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8/14/2019 Ethical Aspects of Sfm
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ETHICAL ASPECTS OF SFM
Background:- Some of the obvious reasons for widespread
unethical financial practices may be listed as follows.Ambition for achieving disproportionately high results with
inadequate resources & time.
Corrupt practices in govt.bureaucracy, politicians &
regulatory authorities. Complex tax laws.
Structural & procedural deficiencies in the organisation.
Monopolistic power creating an imbalance in a market
economy.
Organisational culture does not promote healthy
competition, loyalty, creativity, consistency, transparency &
entrepreneurship.
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Centralised control, lack of empowerment.
Unhealthy rivalry promoted by the owners, their families,
partners & so- called advisors. False notion of racial superiority, intellectuality, religious
& regional supremacy.
Saturated growth of a developed country, leading to a
forced exposure outside which the enterprise may not beready to face.
Individuals family, socio-economic background.
Fear of uncertainty about future.
Definition of Ethical ManagementA transparent approach to business success, which is
enjoyed by all stake-holders, based on the national
priorities & moral guidelines of the society.
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ETHICAL DILEMMA:-
A practice in which an ethical individual or an organisation
being forced to accept an unethical or semi-ethical solution to
a problem in the larger interest of the organisation,
employees & society.
While facing a dilemma an executive is expected to follow a
following preference-order of respect.
The universe
Nation
Society
Organisation
Division
Group
Family
Individual
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Remedy For Ethical Dilemma:-
Ethical dilemma should be sorted out with the best possible,& most acceptable adequate ethical solution. Quality ofsuch solutions may be decided from the following matrix.
The Flexible Solution
(Ethical)
The Best Solution
The Worst Solution
(Legal)
The masterminded solution
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An ethical audit or audit of ethical practices must be carried
out every year, by using two sets of parameters --
Quality of combinations of solutions as shown in the matrix.
Preference observed in addressing ethical dilemma.
Ethical-Economical Combinations :
Financial strategists are more concerned about ethical
economic solutions than ethical legal combination. The
E E combinations could be broadly classified as follows.
Fully ethical & most economical --- Best
Fully ethical & not so economical Acceptable
Most economical & not ethical Dangerous
Non-ethical & non-economical Disastrous
The most effective, ethical & economic approach of business
requires the following major attributes, skills & approaches
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to be mastered by everybody in the organisation.
Creative & alternate thinking about solutions. Entrepreneurial approach to business, at all levels in the
organisation.
Most efficient systems of accounting, information,
communication & control. Maturity for understanding the macro & micro variables of
business.
Patience for long-term results.
Ethical results normally start late on the performance curve ofthe organisation. But results are big & sustainable, compared
to those with unethical, short-cut tactics.
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CORPORATE GOVERNANCE
Corporate Governance encompasses the system of
operating & controlling a body corporate in order to satisfythe expectations & objectives of various stakeholders,creditors, employees, customers, suppliers etc.
What is CG?
It is a network of legal provisions, regulations, & practices
to bring accountability & transparency in the functioning ofbody corporate.
It is concerned with both the internal aspects of thecompany such as internal controls & the external aspectssuch as an organisations relationship with itsshareholders & other stakeholders.
CG structure specifies the distribution of rights &responsibilities among different participants in thecorporation, such as the board, managers, shareholders &
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other stakeholders & spells out the rules & procedures for
makingdecisions on corporate affairs.
CG ensures that resources available to a company are
used in a manner that meets the aspirations of the
society & different stakeholders.
Two basic principles of CG are:
The management (BOD) has executive freedom to run,
direct & drive the enterprise
The management should exercise this freedom within a
framework of effective accountability.
Thus CG provides for empowerment of BOD &
simultaneously creates a system of checks & balances
to ensure that the decision-making power is not misused
but is undertaken, with a sense of care & responsibility.
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FEATURES OF CG
Trusteeship :- Ensures that BOD has responsibility to
protect the interests of different stakeholders. Transparency : Disclosures without jeopardising the
strategic interests.
Empowerment :- Refers to creativity & innovation
throughout the organisation by vesting decision makingpowers as close to the scene of action as possible.
Control :- Timely management of change.
Ethical Behavior :- Both within organisation & in external
ralationships.Focal point of CG is on top management however, in big
organisations it may be addressed to three interlinked
levels namely; Strategic Supervision(BOD), Strategic
Management(Corporate Management Committes ) &
Executive Management( Divisional Chiefs)
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DEVELOPMENTS IN PRACTICES OF CG
At formal level, CG started in India in 1998 when CII evolved
a code of corporate governance for transparent
disclosure norms as follows.
1. Annual Reports of all listed companies should be
accompanied by compliance certificate signed by CEO or
CFO.
2. Listed companies should give a statement on value
addition.
3. Data on high & low averages of share prices should be a
part of the annual report.
4. Disclosure norms for a GDR issue should also be the
norm for any domestic issue of securities.
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RECOMMENDATIONS OF VARIOUS COMMITTEES ON CG
In May 1999, SEBI appointed a committee on CG, under the
chairmanship of K.M.Birla to suggest
Suitable amendment to the listing agreement
Measures to improve the standards of CG in listed
companies.
A code of corporate best practices.
Birla committee made several mandatory & non-mandatory
recommendations about
Independent directors, Nominee directors & Chairman of
the BOD.
Audit Committee & its composition.
Frequency of audit committee meetings, Functions of
Audit Committee.
