E1: Ethics and governance

Answer: A. Finance contributes to business performance management by developing and reporting key performance indicators (financial and non-financial), preparing performance reports against budget and forecast, providing variance analysis, and supporting the design of management information that helps managers monitor and improve performance. Product design, IT management and customer pricing are operational matters in which finance may provide analytical support but is not the primary function responsible.

Answer: B. The six capitals in the Integrated Reporting framework are financial, manufactured, intellectual (including organisational knowledge and brands), human, social and relationship, and natural capital. Market capitalisation is a valuation measure rather than a capital category, dividend capital and regulatory capital are not among the six. Integrated reporting aims to show how an organisation uses and affects all these capitals — not just financial capital — in creating long-term value.

Answer: C. Finance interacts with operations by providing cost information (such as product costs and overhead rates), preparing and monitoring production budgets, analysing variances between actual and standard costs, and supporting capital investment decisions for new equipment. It does not set production schedules or manage staffing — those are operational decisions — but finance provides the financial intelligence that informs and supports them. The relationship reflects business partnering in action.

Answer: D. Finance plays a central role in sustainability by measuring and reporting ESG data (carbon emissions, water usage, workforce metrics and governance disclosures), ensuring the reliability of that data, supporting frameworks such as integrated reporting, and providing analysis that connects sustainability to financial performance. Finance does not set environmental targets unilaterally, exclude non-financial data from its scope, or design physical products. As ESG reporting becomes more regulated and investor-focused, finance's sustainability role continues to grow.

Answer: A. Finance interacts with HR by producing payroll-related cost reports, headcount and people-cost budgets, analysis of remuneration changes (such as the financial impact of a pay rise), and supporting decisions around workforce planning and benefits. Setting marketing budgets relates to finance and marketing, product engineering is a technical function, and supplier negotiations involve finance and procurement. The interaction with HR centres on the people costs that represent a significant proportion of most organisations' total expenditure.

Answer: B. Finance interacts with marketing by analysing the financial return on marketing campaigns, calculating customer lifetime value and profitability by segment, monitoring marketing budgets and variances, and providing financial input to pricing and product decisions. Finance does not write advertising copy, replace the marketing function, or manage social media — those are specialist marketing activities. The business partnering relationship means finance provides financial challenge and support to help marketing make evidence-based spending decisions.

Answer: C. The balanced scorecard provides a framework for measuring organisational performance across four linked perspectives: financial (how do we look to shareholders?), customer (how do customers see us?), internal business processes (what must we excel at?), and learning and growth (can we continue to improve and create value?). It was designed to complement purely financial measures by capturing the drivers of future performance. The other groupings listed are not the balanced scorecard perspectives.

Answer: D. Finance supports procurement and supply chain by analysing supplier costs and terms, managing accounts payable, valuing inventory, assessing the financial viability of suppliers, and providing financial analysis for make-or-buy decisions. Physical logistics — moving goods, warehouse design, setting routes — are operational decisions for supply chain management. Finance's contribution is the financial intelligence and control that ensures procurement decisions create value and payments are managed efficiently.

Answer: A. Board-level financial reporting should be concise, high-level and focused on the information the board needs to fulfil its governance and strategic responsibilities — including financial performance against strategy, key risks, and forward-looking information. Detailed transactional data is appropriate for operational managers but would overwhelm a board. Replicating management accounts or suppressing negative information would not serve the board's governance role. Good board reporting is balanced, material and decision-focused.

Answer: B. CSR has direct financial relevance: the costs of environmental programmes, community investment and governance initiatives need to be budgeted and reported; ESG ratings affect access to finance and investor appetite; and regulatory compliance has financial consequences. Finance measures and discloses CSR performance as part of integrated or sustainability reporting. Finance does not set CSR strategy independently (that involves the board and operational functions), and personal charitable giving by finance staff is a separate matter.

Answer: C. Non-financial indicators are important because they often measure the underlying drivers of future financial performance — a business with high customer satisfaction today is likely to generate better revenues tomorrow; engaged employees deliver higher productivity; product quality drives customer retention. Financial measures are lagging indicators of past performance, while NFPIs provide leading signals. Neither replaces the other — a balanced picture requires both. Regulatory requirements vary but are not the primary rationale for using NFPIs.

