Download Ethics in Finance

Ethics in Finance
by:Karan Srivastava
Ethics are standards of right and wrong, good
and bad. Ethics are concerned with what one
ought to do to fulfill one’s moral duty. There are
two aspects to ethics:
•Being able to determine what is right or wrong,
good or bad
•Committing to doing what is right and good
Characteristics of Management Prone
to Fraud
 Unduly aggressive financial Targets
 Domination by person or group without controls
Pressure to reduce tax liabilities
Non-Financial personnel involved in accounting
matters
Aggressive accounting practice to keep stock prices
high
Major performance related compensation
Ethical issues in Finance
 Financial statements
 Financial Markets
 Insider Trading
 Hostile Takeovers
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.
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
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.
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
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
Introduction Insider trading
Insider trading essentially denotes dealing
in a company ‘s securities on the basis of
confidential information relating to the
company which is not published or not
known to the public used to make profit or
loss. It is fairly a breach of fiduciary duties
of officers of a company or
“
connected” persons as defined under the
SEBI regulations,1992, towards the
shareholders.
Cont’d
 Insider terms actually includes both legal and
illegal conduct.
 The legal version is when corporate insider
officer, directors , and employees buy and sell
stock in their own companies. when corporate
insiders trade in their own securities , they must
report their trades to SEBI.
 Illegal insider trading refers generally to buying
or selling a security , in breach of fiduciary duty
or other relationship of trust and confidence,
while in possession of material , non public
information about the security.
Who are insider traders ?????
Remember this ‘STONE COLD’ guy????????
Who are insider traders?
 Corporate officers, directors , and
employees who traded the corporations
securities after learning of significant ,
confidential corporate developments.
 Friends , business associates, family
members , and other types of such
officers , directors , and employees, who
traded the securities after receiving such
information.
Cont’d
 Employees of law, banking , brokerage and
printing firms who were given such
information to provide services to the
corporation whose securities they traded.
 Govt employees who learned of such
information because of their employment
by the Govt .
 Other persons who misappropriated ,and
took advantage of, confidential
information from their employers.
In India…….
 Only 14 cases taken up by SEBI for insider
trading in 2003-04 , which went down to
only 7 in 2004-05.
 In terms of cases completed, the no was
only 9 and 5 respectively.
 So does India has fewer incidence of
insider trading or our systems/laws not
geared enough to detect such cases?
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
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.
RAJAT GUPTA SCAM
HARSHAD MEHTA SCAM
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
Anti-takeover defense measures
 Poison Pills
 Green mail
 Buy back
 People Pill
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)
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
Buy Back
 Purchase of its own shares by the Company
 Bring down public holding and increases promoter
holding
 A listed Company may buy back its own shares by any of
the following methods:
 Through tender offer;
 From open market though:
Book building process
o Stock exchange
o
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