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Remuneration committee of the board & its composition
Accounting Standards & Financial Reporting
Functions of the Board
Separate Report on CG in the Annual ReportThe committees recommendations have looked at corporate governance
from the point of view of the shareholders & investors. The control &
reporting functions of the BOD & role of the various committees, role of
management assume a special significance from this perspective.
The recommendations of K.M. Birla committee resulted in the introduction ofClause 49 in the Listing agreement. Provisions & requirements of clause 49
of the Listing Agreement are dealing with the following.
BOD :- Composition of the Board, Non-executive directors compensation &
disclosures, Independent directors, Borad procedure, Code of conduct, Term
of office of the non-executive directors etc.
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Audit Committee :- Qualified & independent audit
committee, meeting of audit committee, powers of audit
committee, role of audit committee, review of information by
audit committee.
Audit Reports & Audit Qualifications :- Disclosure of
accounting treatment.
Whistle Blower Policy :- Internal policy on access to Audit
Committee.
Subsidiary Companies :-
Disclosure of Contingent Liabilities :-
Disclosure :- Basis of related party transactions,disclosures about risk-management, Proceeds from IPO,
remuneration of directors, management analysis report,
Redressal of shareholders & investors complaints :-
Regarding transfer of shares, non-receipt of dividends etc.
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CEO/CFO Certification :-
Report on Corporate Governance :-
RECOMMENDATIONS OF NARAYAN MURTHYCOMMITTEE :-
In the year 2002, SEBI constituted a committee under the
chairmanship of N.R.Narayan Murthy to review the
performance of CG in India & to make appropriate
recommendations to enhance transparency & integrity to
stock market. These are as follows.
Audit committees of listed companies will review the
following information mandatorily.
a) Financial statements & draft audit report,
b) Management discussion & analysis of financial
condition
c) Report related to compliance withlaws
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d) Records regarding related party transactions
Companies should be encouraged to move towards
unqualified financial statements. A statement of all related party transactions ( as per AS-
18) should be placed before the independent auditcommittee for approval .
Procedures should be in place to inform the members ofthe BOD about the risk assessment.
BOD should lay down the code of conduct for all members& senior management people.
The nominee directors ( by Govt. or FI ) shall be elected
by the shareholders & be subject to same responsibilitiesas other directors.
All compensations & stock-options payable to non-executive directors should be approved by theshareholders in general meeting.
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Companies should ensure that personnel who observe an
unethical practice should be able to approach the Audit
Committee. The performance evaluation of non-executive directors should
be by a peer group comprising members of BOD.
All Audit Committee members shall be non-executive
directors.
Role of Audit Committee :- The role of audit committee shall
include the following.
1. Oversight of the companys financial reporting process & the
disclosure of its financial information to ensure that the
financial statement is correct, sufficient & credible.2. Recommending the appointment & removal of external
auditor, fixation of audit fee & also approval for payment for
any other services.
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3) Reviewing with management the annual financial
statements before submission to the board, focusing primarily
-- Any changes in accounting policies & practices
-- Major accounting entries based on exercise of judgment
by management.
-- Qualifications in draft audit report.
-- Significant adjustments arising out of audit.-- The going concern assumption.
-- Compliance with Accounting Standards
-- Compliance with stock exchange & legal requirements
concerning financial statements.
-- Related party transactions.
4) Reviewing with the management, external & internal auditors,
the adequacy of internal control system.
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5) Reviewing the adequacy of internal audit function,
including the structure of the internal audit department.
6) Discussion with internal auditors any significant findings &
follow-up thereon.
7) Reviewing the findings of internal investigation by the
internal auditors into matters where there is suspected
fraud or irregularity or a failure of internal control system.
8) Discussion with external auditors before the auditcommences about nature & scope of audit as well as
post-audit discussion to ascertain area of concern.
9) Reviewing the companys financial & risk management
policies.10) To look into the reasons for substantial defaults in the
payment to the depositors, debenture-holders,
shareholders ( in respect of dividends) & creditors.
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Mandatory Review of Information by Audit Committee:-
1. Financial statements & draft audit report, including
quarterly/ half-yearly financial information.
2. Management discussion & analysis of financial
condition & results of operations.
3. Management letters/ letters of internal control
weaknesses issued by statutory/internal auditors.
4. Reports relating to compliance with laws & to risk
management.
5. Records of related party transactions
6. The appointment, removal & terms of remuneration of
the Chief Internal auditor shall be subject to review by
the Audit committee.
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SARBANES OXLEY ACT 2002
The challenge to the investors confidence in listedcompanies caused by some untoward incidents in the
recent past in the international capital markets hasbrought corporate governance issues under the spotlight.Serious financial manipulations in the corporate arenahave intensified the focus on how business houses aremanaged. In view of the scam involving U.S. corporate
giants like Xerox, World Com, Enron etc. the Sarbanes-Oxley Act was enacted in the U.S. with some stringentmeasures relating to CG.
The act deals with the corporate social responsibility &emphasized the audit function & financial disclosure,conflict of interest & corporate governance at publiccompanies. It aims at the strengthening of powers &functions of Audit Committee. It requires the constitutionof Public Company Accounting Oversight Board (PCAOB)
to oversee the audit of public companies that are subject
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securities laws, to establish audit report standards. It prohibits
an auditor from performing specified non-audit services,
alongwith an audit. Audit firms to be appointed by & report
directly to the Audit Committee and subject to rotation of thepartner & the firm.