Corporate Governance Values and Ethics

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Corporate GovernanceValues and Ethics

ETHICS IN

FINANCEBy :- SHIKHAR VERMA


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Ethics In Finance : Overview

All business dealings are involvefinance.[Even not for profit making organizations (NPO) are also deals in finance.]

Most of the ethical issues regardingfinance are concerned with financialreporting*.*[Is a formal record of the financial activities of a business, person, or other

entity.]

The internal financial reporting has to-


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Types of Finance

Corporate accounting andfinance, which refers to theaccounting practices reporting

through financial statements ofpublic limited companies isbroadly categorized as follow :-

1) Accounting.

2) Financial Management.


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Financial Accounting : What isAccounting ?

Accounting is the art of :-

Identifying

Recording

Classifying

Summarizing

Measuring

Interpreting

Communicating

All the information in a significant


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Financial Accounting

Financial accountancy is used toprepare accounting information forpeople outside the organization or

not involved in the day-to-dayrunning of the company.

It is basically concerned with thepreparation of financial statementsfor decision makers, such as :-

Stockholders


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Features of FinancialAccounting

Primarily historical.(Basically based on the data generated in the past.)

Designed and intended for use byshareholders, creditors, and publicregulators.

Reported publicly.

(Generally in the AGMs of the organization)


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Management Accounting

Management accounting ormanagerial accounting is concernedwith :-

The provisions and use ofaccounting information to managers

with in organizations.

To provide them with the basis to

make informed business decisions.


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Features of ManagementAccounting

Primarily forward-looking, instead of historical.

Designed and intended for use by managers withinthe organization, instead of being intended for useby shareholders, creditors, and public regulators.

Usually confidential and used by management,

instead of publicly reported.

Computed by reference to the needs of managers,often using management information systems,instead of by reference to general financial


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Financial Management

The management of the finances of abusiness organization in order toachieve financial objectives

The key objectives of financial

management would be to:

Create wealth for the business


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Elements of FinancialManagement


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Ethics In Finance Ethics in general is concerned with

human behavior that is acceptable or"right" and that is not acceptable or"wrong" based on conventional

morality.

General ethical norms encompass

truthfulness

honesty

integrity


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Unethical Activities inFinance

Insider Trading

Financial Deception

Churning

Suitability


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INSIDER TRADING

Insider trading is the trading of acorporation's stock or othersecurities (e.g. bonds or stock

options) by individuals with potentialaccess to non-public informationabout the company.

For example :- Rajat Gupta

Former Director

Goldman Sachs Grou


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FINANCIAL DECEPTION

Financial deception(or financial scam / financial fraud) isthe

Attractive but false presentation offinancial assets,

Transactions or schemes,

By manipulators whose real aim is topocket those investor's savings.

For example :- Satyam Scandal


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CHURNING

Churning is a slang term that isdefined as

Excessive trading on a client account by

a broker. The purpose of the activity is not to

benefit the investor,

But to generate additional commissionsfor the broker.

Also referred to as twisting,

The practice of churning is considered tobe hi hl unethical


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SUITABILITY

Suitability refers to the situation when abroker recommends to the clients thatyou buy or sell a particular security.

In making this assessment, the brokermust consider the clients risk tolerance,

other security holdings, financialsituation (income and net worth),financial needs, and investmentobjectives.


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examples of violations of thesuitability rules:

Recommending securities without having a reasonable

basis for the recommendation

Recommending securities without taking the client'sfinancial situation, needs and objectives into account

Recommending the same security to all clients

Failing to describe important facts and risks about thesecurity to each client

Making trades of excessive size in a client's account


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Way to Encourage Ethical Behaviour inFinancial Services

Organizations are making some arrangements for givingadvanced ethics education to its employees andworkers.

Decentralization in various steps involved in any deal.

Separation of different functions from one to many.

Time to time survey of the client.

Encouraging ethical behaviour to reduce pressurecreated by the corporate culture.


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Corporate Governance Values and Ethics