FINA201 TUTORIAL 1.

2 QUESTIONS
Topic 1 Corporate governance and ethics
1. Suppose you own shares in a company with a current share price of R25. Another
company has just announced that it wants to buy your company and will pay R35 per
share to acquire all the shares in issue. Your company’s management immediately begins
fighting off this hostile bid. Explain whether the actions taken by management align with
the shareholders’ best interests. Provide a reason for your answer.

2. Explain why each of the following situations is an agency problem and the potential costs
the firm may incur as a consequence. Suggest alternative solutions to address the problem
without resorting to firing the individual(s) involved.
a) The front desk receptionist routinely takes an extra 20 minutes of lunch time to run
personal errands.
b) Division managers are inflating cost estimates to show short-term efficiency gains
when the costs come in lower than the estimates.
c) The firm’s chief executive officer (CEO) has had secret talks with a competitor about
the possibility of a merger in which she would become the CEO of the combined
firms.
d) A branch manager lays off experienced full-time employees and fills the positions
with part-time or temporary employees. By doing so, the branch incurs lower
employment costs contributing to and raising the current year’s branch profit. The
manager’s bonus is based on profitability.

3. The King IV Report outlines three significant paradigm shifts in corporate governance:
inclusive capitalism, long-term sustainable capital markets, and integrated reporting.
Explain how these interconnected shifts can contribute to a more balanced approach to
value creation.

4. Ahmed recently earned his CFA designation and joined a medium-sized hedge fund as a
senior analyst. His supervisor, Bennett, the founder of the firm, earned her CFA
designation 10 years ago. But she has not paid her CFA Institute membership dues for the
past four years and no longer participates in the organization’s continuing education
program. Bennett uses the CFA designation on her business card and on all the marketing
materials for the fund. When Ahmed asks Bennett about her using the designation,
Bennett tells him that since she passed the exam and earned the charter, the credential is
similar to a degree from university that cannot be taken away. Later, during a marketing
pitch by Ahmed and Bennett to a potential investor, the investor notes that he has
narrowed down his manager search to firms that only employ CFA charter holders in
senior positions. He asks Bennett if everyone in the firm on the investment side is a CFA
charter holder. Bennett responds “Yes, that is correct.” Ahmed does not respond. Did
either Ahmed or Bennett violate the CFA Institute Standards of Professional Conduct?
Justify your answer.

For this question you are required to refer to the CFA Institute Standards of Professional
Conduct under topic 1.
5. You are a newly hired junior accountant at a reputable firm, and your team has just
received a client engagement involving a company facing ethical challenges in its
financial reporting. The client has been under pressure to meet performance targets, and
there are indications that some financial information may be manipulated to present a
more favourable picture.

In light of this situation, your manager has assigned you the task of evaluating the actions
of the company according to the South African Institute of Chartered Accountants
(SAICA) Code of Professional Conduct. The SAICA Code sets out requirements and
application material for professional accountants in business when applying the
conceptual framework. Using the information provided in sections 110, 120 and 220 of
the Code, evaluate whether the company’s actions align with the ethical standards in the
accounting profession.
For this question you are required to refer to Section 110 Fundamental Principles (page
29 of the pdf), section 120 The Conceptual Framework (page 36 of the pdf) and section
220 Preparation and Presentation of Information (page 49 – 52 of the pdf) of the SAICA
Code of Professional Conduct document under Topic 1.