Chartered Financial Analyst Code of Ethics

Abstract

As a CFA, a Chartered Financial Analyst, Harry Markham’s profession and designation requires he provide sound investment consulting services to trustees and administrators of a state pension, in conjunction with his employer, Investment Consulting Associates (ICA). The CFA Institute which Harry Markham is a member of, measures the competence and integrity of its members. In order to attain this well-respected designation in the field of investment analysis. CFA candidates must pass 3 exams to ensure they have the knowledge required. This grueling exam has a 40-50% pass rate and requires more than 300 hours of study, which includes a standardized, industry-wide framework and code of ethics and standards . (CFA Institute). The CFA designation requires that all members follow and adhere annually that they are following the CFA’s strict code of ethics and standards. Failure to follow standards can cause a member to forfeit their CFA charter and designation (Investopedia). This case will describe the challenges faced by financial professionals such as Harry Markham when professional loyalties and ethical responsiblities disagree.

Problem Statement

The problem and concern of this case study, as stated by Minahan and Reavis (2012), is the valuation of the fund’s liabilities reported directly by the fund’s actuaries. Harry Markham’s firm was very clear when discussing the sensitive nature of the client’s investments. They advised Markham that they did not want the board of the state pension funds, or their valuations questioned (Minahan, & Reavis, 2012). The firm’s only concern was to keep the funds in their portfolio and trustees’ content and oblivious of issues. Markham’s dilemma was an ethical one as he knew based on his educational background and pledge to his CFA designation that he had an ethical responsibility to the pensioners as well, who were depending on his expert knowledge and experience to provide the pension administrators with the most sound, ethical and profitable advice possible. This creates a dilemma for Markham between his professional, and ethical responsibility to adhere to the guidelines and standards of the CFA designation, and to that of his company ICA and their desire to keep their client’s business by not questioning the valuation methods of the funds and raising red flags of concern as to the liability valuation issue.

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As the messenger with an ethical responsibility and designation of CFA , Harry Markham must advise the board of the fundamental differences between public and government valuations. He must ensure that they are aware of the varying valuation methods and how they are based on the different standards according to the environment or situation of the entity.

This case study will further discuss the ethical guidelines that Harry Markham should follow to establish how he can proceed in a manner that follows morale compass as well as meets the requirements of his CFA designation and also, allows his employer and clients the knowledge and comfort of knowing he is looking out for their best interest.

Statement of Cause

“The prevalence of public services and goods in government, combined with viewing the benefits and costs of those services and goods from a societal perspective, results in a somewhat different approach to measurement in governmental financial reports”. (GASB, 2017, p.18).

As discussed by Minahan & Reavis (2012), The Government Accounting Standards Board (GASB), discounting liabilities was reasonable for pension funds due to the long-term investments. The battle between the economist, analysts and the pension plan and GASB, was that the discount percentage being used to discount the liabilities was not in line with earning potential of the assets in a reasonably safe investing environment. The GASB (2017), states that due to the fact that the primary goal of government is not financial return, other measures are used. Therefore, it is with this premise that the GASB has a long-term view and emphasize allocation of resources and future trends and not short-term fluctuations (GASB, 2017).

The discount rate being used that is the point of contention and debate for Markham has been discussed in length by GASB and so have the differences between the Financial Accounting Standard Board (FASB), which most importantly involves a measurement or valuation for the pension plans that in contrast to those in the public sector. Although, risk, contributions and projected returns should be similar, these investments are projected and valued according to the plan’s resources, postemployment government obligations and overall government liabilties. It is the responsibility of the Markham to provide sound and accurate investment advice, including the risks associated with certain funds, including valuations.

Conflicts of Interest. There are various opinions and solutions proposed to address the issue of conflicts of interest in various industries, including the financial and accounting industry. As discussed in Disclosing Conflicts of Interest by Cain and Moore, the study and experiment methods with regard to disclosures show that the impact that disclosures which negatively affect the personal gains of the advisor. If the disclosure benefited the advisor financially or was in their best interest, it was disclosed, otherwise it was not. The results showed that disclosures in financial advisory industry created less compensation for the advisors and therefore, this creates the ultimate conflict of interest (2005).

