Ethics in Finance

Barsa RoutrayRahul SahuRavi Kant GuptaAlok Chandra SinhaSujit Dutta MazumdarPrakash PrabhakarYashasvi Goja

Presented by:

Contents• What is Finance• Ethics and Finance• Ethical issues in Accounting• Role of Finance Manager• Ethical issues in Financial Markets• CSR Accounting and Ethics• The Banking Ombudsman Scheme, 2006• Case Study: Books manipulation at Xerox

What is Finance ?

• The two most visible aspects are financial markets and the financial services industry.

Most Visible Aspects

Financial Market

Financial Operations

Ethics and Finance

• Important because they bear on our financial well-being.• Ethical misconduct by individuals or by financial

institutions. • Well developed and effective safeguards should be there. • Strong emphasis on the integrity of the finance professionals

and on ethical leadership.

Ethics in Accounting

A set of distinct guidelines for a business to maintain:

• clean balance sheets• accounting for profits, losses and expenses • prevent it from mishandling financial reports and

statements.

• Provides fair and accurate reporting of the financial position of a business

• Ethical issues:

Reporting income Falsifying documents, Allowing or taking questionable deductions, Evading(Avoiding) income taxes, Engaging in frauds

Role of Finance Manager

Cont.…

• Providing and interpreting financial information • Business modeling and forecasting • Monitoring performance and efficiency• Analyzing change, risk assessment• Strategic planning• Formulating long-term business plans

• Pricing, competitor analysis• Developing financial models• Preparing accounts• Budgetary control• Monitoring cash flow

ETHICAL ISSUES IN FINANCIAL MARKETS

Ethical issues are related to:

• Savings and credit banks• Investment banks• Finance companies and fund manager• Intermediaries and advisors• Insurance companies• Financial mangers of large industrial organisation.

To prevent unethical issues in financial markets

• For smooth running an preventing unethical activities , the govt. enacted many legislation and guidelines:

• INDIAN COMPANIES ACT 1956:

To regulate functioning of the companies aims at giving more protection to investor.• CAPITAL ISSUE CONTROL ACT:• SECURITIES CONTRACT (REGULATION ACT) 1956

• SEBI, established on April 12, 1992 in accordance with the provisions of the securities and exchange board of India act,1992.

• To protect the interest of investor in securities and to promote the development of and to regulate the securities market and for matters connected therewith or incidental.

• RBI guidelines for commercial banks

CSR Accounting and Ethics…

Importance of CSR Accounting

CSR Accounting

Social Environmental

Initiative taken by Accounting profession and agencyGlobal Reporting Initiative (2003)Political Economy Theory (Gray et al ,1996/P.47) International Financial Reporting Standards (IFRS)American Institute of Certified Public

Accountants(AICPA)Social and environmental International Finanial

Reporting Standards (2008)

Ethical message…….

• Good ethical practices are here to stay .For professional accounts in business being answerable for behavior on the issue of sustainability is vital to improving public perception and to winning stakeholders trust. All professional accountants in business now need the knowledge to handle the responsibility that comes with their expanding roles as it is clear sustainability can no longer be an optional add on for business.

( Professional Accountants in Business- At the Heart of Sustainability, IFAC-2006,a,P.12)

The Banking Ombudsman Scheme, 2006

What is the Banking Ombudsman Scheme?

The Banking Ombudsman Scheme enables an expeditious and inexpensive forum to bank customers for resolution of complaints relating to certain services rendered by banks. The Banking Ombudsman Scheme is introduced under Section 35 A of the Banking Regulation Act, 1949 by RBI with effect from 1995.

Who is a Banking Ombudsman?

The Banking Ombudsman is a senior official appointed by the Reserve Bank of India to redress customer complaints against deficiency in certain banking services.

How many Banking Ombudsmen have been appointed and where are they located?

As on date, fifteen Banking Ombudsmen have been appointed with their offices located mostly in state capitals.

Which are the banks covered under the Banking Ombudsman Scheme, 2006?

All Scheduled Commercial Banks, Regional Rural Banks and Scheduled Primary Co-operative Banks are covered under the Scheme.

What are the grounds of complaints?

The Banking Ombudsman can receive and consider any complaint relating to the following deficiency in banking services (including internet banking):

• non-payment or  inordinate delay in the payment or collection of cheques, drafts, bills etc.;

• non-acceptance, without sufficient cause, of small denomination notes tendered for any purpose, and for charging of commission in respect thereof;

• non-acceptance, without sufficient cause, of coins tendered and for charging of commission in respect thereof;

• non-payment or delay in payment of inward remittances ;• failure to issue or delay in issue of drafts, pay orders or bankers’ cheques;…

Thus, Banking Ombudsman is a quasi judicial authority functioning under India’s Banking Ombudsman Scheme 2006, and the authority was created pursuant to the a decision by the Government of India to enable resolution of complaints of customers of banks relating to certain services rendered by the banks. The Banking Ombudsman Scheme was first introduced in India in 1995, and was revised in 2002. The current scheme became operative from 1 January 2006, and replaced and superseded the banking Ombudsman Scheme 2002. From 2002 until 2006, around 36,000 complaints have been dealt by the Banking Ombudsmen.

Q: Why business ethics in CSR?

(Why not impose some strict rules on companies?)

Because every system have their loop holes…

For example:

We have antivirus software in our system, even that our computers are not free from virus..

Companies taking advantages of loop holes…

• Selling their capital.• Loan settlement.• Book washing.

Case Study:XEROXING Corruption

XML , Indian branch of Xerox reported that in years 1998 and 1999 it manipulated its books to make fictitious payments which were recorded as commissions or discounts.

According to the US based parent company s’ own admission. Xerox India paid over US$ 600,000 as bribes to various government employees to win contracts, though it was a serious criminal offence for an American company under the FCPA to pay bribes in a foreign country to win contracts.

The bribes were paid in 1998-1999 when Xerox India was being controlled by B.K. Modi group.

In year 2000 when the parent company acquired majority of shares and ordered their audit firm, Price Waterhouse Cooper to inspect and later found that the money went into several fictitious accounts that were yet to be unearthed.

Unaccounted cash worth US$ 200,000 was recovered by Income Tax Department, who then claimed over US$ 5 million of tax evasion by the Indian arm of Xerox.

The above case highlights:

• How bookkeepers misrepresent information in financial statements to skim money.

• Blatant robbery by internal managers and accountants.

References:

• A C Fernando, Business ethics- an Indian perspective, Pearson, 2010www.bankingombudsman.rbi.org.in

• http://www.iajbs.org/resources/181.doc