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Content, order and logic of this chapter

Within this chapter we will cover the following topics:

- Company law and directors' responsibilities

- Record keeping/bookkeeping

- Internal controls - accounting systems and procedures - prevention of error and fraud

- Audit external and internal - prevention of error and fraud

- Corporate governance

Logic and order

The order of this chapter is to start with an overview of company law, particularly as it applies in the United Kingdom. Understanding finance could be tackled from how source data build up to give cash reports, P&L accounts and balance sheets or from the starting point of the statements. My belief is that if you really want to get to grips with what financial reporting is about, then starting with source data and building up to the statements is a very good learning technique. The recording of every single business transaction by means of an almost inevitably computerized accounting or bookkeeping system makes sense. If data are captured completely and correctly classified, the end result ought to be reliable financial statements. However, Chapter 5 explains that there is an art to accounting, and while US and UK accounting standards aim to bring consistency and outlaw poor or plainly wrong accounting, there are views on how accounting items should be classified and treated. It is at this stage that, in spite of having reliable data, we find that the human element enters. If there is not a clear understanding of what is right and wrong, a clear code of ethics, then the innocent numbers may be tainted or completely corrupted. The chapter ends with a review of corporate governance and what it means, as financial strategies may be sidelined or overridden if there is lax governance. Governance needs a creed or a code of ethics, as objectives and supporting strategies ought to be delivered ethically. A decent and sound corporate governance structure should be in place if you are to have ethical strategies and use ethical tactics. However, there are personal and culturally varying views on what is ethical, and as a means of provoking thought there is a short quiz where you can compare your views with the maybe pious and dogmatic suggested answers.

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