compared. If there is a conflict, the director has breached the duty to act for proper purpose. 

At last, the director must disclose any material personal interest to the board unless exemptions apply.(S.191（1） &（2）). Under S.195, the public company directors are prohibited from participating and voting at boarding meetings that consider matters in which they have a material personal interest, exceptions apply. Furthermore, the improper use of position(s.182) and information(S.183) are also prohibited by the statutory provisions. 

The consequence of breaching the loyalty and good faith duties will commonly face civil penalties enforced by ASIC. For instance, the director may be disqualified from the position or be ordered to compensate company’s loss. ASIC may also seek criminal penalties for serious contraventions of the Corporations Act.  

Day 192 Cash is king

Cash is king

When investors determine the value of a company’s share price, the cash flow is one of the most crucial factors that is taken into consideration. According to the statistics over small and medium-sized entities, their survivals were threatened by the classic killer of business, the insufficient cash flows. The typical victim of the cash flow issues is the One. Tel Ltd, which suffered an immense amount of deficit of cash while maintaining a high volume of profit and stock price. The collapse of it emphasized the importance of liquidity once again. As an accountant, we must be able to provide reliable cash flow statement in order to successfully communicate accurate information towards external/internal users. And consequently, they will be able to make relevant decisions base on that.

Investors, managers and other interested parties, require the statement of cash flows due to the following reasons. Firstly, it indicates the business’ ability to generate future cash flows. The users of the report will be able to identify the major source of cash inflows and outflows. Since cash is needed to settle the daily transactions, plus supply fund for investment, it is a critical issue for the entity to maintain an adequate level of cash reserve. In addition, the statement defines the entity’s ability to pay out cash dividends, debts and other obligations. If a business’s cash flow statements presents the problem of low level of cash, the related parties epically the investors will question about the possibility of the risk that business would not be able to pay its bills. Moreover, the users of the statement may determine the difference between the profit and operating cash flow. In our previous example, One. Tel. Ltd. incurred the problem of this tremendous gap in these two figures. In fact, a healthy and sustainable stream of cash flow correlated with the profit to determine the business’ status. A company may raise a lot of cash by selling non-current asset, which is not likely to continue in the next period. In contrast, company that makes a huge profit over credit sales also faces the potential threat of fund chain fracture. Furthermore, the users of the statement will obtain a better understand of the changes in liability and equity account through the study of investment and financial cash flow activities.

In conclusion, the cash flow statement provides a systematical report of the business’ cash reserves condition. Hence it is crucial for us to comprehend this useful tool in financial accounting. 

Day 189 Self-review before the new trimester

Self-review before the new trimester 

During last trimester, I have been through and overcome a lot of challenges as a novice in university life. To make a brief conclusion, I have done well and achieved high distinctions in all units. However, I prefer to set the objective higher for this trimester. Therefore I would like to make a self-reflection in order to conquer all impediments on my journey. 

I always believed that the fundamental element to success is comprised of three factors, including: a proper goal, efficient method to approach and control the process. Therefore, I tried to comply with these rules in the first trimester. The ultimate goal for me was straightforward, which is complete the commerce degree with the shortest time possible and retain the quality of learning as well. I have divided this objective into several subsidiary targets, which are more applicable for me to approach. For instance, the finance subject required me to understand and be familiar with the financial issues. Thereby my short-term goal on this subject was to comprehend the learning resources and achieve a decent grade in this course. 

Once I have determined the objective, the development of the target achieving strategy took place. Although there are plenty of techniques could be discussed, I think the unique one in the university is the digital literacy resource. It created an outstanding platform to assist my study. The online library allowed me to access most of the academic resources through the Internet, so I could easily locate the external readings for my course. In addition, I sufficiently utilized the collaborate discussion forum to find out the answers of my questions. In conclusion, I was aware of the value on digital literacy resources, and anticipated using it more to achieve my goals in the future. 

The self-management was the hardest part for me, but I understand it is the most crucial factor. Thus, I made an immense amount of effort to improve my self-control. During this process, I recognized the power of consistency, so I invested my endeavor to establish inertia on study. My weekly plan helped me enormously on both time and activity management. Besides that, I insisted to update my writing practice blog every day, since I found it would help me to review my knowledge and record my ideas. More importantly, this activity made me understand the value of preservation. As a consequence, I obtained more control over my actions, and I believe this blog will eventually contribute to my future career. On the other hand, the experience on group assignment also helped me to enhance my self-management. Because now I understand the best way to win people’s respect is to create value to them. And only people who maintained substantial control over their goal completion would be able to do this. 

Although I did reach my initial objective on last trimester, there are still some improvements could take place. To illustrate, I need study the financial investment on a more systematical approach, so I could truly understand and be consistent with my decision. In fact, there were several avoidable losses on the stock market, which I failed to prevent. Moreover, the fifth unit will definitely add more pressure on my study, thus I must be ready to contribute more effort. I believe I am capable to deal with these difficulties and create a bright path for myself in the future.