CPA CFE Strategy and Governance 2 — Questions and Answers
Question 1: What is the primary purpose of a stakeholder analysis in strategic management?
- To calculate the return on equity for shareholders
- To identify and assess the interests, influence, and expectations of parties affected by or affecting the organization (Correct answer)
- To determine the company's market share
- To prepare the annual budget
Correct answer: To identify and assess the interests, influence, and expectations of parties affected by or affecting the organization
Stakeholder analysis identifies all parties with an interest in the organization (shareholders, employees, customers, regulators, communities) and assesses their relative power, influence, and expectations to develop appropriate engagement strategies.
Question 2: According to the COSO Internal Control framework, which component addresses the entity's commitment to integrity and ethical values?
- Risk assessment
- Control activities
- Control environment (Correct answer)
- Monitoring activities
Correct answer: Control environment
The control environment is the foundation of the COSO framework and sets the tone of the organization. It includes the entity's commitment to integrity and ethical values, governance oversight, organizational structure, commitment to competence, and accountability.
Question 3: A company is considering vertical integration. What does backward integration involve?
- Acquiring a competitor at the same level in the value chain
- Acquiring or developing capabilities of a supplier to control inputs (Correct answer)
- Acquiring or developing distribution channels closer to the end customer
- Divesting non-core business units
Correct answer: Acquiring or developing capabilities of a supplier to control inputs
Backward (upstream) integration involves acquiring or developing the operations of suppliers to gain control over raw materials or inputs. Forward integration moves toward the customer. Horizontal integration involves acquiring competitors at the same level.
Question 4: What is the 'agency problem' in corporate governance?
- The difficulty of finding qualified independent directors
- The conflict of interest between management (agents) and shareholders (principals) when their interests diverge (Correct answer)
- The challenge of complying with multiple regulatory bodies
- The cost of maintaining an internal audit department
Correct answer: The conflict of interest between management (agents) and shareholders (principals) when their interests diverge
The agency problem arises because managers (agents) may act in their own self-interest rather than in the best interests of shareholders (principals). This information asymmetry and misalignment of incentives can lead to suboptimal decisions for shareholders.
Question 5: In the BCG growth-share matrix, what characterizes a 'cash cow'?
- High market growth and high market share
- Low market growth and high market share (Correct answer)
- High market growth and low market share
- Low market growth and low market share
Correct answer: Low market growth and high market share
Cash cows operate in low-growth markets but hold high market share. They generate significant cash flows with minimal investment needs, as the market is mature. The cash generated can be used to fund stars and question marks in the portfolio.
Question 6: What is the purpose of a code of conduct in corporate governance?
- To replace all government regulations
- To establish expected standards of behavior and ethical guidelines for directors, officers, and employees (Correct answer)
- To determine employee compensation levels
- To set production quotas for each department
Correct answer: To establish expected standards of behavior and ethical guidelines for directors, officers, and employees
A code of conduct sets out the organization's values, ethical standards, and expectations for behavior. It provides guidance for decision-making in ethical dilemmas, promotes a culture of integrity, and serves as a governance tool for accountability.
CPA CFE Strategy and Governance 2
What is the primary purpose of a stakeholder analysis in strategic management?