Chartered Financial Analyst (CFA) Practice Exam Level 2

Which of the following is considered as a business relationship indicating lack of independence?

1. Prior employment as an executive in the company

2. Graduate studies related to the company field

3. Advising on market trends without direct involvement

4. Networking with company employees

The correct answer is: Prior employment as an executive in the company

A prior employment as an executive in a company is a clear indicator of a business relationship that may compromise independence. When an individual has served in a key position within a business, they often develop substantial familiarity with the company’s operations, culture, and inner workings. This previous association can lead to potential biases or conflicts of interest when evaluating or working with the same company later on. The perception of independence is crucial for analysts, auditors, and advisors, as stakeholders need to trust that opinions and analyses are not influenced by past ties or loyalties. In contrast, the other options involve relationships or activities that do not directly compromise independence to the same extent. Graduate studies related to the company field may indicate expertise but do not inherently create a conflict of interest. Advising on market trends without direct involvement suggests a level of detachment from the specific operations of the company, allowing for objective analysis. Networking with company employees can foster professional relationships but does not necessarily imply a conflict that would affect one's independence in performing evaluations or providing services.