Answer: D. Finance and IT interact closely: finance provides the financial analysis for technology investment decisions (capital appraisal, build vs buy, expected returns), manages IT budgets, and ensures financial controls are embedded in IT systems. IT delivers, maintains and secures the technology platforms finance depends on. Finance does not write software code or manage the helpdesk; IT does not make the financial case for its own investments without finance input. Their collaboration is especially important during major system implementations such as ERP upgrades.

Answer: A. The TCFD framework, developed by the Financial Stability Board, provides guidance specifically for companies to disclose how climate-related risks and opportunities affect their strategy, governance, risk management, and financial metrics. IFRS covers financial reporting standards, the balanced scorecard is a performance measurement tool, and the CIMA Code of Ethics is a professional conduct framework. Finance professionals need to understand climate-related reporting frameworks as investor and regulatory expectations around ESG disclosure grow rapidly.

Answer: B. Stakeholder theory, associated with Edward Freeman, argues that organisations have obligations to a broad range of stakeholders — not just shareholders — and that balancing those interests leads to better long-term outcomes. This contrasts with the shareholder primacy view (Milton Friedman), which holds that maximising returns to shareholders is the firm's primary obligation. Finance must consider this debate when designing reporting frameworks, allocating capital and advising on strategy. Ignoring non-financial impacts and reporting only to one shareholder are both inconsistent with stakeholder theory.

Answer: C. Finance contributes to innovation by providing the financial analysis framework for evaluating R&D and innovation investments (using techniques such as real options, scenario analysis and NPV), managing innovation budgets, and helping leadership prioritise projects based on expected risk-adjusted returns. Blocking all new spending, taking over R&D, or imposing unrealistically short payback criteria would all undermine innovation rather than support it. Finance should be an enabler of innovation, providing the financial discipline that helps ideas become viable businesses.

Answer: D. Treasury manages foreign exchange exposure to reduce the uncertainty that currency movements create for the organisation's revenues, costs and profits — using instruments such as forward contracts, options and natural hedging. The goal is protection (hedging) rather than speculation; responsible treasury management is not primarily about trading currencies for profit. Reporting in local currencies is an accounting decision, and pricing decisions are made commercially, though treasury analysis informs both. FX risk management becomes more important as an organisation expands internationally.

Answer: A. Finance professionals in regulated industries must understand sector-specific regulations — for example, banks face capital adequacy requirements (Basel III/IV), solvency standards (Solvency II for insurers) and extensive regulatory reporting obligations beyond standard financial statements. Non-compliance carries serious financial penalties and reputational damage. General accounting standards, office layout and personal salary negotiations are separate matters. Finance in regulated sectors sits at the intersection of accounting, legal compliance and risk management.

Answer: B. Finance supports digital transformation by building the business cases for digital investments, managing budgets for transformation programmes, tracking the realisation of projected benefits, and providing the financial governance that keeps projects on track. Requiring immediate payback rules out many worthwhile long-term investments; taking over project management from IT is outside finance's remit; cutting technology spending would undermine transformation. Finance's role is to be a financial enabler and accountability partner for digital change.

Answer: C. Finance and legal work closely together in areas such as contract negotiation (ensuring financial terms are appropriate), regulatory compliance (where financial and legal obligations overlap), tax planning and disputes, M&A transactions (financial and legal due diligence run in parallel) and corporate governance. Finance does not provide legal advice — that is the legal function's role — nor does it manage litigation or replace the legal function in smaller organisations. Their collaboration is strongest where financial and legal risks intersect.

Answer: D. Finance's role in pensions covers the accounting treatment of pension costs (under IAS 19 for defined benefit schemes), analysing the funding position and cash contribution requirements, and working with actuaries and pension trustees to understand the financial implications of the scheme's performance. Investment strategy is set by the trustees in conjunction with investment advisers, day-to-day administration is handled by HR or the scheme administrator, and provider selection is a governance matter for trustees. Finance provides the financial intelligence that informs pension strategy and governs how costs are reported.

