Ethical Issues in Finace

7/28/2019 Ethical Issues in Finace

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CHAPTER- 11ETHICAL ISSUES IN FINANCE



Objectives of the Chapter

Importance of financial statements

Ethical issues in Mergers and

Acquisitions

Insider Trading

Money Laundering



Importance of Financial Statements

To run a business ethically, it is necessary to have

trustworthy internal accounting systems.

Companies usually maintained two sets of

accounts.Financial accounts that are given to the

shareholders and internal management accounts.

Management accounts give details about thefunctioning of the different departments, the work

they perform, the cost involved and the earning.



Importance of Financial Statements

contd…

The steps that a company’s management shouldtake into account for true, fair and reliablemanagement accounts are:

Determining the key elements of the business

like the objectives of the firm and see how theyare defined and measured.

Making sure that the funds are allocated todifferent activities on the basis of their

importance,Frame rules that have a positive effect on

business activities.




Acquisitions

Mergers and acquisitions can help a company

develop a competitive advantage and thereby

increase shareholder values.

At the same time mergers and acquisitions,buyouts and takeovers present several ethical

challenges.

They are said to destroy industries and

increase unemployment.




Acquisitions

contd… Takeovers are said to harm the interest of stakeholders as they reduce employmentand disrupt the organization's relationshipswith suppliers and customers.

The changes brought about by takeoversand mergers should be handled in such amanner as to protect all the interests of stakeholders and shareholders of theorganization.



One more charge that is levied is that

takeovers involved breach of trust as they

transfer wealth to shareholders by isolating

implicit contract with other stakeholders.It implies that a supplier or an employee who

expects security for their work can be ignored

during takeovers.


Acquisitions contd…



Hostile Takeovers

• Hostile Takeovers are those that elicitoppositions from the boards or employees of thetarget company. They are typically thosetakeovers to which managers of the targetcompany are against.

• The reasons for the oppositions to the takeoversare:

Protecting their own interestDisagreements over price



Hostile Takeovers

contd…

Some of the popular ways in which

managements use to protect themselves from

unruly predators are:

Poison pillsGreenmail

Golden parachute

People pillSandbag



Poison Pills

Poison pill is an anti-takeover devices used

by a company’s management to make a

takeover prohibitively expensive for the

bidders.The company under target changes the

‘Article of Associate’ so that a group of

shareholders have special rights, which are

evoked by a takeover.



Greenmail

Greenmail occurs where a potential takeover

agent purchases stock in a company.

After the purchase have totaled five percent,

the agent must announce his intention totakeover the company, if that is the intent.

The stock price goes up in anticipation of the

takeover battles.



Greenmail

contd…

The takeover agent ends up selling the shares

back to the company for this increased price

or somewhat higher negotiated price, when

the attacked company struggles to thwart thetakeover.

Greenmails are considered unethical because

the target company may be forced to incur

debts to raise funds to finance the buyback of the shares at a premium price.



Golden Parachute

When a company is taken over, many top

executives are likely to lose their jobs. So to

discourage an unwanted takeover attempt, a

company gives lucrative benefits to its topexecutives- these benefits are awarded to

those executives who lose their jobs after

takeover.

Benefits include stock options, bonuses, andseverance pay, etc. Such Golden parachutes

can run into millions of dollars and can cost

the firm a lot of money.



People Pill

This is a defensive strategy for warding off a

hostile takeover.

In this case management threatens that, in

the even of a take over, the entiremanagement team will resign

This is a very effective method if they are a

good management team, in place, the loss of

which would harm the company.



Sandbag

This is another tactic used by management to

stop a takeover attempt.

The company stalls the attempts in the hope

that another more favorable company will tryto take them over.

Management should not waste too much of

time in trying to find a more favorable

company.



Insider Trading

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 toother market participants.

Insider dealing is considered unethical and

blamed because it is though to violate

equality of opportunity.



Money Laundering

Money laundering involves hiding, moving and

investing the process of criminal transactions.

Money laundering involves disguising assets so

they can be used without detection of the illegalactivity that produced them.

Through money laundering, the criminal

transforms the monetary proceeds derived from

criminal activity into funds with a seemingly legalsource.



Money Laundering

Even legal money can become illegal, if moving it violates a country’s foreign-exchange control or other financialregulations.

Laws governing money laundering originated inthe US.

In the US money laundering laws wereenacted primarily to drugs and narcotics

dealers who were legalizing the profits earnedfrom their nefarious activities.

A number of initiatives have been establishedfor dealing with the problem at theinternational level.

Eg. Financial Action Task Force



Summary of the Chapter

Importance of financial statements


Acquisitions

Insider Trading

Money Laundering

Ethical Issues in Finace

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