Fundamentals of Ethics and Corporate Governance: Principles, Threats and Safeguards
Ethics and governance questions test judgement, not definitions alone. You must know CIMA's five fundamental principles, recognise the standard threats, select realistic safeguards, and explain how governance structures address the agency problem between shareholders and directors.
The five fundamental principles
- Integrity: be straightforward and honest in all professional and business relationships.
- Objectivity: no bias, conflict of interest or undue influence of others.
- Professional competence and due care: maintain knowledge and skill and act diligently.
- Confidentiality: do not disclose without authority or a legal duty, and never use information for personal advantage.
- Professional behaviour: comply with laws and avoid action that discredits the profession.
Threats and safeguards
- Self-interest (bonus, shares, close business link), self-review (checking your own work), advocacy (promoting a client's position), familiarity (long or close relationship), intimidation (pressure, threats, dismissal risk).
- Safeguards: consultation with an ethics helpline or senior professional, independent review, rotation, removing the individual from the engagement, disclosure to those charged with governance, declining or withdrawing from the work.
Corporate governance
- The agency problem arises because ownership is separated from control.
- Typical code provisions: separate chair and chief executive; at least half the board independent non-executive directors; independent audit, remuneration and nomination committees; internal control and risk review; transparent reporting to shareholders.
- Directors' duties include acting within powers, promoting the success of the company, exercising independent judgement, reasonable care and skill, avoiding conflicts and declaring interests.
Worked example
A financial controller holding share options is told by the CFO to reverse a restructuring provision so the year-end target is met. The threats are self-interest (options and bonus) and intimidation (pressure from a superior). The response is to apply integrity and objectivity: establish the facts and the correct accounting treatment, refuse the adjustment, document the request, escalate to the audit committee if pressure continues, and treat resignation as a last resort.
Traps
Treating resignation as the first step; thinking confidentiality prevents reporting misconduct internally or to a regulator; confusing a threat with a safeguard; suggesting that non-executive directors run the business day to day.
Fundamentals of Business Law: Contracts, Liability and Business Structures
Business law in BA1 covers contract formation, liability, business structures and employment basics, tested through short scenarios where you apply rules to facts rather than recite them.
Forming a contract
- Requirements: offer, acceptance, consideration, intention to create legal relations, capacity and legality.
- Advertisements, shop displays, auctions and invitations to tender are generally invitations to treat, not offers.
- Acceptance must be unqualified and communicated. A counter-offer destroys the original offer. Under the postal rule, acceptance takes effect on posting where post is a reasonable means of acceptance.
- Consideration must be sufficient but need not be adequate, and it must not be past.
Liability and business structures
- Negligence requires a duty of care, breach, damage and causation; the Caparo test governs novel duty situations.
- An employer may be vicariously liable for an employee's acts carried out in the course of employment.
- A registered company has separate legal personality (Salomon v Salomon & Co Ltd, 1897), so shareholders have limited liability and the company contracts in its own name. Directors owe statutory duties and may face liability for wrongful trading.
- Employment: a contract of service makes someone an employee, entitled to protection against unfair dismissal and to redundancy pay; a contract for services indicates self-employment.
Worked example
Ade advertises a car for $5,000. Ben offers $4,800. Ade refuses. Ben then says he accepts the $5,000 price. No contract exists: Ben's $4,800 was a counter-offer that extinguished the original invitation, and Ade never made an offer that Ben could accept. Ben's 'acceptance' is at most a fresh offer that Ade may accept or reject.
Traps
Treating an advertisement as an offer; forgetting that a counter-offer kills the original offer; assuming silence is acceptance; believing consideration must be a fair price; assuming a company's shareholders are liable for its debts.