Ethics in Finance

1. Ethics in Finance PGDM-Session 7

2. Characteristics of Management Prone to Fraud • Unduly aggressive financial Targets • Domination by person or group without controls • Aggressive accounting practice to keep stock prices high • Pressure to reduce tax liabilities • Major performance related compensation • Non-Financial personnel involved in accounting matters

3. Ethical issues in Finance • Financial statements • Hostile Takeovers • Financial Markets • Insider Trading

4. Fraud in Financial Statements • Fictitious Revenues • Concealed Liabilities and Expenses • Fraudulent Asset Valuations • Improper or Fraudulent Disclosures or Omissions • Creative accounting – form of fraudulent financial reporting so as to provide misleading information.

5. Duties of an Auditor • To give an accurate statement to the members about the state of affairs of a company • To meet the objectives of the Companies Act 1985 and also the Articles of Association • To be reasonably skillful and careful in identifying the true nature of the accounts

6. Ethical Audit • An audit that assess a business’s structures, procedures, systems and policies. • It measures the extent to which the activities of a business comply with the standards it has publicly declared to its external customers • It measures business conduct against varied moral standards of the community.

7. Objectives of Ethical Audit • to provide a critical assessment of functioning of business • To investigate into acquisition or restructuring operations • To determine the type of training necessary for employees • To establish ethical conduct of business • To enhance, measure and promote the quality that increases business performance by assessing them against the ethical business objective • To improve the quality of governance by evaluating the performance and ensuring that financial information is both available and reliable

8. Ethical Issues in Financial Markets • Deception: act of misrepresenting relevant information • Churning: Excessive or inappropriate trading for clients account by a broker who has control over the account with intent to generate commissions rather than to benefit client • Unsuitability • Unfairness in Markets

9. Insider Trading • Refers to trading on price sensitive information by company employees or individuals closely connected with the firm • This information has not been disclosed to other market participants

10. Ethics & Insider Trading • It violates equality of opportunity • Does not give a level playing field between insiders and outsiders • Might harm exchange as a whole because investors might not be willing to trade on exchange that does not give shareholders their rights.

11. Hostile Takeovers • Are those that elicit opposition from the boards or employees of Target company • Reasons for opposition are as follows: • Disagreements over price • Protecting their own interests

12. Anti-takeover defense measures • Poison Pills • Green mail • Golden Parachute • People Pill

13. Poison Pills • An anti-takeover device used by company’s management to make takeover prohibitively expensive for the bidders • Company under target changes AOA so that group of Shareholders have special rights to buy and sell preferred stock at highly favorable prices (At times below market price)

14. Ethics & Poison Pills • Poison pills are prohibited in Britain by takeover code because they prevent open competition between bidders for shares • Use of poison pills are ethical if they are designed to protect the management from unwanted takeover bids.

15. Greenmail • It occurs where a potential takeover agent purchases stock in a company • After the purchases have totaled five percent the agent must announce his intention to takeover the company, if that is the intent • Stock prices go up in anticipation of takeover battle • Management of target company sends greenmails to prevent a shareholder from taking over the company • Takeover agent ends up selling the shares back to company at an increased or higher negotiated price

16. Ethics & Greenmail • Target company may be forced to incur debts to raise funds to finance the buy back of shares at premium price

17. Golden Parachute • A company gives lucrative benefits to its top executives such as stock options, bonuses, etc • Presence of parachute allows management to evaluate takeover bid more objectively

18. People Pill • Management threatens that in event of a takeover the entire management team will resign • If managers act in their own interest rather than company’s long term value then they are acting unethically

19. Management Buyout • It occurs when management decide to bid for the company • They convert the company into a private company and at a later date, bring it back to market to make substantial profits.

20. Ethics & Management Buyout • Shareholder believe that management may resort to unethical practices to bring down share prices and buy out at cheaper rate • Unethical activities can involve leaking confidential information by managers for their benefit during buy out

21. Thank You