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Answer the following questionsbased on the attached news articles on CBA:

Australian Financial Review, 29 August2017,APRA proberisks CBA rating on CBA,Australiawww.afr.com

1. What accounting issues have been addressed in the article? Briefly,summarisethe issues in 2-3 sentences.
3. In terms of the accounting issue being discussed, what did you agree/disagree with in the article? Provide support for your argument. 2-3 paragraphs
5. How does this article relate to theory/theories discussed in the Advanced Accounting unit?Demonstrate the connection to at least two accounting theories.3-4 paragraphs

The Australian Financial Review, Tuesday 29 August 2017 APRA probe risks CBA rating Jonathan Shapiro, Phillip Coorey and James Eyers Page 1 Global credit rating agencies are on alert after the prudential regulator unveiled an inquiry into scandalridden lender Commonwealth Bank of Australia warning that it could lead to a credit downgrades of the bank. S&P Global said any ''material adverse findings'' from the Australian Prudential Regulation Authority's review into CBA's governance, culture and accountability could weaken the bank's credit profile. The ratings agency also said any indications of weaknesses in CBA's governance and risk management frameworks uncovered by the inquiry or material damage to its reputation could also weigh on its rating, which is already on a negative outlook. Fitch Ratings said the APRA process could ''result in negative rating action'' if systemic issues were identified or if ''lasting damage to the franchise'' was inflicted. It also warned that management time at CBA could become consumed even if failings were not uncovered. APRA's highly unusual move to set up an independent panel to examine CBA comes after a series of scandals at the bank, and almost a month after the AUSTRAC money laundering debacle renewed pressure on politicians and regulators to fix the conduct of the big banks. Treasurer Scott Morrison said CBA's behaviour over recent years warranted special and immediate scrutiny as he suggested he had encouraged the independent regulator to move. ''Australia's banks are well capitalised, well regulated and financially sound. However, there have been too many cases and events that have damaged their reputation and standing in the eyes of many Australians, that warrants our regulators taking action now.'' The APRA inquiry was announced without the terms of reference being set or the panel members being appointed. The move is highly unusual because the regulator typically works behind the scenes to resolve issues within the banks, rather than announcing public reviews. Mr Morrison said he had been working closely with the regulators ''to make sure we have a full court press response to what has happened at CBA''. ''They take their own decisions and that is appropriate. But they are in no doubt about the government's strong resolve to ensure that action is being taken now to address these issues. ''This is a further example of the take-action-now approach to our banks.'' But shadow treasurer Chris Bowen said an APRA inquiry into CBA was insufficient. He renewed Labor's calls for a royal commission into the entire sector that the government had attempted to thwart through various budgetary measures including the controversial bank tax. ''How can an inquiry into Australia's biggest bank be a good thing, but an inquiry through a royal commission into Australia's banks generally be a bad thing?'' Mr Bowen said. ''APRA has acted, good on APRA. But there shouldn't be just an inquiry into one bank, there should be a royal commission into all banks.'' The inquiry is aimed at restoring the public's ''damaged trust'' as APRA singled out CBA as being ''negatively impacted by a number of issues that haveaffected thereputationof thebank.'' ''Given its position in the Australian financial system, it is critical that community trust is strengthened,'' said APRA in a statement. Under fire CBA chief executive Ian Narev, who will be replaced by July 2018, said he welcomed the review was a ''positive and constructive step''. ''CBA and APRA has a role to strengthen trust. It's interest goes beyond capitalisation and financial strength and we agree,'' he said. In his almost six years as CEO, Mr Narev has delivered strong shareholder returns while customer satisfaction ratings have improved to exceed that of its big bank rivals. But the bank's reputation has been damaged by a series of high profile scandals in its financial advice and life insurance units. Earlier this month, financial intelligence agency AUSTRAC initiated civil proceedings against CBA after it failed to respond to thousands of incidences of anti-money laundering breaches. The share price has slid almost 10 per cent since the filing was announced while the bank's new chairman Catherine Livingstone cut management bonuses and directors' fees and accelerated plans for Mr Narev's departure. ''We have confidence in the institution and confidence in what we are doing, but we're aware we have been in the news for the wrong reasons,'' he said. ''We have been aware that this has caused people to want to learn more about whether there are any root causes.'' The inquiry is likely to further limit the chances of an internal candidate succeeding Mr Narev while some investors said the board of directors could also come under further scrutiny. Mr Morrison said there had been more than a dozen compliance issues at CBA since 2008. ''It is apparent that while the bank's board and management have talked about the importance of culture and accountability, the continuing occurrence of these types of issues demonstrate that their actions have so far failed to meet customer and investor expectations,'' he said. APRA said the panel members would be announced when the inquiry commences; Mr Narev said he hopes it ''will start as soon as possible''. CBA will meet the costs of the inquiry. 