As the messenger with an ethical responsibility and designation of CFA , Harry Markham must advise the board of the fundamental differences between public and government valuations. He must ensure that they are aware of the varying valuation methods and how they are based on the different standards according to the environment or situation of the entity. This case study will further discuss the ethical guidelines that Harry Markham should follow to establish how he can proceed in a manner that follows morale compass as well as meets the requirements of his CFA designation and also, allows his employer and clients the knowledge and comfort of knowing he is looking out for their best interest.

Code of Ethics. As discussed in GASB (2017), The American Accounting 22 Association’s (AAA) Committee on Concepts of Accounting Applicable to the Public Sector divided what entities are accountable for into four parts:

a. Financial resources.

b. Faithful compliance or adherence to legal requirements and administrative policies.

c. Efficiency and economy in operations.

d. The results of government programs and activities, as reflected in accomplishments, benefits, and effectiveness. (GASB, 2017, p.21)

In addition to the differences and ethical dilemma in presenting the true value of the liabilities of these funds and the differences between the public and government accounting methods, is also the accumulated and future pension obligations for the general tax payer.

The effect of government accounting valuation methods for government pensions and possible losses are also a detriment to the tax payer for accumulated pension obligations, new funds that become underfunded or lose value. The harm to the general tax payer is the government’s pension debt that in 2008 was valued at $3.23 trillion in pension underfunding, according to the Journal of Economic Perspectives (Novy-Marx & Rauh, J. (2009).

References

• CFA Institute. (n.d.). CFA Institute. Retrieved from https://www.cfainstitute.org/
•                  Investopedia (2018). Chartered Financial Analyst (CFA). What is a Chartered Financial Analyst (CFA). Retrieved by https://www.investopedia.com/terms/c/cfa.asp
•                  CFA Institute. (n.d.). CFA Institute. Retrieved from https://www.cfainstitute.org/
• Cain, D., Loewenstein, G., & Moore, D. (2005). The Dirt on Coming Clean: Perverse Effects of Disclosing Conflicts of Interest. The Journal of Legal Studies, 34(1), 1-25. doi:10.1086/426699
• GASB (n.d.) Fact Sheet on the GASB’s New Pension Standards: Reporting by Pension Plans. Government Accounting Standards Board. Retrieved by https://www.gasb.org/cs/ContentServer?c=Page&cid=1176160452828&d=&pagename=GASB%2FPage%2FGASBSectionPage
• GASB (2017). Why Governmental Accounting and Financial Reporting Is-and Should be – Different. Government Accounting Standards Board. Retrieved from https://www.gasb.org/cs/ContentServer?c=Document_C&cid=1176169371273&d=&pagename=GASB%2FDocument_C%2FDocumentPage
• Investopedia (2018). Chartered Financial Analyst (CFA). What is a Chartered Financial Analyst (CFA). Retrieved by https://www.investopedia.com/terms/c/cfa.asp
• Minahan, J., & Reavis, C. (2012). Harry Markham’s Loyalty Dilemma. Retrived from (https://mitsloan.mit.edu/LearningEdge/Leadership/HarryMarkhamA/Pages/Harry-Markham-Loyalty-Dilemma-A.aspx

• Novy-Marx & Rauh, J. (2009). The Liabilities and Risks of Sate Sponsored Pension Plans. Journal of Economic Perspectives. Retrieved from https://web.stanford.edu/~rauh/research/JEP_Fall2009.pdf
  • Steinbauer, R., Renn, R., Taylor, R., & Njoroge, P. (2014). Ethical Leadership and Followers’ Moral Judgment: The Role of Followers’ Perceived Accountability and Self-leadership. Journal of Business Ethics, 120(3), 381-392. Retrieved from http://www.jstor.org/stable/42921343