P3
1
March 2012
Strategic Level Paper
P3 – Performance Strategy
Senior Examiner’s Answers
SECTION A
Answer to Question One
(a)
(i) M plc is a newspaper and so relies on its reputation for truthful and accurate reporting.
Publishing unedited and unverified facts creates the risk that commentators will abuse the
site for the sake of attracting much more publicity than if the same comment had been
made on a personal website or blog. There have been many cases where false claims
have attracted significant (albeit short–lived) attention, such as false statements that
celebrities or politicians had died suddenly.
Anyone affected by such a false claim is likely to take action against M plc rather than the
person who made the false posting. This is partly because M plc is potentially a more
lucrative target for a damages action and partly because the injured party is more likely to
deter any repetition if the owner of the website has an incentive to block any future
defamation.
The public is unlikely to view such controversial postings as acceptable and so M plc’s
reputation may be harmed. Newspapers are frequently criticised for stirring up
controversial stories and printing false allegations in order to boost sales. Establishing a
website that invites unverified statements is likely to be seen as such an act.
M plc’s rivals are likely to do their utmost to draw attention to any harmful publicity that
could undermine the company’s credibility. That is what happened in the case of the story
about J. Readers of those rival newspapers will base their opinion on what they are told in
the press rather than taking the trouble to establish the facts.
(ii) M plc should ensure that it has genuine contact details for all of the subscribers to its
website. Subscribers cannot be permitted to make posts anonymously before
disappearing and leaving M plc with the scandal. All subscriptions should be paid by a
major credit card so that there is a trail back to the customer via their banking details.
All subscribers should be made to accept responsibility for anything posted using their
account. That will ensure that they are careful about safeguarding their login information.
Otherwise, it will be easy for a subscriber to make a defamatory post and then to deny
authorship by claiming that the post was made by an imposter.
March 2012
2
P3
All login attempts should be checked carefully, with realistic security in place such as a
limited number of login attempts before the account is blocked. Passwords should be
tested to ensure that they are reasonably secure. The website should not permit web
browsers to “remember” passwords so that login can be automatic.
M plc should pursue action against any subscriber whose use of the website brings the
company into disrepute. If it does so in a very public way then it may deter any further
such acts. It may also help to demonstrate that M plc is behaving honestly and in the
public interest.
There should be a facility for anybody who reads a post to flag it as inappropriate.
Hopefully that would mean that electronic subscribers will flag up a number of
unacceptable statements that do not trigger the automatic filters. Clicking on this
notification could hide the post until it has been reviewed by one of M plc’s staff and
confirmed as fit for publication.
(b)
(i) All staff look to the control environment in order to decide whether behaviour is
acceptable or not. The control environment is essentially the attitude of senior
management towards the control system’s operation and effectiveness. Arguably, it is the
exception that proves the rule. Mismanagement and misbehaviour will be accepted
according to custom and practice if action is not taken.
(ii) It appears that the directors have been receiving monthly management accounts that
have shown increasing costs associated with journalist expenses. This increase has not
been budgeted and there has been no investigation until now. The message that has
been communicated to journalists is that the board is perfectly happy to tolerate such
extravagance.
Presumably, expenses have either been paid without any further authorisation or those
responsible for authorising payments have been happy to sign almost anything without
considering whether the cost is justified or not. It may be that M plc has created a culture
in which journalists believe that they are entitled to eat in the best restaurants or to buy
expensive equipment at the company’s expense. If colleagues share stories about such
claims then all staff will quickly feel that this behaviour is the norm.
The fact that editors do not believe that they can refuse claims suggests that they have
had insufficient support from senior management. The board has made it difficult for
editors to enforce acceptable standards of behaviour by allowing these costs to spiral out
of control. Editors will find it difficult to exert their authority if they cannot rely on senior
management to support them when faced with a dispute with a journalist over expenses.
(iii) The internal audit department is generally responsible for monitoring compliance with
rules. The very nature of a journalist’s expense claims make it difficult to set hard and fast
rules. For example, setting a fixed upper limit for the cost of a meal may be embarrassing
when a journalist has to interview a senior politician or business leader.
The internal audit department will find these rules difficult to investigate because of the
lack of clear and observable benchmarks for acceptable claims. Such reviews could
involve asking the journalist who lodged a claim to explain why it was appropriate to
spend that amount under those circumstances. Such reviews could cause some
resentment on the part of journalists who feel that their expenses are a necessary part of
their effectiveness in gathering news and writing stories. That risk could be reduced if the
internal audit department approaches these reviews with an open mind and gives the
subjects of the investigations the opportunity to explain why a particular choice was made
when there may have been a less expensive alternative.
One possible danger is that journalists will start to pass up opportunities to investigate
important stories because of the difficulties associated with processing expenses claims.
The involvement of internal audit in reviewing expenses on a day–to–day basis could deter
staff from incurring reasonable costs if they feel that the internal audit department does
not understand the process of gathering news.
(c) UK supplier
This arrangement effectively proposes passing the cost of a rise in the cost of pulp to a
third party. It is very unlikely that a sophisticated supplier will tolerate such additional risk
without seeking compensation. The cost of hedging in this way will be implicit in the fixed
cost set by the supplier for the duration of the contract.
The first risk associated with this arrangement is that M plc may have to pay more for its
pulp than its competitors. That may make it possible for rival newpapers to undercut M plc
on price. That risk is likely to arise if the cost of pulp declines or if the fixed price exceeds
the present market price and market prices remain constant.
There is a risk that M plc may be too aggressive in negotiating a fixed price so that the
supplier cannot afford to honour the contract if prices increase substantially.
USD deposit
The primary cost associated with this arrangement will be the fact that the rate of interest
received on the bank balance is unlikely to exceed M plc’s cost of capital. There is
effectively an opportunity cost associated with tying up large amounts of capital in a bank