1 While the terms of reference have not yet been set by APRA, Mr Narev said he expects the inquiry to examine ''the specificity of accountability'' of staff working in the complex organisation. He also expects the inquiry - which will take six months to prepare its report - to examine whether too much emphasis on financial objectives to assessing performance both for the bank and individuals. ''My strong interference from what APRAhassaidisthattheyaregoingtobe looking at the way in which financial objectives are balanced by other objectives in assessing target performance, both for the organisation as a whole and individual performance,'' Mr Narev said. CBA shares fell 1.3 per cent to $76.80 on Monday, less than the 1.8 per cent decline in the shares of Westpac. Shares in NAB and ANZ fell by 0.7 per cent and 0.5 per cent while the broader S&P/ASX200 was down by 0.6 per cent. ''APRA's inquiry into CBA is sensible but ultimately symbolic. We do not expect the findings will translate into a punitive outcome that will materially affect CBA's operations or earnings,'' said Wilson Asset Management portfolio manager Matthew Haupt. CBA shares have declined by almost 10 per cent in August as it faced the fallout of the AUSTRAC legal action and the prospect of a large fine. S&P Global's analysts said the inquiry would prove ''valuable in identifying any potential shortcomings and remedial actions'' after the legal action initiated by AUSTRAC. ''We consider that erosion in confidence of the major stakeholders in the bank's corporate governance processes would likely also weaken its credit profile.'' The Finance Sector Union said APRA must frame the terms of reference so bank management cannot blame individuals or groups of employees. ''We need to have a close look at all the banks because FSU members report concerns about culture and governance issues across the industry,'' said national secretary Julia Angrisano. Page 2 A key objective of the inquiry will be to provide CBA with a set of recommendations for organisation and cultural change, where that is identified as being necessary. Wayne Byres, APRA chairman, on the inquiry into CBA. Another day, another inquiry into banking. In this case, it is the Commonwealth Bank suffering the ignominy of being investigated by the banking regulator over its ''governance, culture and accountability''. CBA chair Catherine Livingstone must have had to take another deep breath before ''welcoming the opportunity'' for independent parties to review the work the bank has done to restore community trust - ''and advise on what more we can do''. The CBA even gets the pleasure of paying for the six-month inquiry by a special panel. Australian Prudential Regulation Authority chair Wayne Byres still sounds rather like a stern school principal at assembly announcing his reasons for the suspension of senior prefects. For the CBA leadership, it's like being publicly graded an F for bad behaviour no matter how good their exam results have been. ''The Australian community's trust in the banking system has been damaged in recent years, and CBA in particular has been negatively impacted by a number of issues that have affected the reputation of the bank,'' Byres declared. The latest spectacular incident is the launch of civil proceedings against the bank for alleged breaches of money laundering law - a move apparently unanticipated by the bank which is also facing a separate inquiry by the Australian Securities and Investments Commission over its continuous disclosure obligations. Of course! APRA's description of the latest inquiry to hit CBA is delicately phrased to avoid any interference with the legal case by yet another regulator, the antimoney laundering body, AUSTRAC. ''Given its position in the Australian financial system, it is critical that community trust is strengthened. A key objective of the inquiry will be to provide CBA with a set of recommendations for organisation and cultural change, where that is identified as being necessary.'' Ian Narev can only grind his teeth about the trashing of his ''legacy'' as he pledges the bank's ''full support''. But with his own exit already abruptly announced by Livingstone, Byres' warning will reverberate through the ranks of the senior executive team and the board. The regulator is aiming at something far harder to identify even than $9.9 billion in net profit. It's a very different calculation of Return on Equity and dividend payout figures. ''CBA is a well-capitalised and financially sound institution,'' Byres said . ''However, beyond financial measures, it is also critical to the longrun health of the financial system that the Australian community has a high degree of confidence that banks and other financial institutions are well governed and prudently managed.'' If only by omission, that wording sounds a pretty unflattering assessment of what is missing in CBA's