CIFA Foundation Level

Professional Ethics and Governance flashcards

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Complete Flashcard Reference

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How do ethics and law differ by source, enforcement and scope?

Source: law comes from legislation, regulation and case law; ethics from personal, professional and societal moral standards. Enforcement: law through courts, regulators and formal sanction; ethics through conscience, peer and professional judgement and reputational consequence. Scope: law is a codified floor of required conduct; ethics extends beyond the floor to what is right, not merely what is permitted.

What are the three elements of the fraud triangle, and which one can an organisation most directly control?

Pressure: a financial or personal problem that seems to need a solution. Opportunity: a weakness in internal control that makes the act achievable and concealable. Rationalisation: framing the act to oneself as justified or not really wrong. Opportunity is the leg an organisation controls, so internal control design (above all segregation of duties) focuses on removing it.

What is corporate governance?

The system of rules, practices and processes by which a company is directed and controlled. It defines how rights and responsibilities are distributed among the board, management, shareholders and other stakeholders, and the rules and procedures for making decisions on corporate affairs.

How do executive, non-executive and independent directors differ?

Executive director: also holds a management role inside the company. Non-executive director: holds no management role and is expected to bring independent judgement. Independent director: a non-executive with no material relationship to the company beyond the directorship, best placed to challenge management objectively.

What do agency theory and stewardship theory each assume about managers?

Agency theory: managers are self-interested, so they must be monitored and incentivised to align with the owners. Stewardship theory: managers are intrinsically motivated to act as good stewards of the company's assets, so they should be empowered (for example by combining the chair and CEO roles) rather than constrained.

What is a conflict of interest, and what three-part response do the codes require?

A conflict arises when a professional's own interests, or a third party's, could reasonably be seen to compromise their objective judgement on a client's behalf. Avoid it where practical. Manage it through internal controls (information barriers, approval processes) where avoidance is not practical. Disclose it clearly to those affected so they can judge for themselves.

What is a GIPS composite, and what problem does it solve?

An aggregation of one or more discretionary portfolios managed to the same mandate, objective or strategy into a single track record. It stops a firm presenting only its best-performing accounts (cherry-picking and survivorship bias): every discretionary account run to that strategy goes in, asset-weighted.

Who sits on the audit committee, and what does it oversee?

A board committee made up mainly or wholly of independent non-executive directors. It oversees the integrity of financial reporting, the internal control environment, and the work of both the internal and the external auditors, giving the board a focused, independent check on the areas most exposed to fraud and ethical risk.

Why are minority shareholders vulnerable, and what protections do they typically have?

Their stake is too small to control decisions, so a controlling shareholder or entrenched board can disadvantage them: related-party transactions on unfair terms, dilutive share issues, or simply outvoting them. Protections: pre-emption rights, minority approval requirements for related-party transactions, and rights to challenge oppressive conduct.

What are Goleman's five components of emotional intelligence, in order?

Self-awareness: recognising one's own emotions, strengths and weaknesses and their effect on others. Self-regulation: managing or redirecting disruptive emotions and impulses. Motivation: a drive to pursue goals beyond external reward, with resilience after setbacks. Empathy: understanding others' emotions and perspectives. Social skills: communicating clearly, resolving conflict and building cooperation.

What makes a situation an ethical dilemma rather than simply a hard choice?