Answer: A. The GRI Standards are the most widely used framework for sustainability reporting, enabling organisations to disclose their economic, environmental and social impacts in a structured and comparable way. GRI reports are voluntary but increasingly expected by investors, customers and regulators. The GRI is not a tax framework, internal audit standard or budgeting tool. Finance professionals are involved in producing GRI reports because the data they contain (carbon costs, community investment, employment metrics) has financial as well as non-financial dimensions.

Answer: B. Dividends are declared by the board and approved by shareholders; finance supports this by analysing the level of distributable profits available, the cash flow impact of different dividend levels, and how the proposed dividend compares with peer companies or investor expectations. Finance does not set dividend policy unilaterally, nor does it have authority to prevent or pay dividends without proper governance. The board must balance rewarding shareholders with retaining sufficient capital for operations and investment, and finance provides the analysis to inform that judgement.

Answer: C. Finance interacts with the audit committee — a sub-committee of the board comprising independent non-executive directors — by presenting financial statements and explaining significant accounting estimates and judgements, reporting on internal control matters, and acting as a liaison between the audit committee and the external auditors. The audit committee sets its own terms of reference and appoints auditors; finance supports this oversight rather than controlling it. The audit committee's independence requires that finance does not chair its meetings.

Answer: D. The 17 SDGs — covering areas such as climate action, decent work, responsible consumption and reduced inequality — are widely used as a framework for corporate sustainability strategy and reporting. Finance is involved in measuring the organisation's contribution to relevant goals, quantifying the costs of sustainability initiatives, and reporting SDG-related metrics to stakeholders. Finance professionals are not required to make personal donations, the SDGs do not override accounting standards, and they do not create automatic tax benefits. The SDGs connect corporate sustainability to a globally recognised framework.

Answer: A. Finance contributes to customer strategy through customer profitability analysis — calculating the revenue, directly attributable costs and contribution generated by different customer segments, channels or individual accounts. This helps sales and marketing prioritise the most profitable customers and identify where relationships are loss-making. Finance does not handle complaints (a customer service role), design marketing campaigns (a marketing role), or set prices unilaterally (a commercial decision involving sales, marketing and finance together). Customer profitability analysis is a management accounting tool that drives better commercial decisions.

Answer: B. Finance supports board-level strategy by translating options into financial terms — modelling the NPV or IRR of major investments, stress-testing strategic plans under different scenarios, quantifying financial risks, and providing the financial data the board needs to assess whether a strategic direction is viable and value-creating. Finance does not make strategic decisions (that is the board's role), replace strategy functions, or hold veto power over board discussions. Its strategic contribution is analytical — improving the quality of the board's decision making.

Answer: C. In the Integrated Reporting framework, human capital represents the knowledge, skills, experience, values and motivations of people within the organisation — including employees, contractors and others who contribute to value creation. Cash tied up in employment contracts, machinery (manufactured capital) and share market value (financial capital market metric) are separate concepts. Finance is increasingly expected to measure and report on human capital — for example, through metrics such as employee turnover, engagement, training investment and skills gaps.

Answer: D. Finance contributes to risk culture by translating the board's risk appetite into financial terms, embedding risk considerations into budgeting and investment appraisal, providing financial risk analysis that informs operational decisions, and ensuring performance frameworks reward risk-adjusted, not just absolute, returns. Encouraging maximum risk ignores the downside; eliminating all risk starves the organisation of opportunity; and centralising all risk decisions removes accountability from the people best placed to manage operational risks. Finance helps build a culture of informed, proportionate risk-taking.

Answer: A. Finance's insurance role involves working with risk management and legal teams to identify the organisation's insurable exposures, procuring appropriate cover within budget constraints, accounting for premiums and claims correctly, and coordinating major claims to ensure the organisation recovers what it is entitled to. Finance does not sell insurance, perform independent actuarial valuations (those require specialist actuaries), or manage external insurers' investments. Insurance is a mechanism to transfer financial risk, and finance provides the financial discipline that governs its use.

Answer: B. Finance adds value by improving the quality of decisions across the organisation — through better information, more rigorous analysis, proactive risk management and effective business partnering. This goes beyond transaction volume, cost-cutting alone or headcount growth. When finance is embedded in business decisions, it helps the organisation allocate resources to the highest-value opportunities, avoid costly mistakes and build the controls that protect the assets and reputation of the business. Value creation, not just value recording, is the hallmark of a high-performing finance function.