approach. The subtext is the number of ''scandals'' in recent years, including in its financial planning and insurance arms. CBA's response has effectively been to offer belated apologies along with promises to constantly improve its systems while insisting such failures were in the past. APRA seems to have a much sharper opinion, although expressed in typically impenetrable regulator-speak. Naturally, Scott Morrison is delighted to pile in more directly, pointing out the government has been working with the regulators for some weeks. ''It is appropriate for the regulators to be the ones to undertake these inquiries,'' he said as the news of the inquiry broke. ''So, they are taking action now. That is entirely consistent with the Turnbull government's approach to the banks which is to take action now.'' It's no coincidence Malcolm Turnbull also constantly repeated the phrase ''taking action now'' as he called in the energy company bosses for another lecture this week while talking up the new Snowy Hydro scheme. 2 The Prime Minister insists his government is already helping Australian families get lower electricity bills as well as ''taking action now'' to deliver outcomes and protections Australians need from the banking system. This is all part of an increasingly urgent need to persuade an aggravated public the government really is hard at work delivering results rather than being constantly distracted by internal dramas. In the case of the banks, ''taking action now'' is supposed to negate any need for Labor's royal commission which the Treasurer derides as mere ''grandstanding by Bill Shorten'' and the Prime Minister dismisses as more ''rhetorical politics'' from the Leader of the Opposition. What is most obvious to the public, however, is that something must be badly wrong with Australia's banking system given all the recriminations from politicians on all sides. What is most obvious to the banks is how completely friendless they are in Canberra despite their importance to the economy and their relative global strength and commercial success. Morrison is correct in arguing the Coalition is already imposing a whole lot of new regulations and restrictions on banks and bank executives that extend well beyond the imposition of a banking tax in the last budget. All of the big bank CEOs are reeling from this potent combination, desperate to figure out what else they need to do to remove themselves from their starring roles in political target practice. Among other ''reforms'' the banks are busily imposing on themselves, the Australian Bankers' Association is promoting the new Code of Banking Practice as a way to rebuild community trust. Chief executive Anna Bligh highlights the alternative. ''In the absence of closing the trust gap, banks can look forward to more and more regulation,'' she said. Shareholders can look forward to more and more bank resources being devoted to avoiding that fate - almost certainly unsuccessfully. What is most obvious to the banks is how friendless they are in Canberra. Page 6 Elizabeth Sheedy: Staff think leaders don't want to hear of risks. The prudential inquiry into Commonwealth Bank of Australia's culture should examine whether staff feel inhibited about communicating bad news to their managers and if less sales-centric remuneration policies are being implemented in practice, says a leading risk governance experts. After the Australian Prudential Regulation Authority said it would appoint an independent panel to investigate CBA's governance, culture and accountability, Macquarie University professor Elizabeth Sheedy said the inquiry should set up a confidential survey of CBA staff to determine what they really think about the culture created by management. One of the key issues for the inquiry will be determining whether staff, especially junior staff, are willing to speak up. ''Research we have done shows in large banks, it is a real challenge to get risk issues reported up the line because staff perceive that leaders don't want to hear it,'' she said. Similarly, it is important to ask staff, in a confidential process, whether the principles in revised remuneration systems to put customers first are actually being promoted by managers. Like the other big banks, CBA has committed to implementing the recommendations of former Australian Public Service commissioner Stephen Sedgwick, who said in April sales should not be the dominant component of banker incentives. But Professor Sheedy said ''there is often a big difference between policy and what happens on the ground, and staff know and will tell you if you design survey questions around whether the remuneration system is actually doing what it says it does''. ''Research I have already done has highlighted this as a big problem - in the large Australian banks, a majority of staff perceive that remuneration systems are not consistent with prudent risk management and that perception is associated with non-compliance.'' APRA said the inquiry would consider whether CBA's ''organisational structure, governance, financial objectives, remuneration and accountability frameworks are conflicting with sound risk management and compliance outcomes''. This would examine CBA's ''compliance gateways'', Professor Sheedy said, referring to procedures that restrict bonuses when staff fail to meet hurdles. But knowing how many bankers have actually been caught and had bonuses withheld is important to show whether policies work in practice. Since APRA has increased its focus on risk culture in banks as part of its prudential efforts - including publishing its expectations in a discussion paper last October - banks have been conducting their own surveys of staff, but many of these have been attached to staff engagement surveys, raising questions about their reliability. Risk-management experts say when reviewing accountability, it is important banks don't only focus on scapegoats but can show the organisation has learnt from issues uncovered by previous incidents. APRA chairman Wayne Byres said yesterday trust in CBA had been negatively impacted by a number of issues that have affected the reputation of the bank. The regulator said in its risk culture discussion paper it is reviewing bank remuneration practices across the industry to ensure banks are meeting the requirements of the prudential standard known as CPS 510, which was introduced in 2010. ''Remuneration frameworks, and the outcomes they produce, are therefore important barometers and influencers of risk culture,'' that paper said. However, experts acknowledge the whole area of risk culture is still a work in progress, and that changing remuneration practices alone will not be enough to improve it. When he released his report in April, Mr Sedgwick said banks needed to also revise target setting, performance management, leader development and culture to align with an ethical, customer-centric philosophy Page 7 3 Phillip Coorey Earlier this month, after the CBA money laundering scandal erupted, Malcolm Turnbull argued against fresh calls for a royal commission on the basis it would interfere with the investigation and the subsequent court case. ''AUSTRAC has commenced legal proceedings. It has done its job. Were there to be an inquiry held into that of the kind [that Labor] suggests, it would mean delaying or staying the legal proceedings,'' he told Parliament on August 8. ''AUSTRAC is on the case, doing its job. It has uncovered the wrongdoing and it is pursuing it.'' Treasurer Scott Morrison added to the answer, telling Parliament that the day before, he had called CBA chairman Catherine Livingstone to Canberra for a dressing down. He said he had already spoken to the Australian Securities and Investments Commission, APRA and the Treasury about the latest CBA scandal. ''I have made it very clear to the Commonwealth Bank that, in relation to these matters, the government's response is prepared to consider all options.'' On Monday, this week, that ''all options'' was revealed as the APRA inquiry into the CBA's governance, culture and accountability, a bit like a royal commission into one bank. Most pleased will be the other big three banks, which were absolutely furious at CBA when the money laundering scandal broke. Only two weeks earlier, Australian Bankers' Association chief executive Anna Bligh had launched a campaign giving the banks five years to fully restore their image. One of the big four, not even half in jest, was on the cusp of making a public call for a royal commission into CBA, given its disproportionate role in ruining the image of banks. There are no qualms from the government, either, about the APRA inquiry interfering with the AUSTRAC process, as it claimed a royal commission would. And while APRA is independent, Morrison hinted that he had given it a gentle shove. ''Look, we work closely with our regulators. I work closely with the Council of Financial Regulators on everything from what we have seen with the macro prudential control over bank lending in the housing sector to broader regulatory issues like this,'' he said. ''They take their own decisions and that is appropriate. But they are in no doubt about the government's strong resolve to ensure that action is being taken now to address these issues.'' That this inquiry was announced without any detail in terms of who will be on the independent panel, when it would start, and the terms of reference raised suspicions that it had been fasttracked if only for the government to find a circuit-breaker. In that vein, Turnbull spent the day back at the Snowy-Hydro scheme reannouncing plans to expand the scheme and reannouncing increased funding for a feasibility study. The government also reannounced it was ''summoning'' electricity retail chief executives to another meeting to jump ugly on them over power prices. The meeting, scheduled for Wednesday in Sydney, was the followup scheduled when Turnbull and the CEOs met a month ago. And he reannounced there were at least a million households paying more for electricity than they need to because they are on the wrong plan. It was Turnbull's Snowy-hydro expansion in March that gave him and his government the only appreciable poll lift since the election. Monday was about going back to the well. The APRA announcement was dismissed by Labor as inadequate because it only looked into one bank. Labor stepped up its call for a royal commission. Turnbull called the APRA inquiry a surgical focus on CBA's ''problems and issues'' and, unlike a royal commission, there would be an outcome in six months. Morrison said it showed the government had a ''take-action-now'' approach. ''The things that a royal commission would potentially recommend we are already doing that: increased powers and resources for ASIC - tick, done, swoosh, just do it, the Nike approach - that's what we are doing with banks,'' he said. 4