Ethics in finance

by:-Karan Srivastava

Ethics in Finance

Ethics are standards of right and wrong, good and bad. Ethics are concerned with what one ought to do to fulfill ones 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 FinanceFinancial statements

Financial Markets

Insider Trading

Hostile Takeovers

Fraud in Financial StatementsFictitious RevenuesConcealed Liabilities and ExpensesFraudulent Asset ValuationsImproper or Fraudulent Disclosures or OmissionsCreative accounting form of fraudulent financial reporting so as to provide misleading information.

Duties of an AuditorTo 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 AssociationTo be reasonably skillful and careful in identifying the true nature of the accounts

Ethical AuditAn audit that assess a businesss 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 customersIt measures business conduct against varied moral standards of the community.

Objectives of Ethical AuditTo provide a critical assessment of functioning of businessTo investigate into acquisition or restructuring operationsTo determine the type of training necessary for employeesTo establish ethical conduct of businessTo enhance, measure and promote the quality that increases business performance by assessing them against the ethical business objectiveTo improve the quality of governance by evaluating the performance and ensuring that financial information is both available and reliable

Ethical Issues in Financial MarketsDeception: 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 clientUnsuitability 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.

ContdInsider 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.

ContdEmployees 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 TradingRefers to trading on price sensitive information by company employees or individuals closely connected with the firmThis information has not been disclosed to other market participants

Ethics & Insider Trading

It violates equality of opportunityDoes not give a level playing field between insiders and outsidersMight 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 TakeoversAre those that elicit opposition from the boards or employees of Target companyReasons for opposition are as follows: Disagreements over price Protecting their own interests

Anti-takeover defense measuresPoison Pills

Green mail

Buy back

People Pill

Poison Pills

An anti-takeover device used by companys management to make takeover prohibitively expensive for the biddersCompany 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)

GreenmailIt occurs where a potential takeover agent purchases stock in a companyAfter the purchases have totaled five percent the agent must announce his intention to takeover the company, if that is the intentStock prices go up in anticipation of takeover battleManagement of target company sends greenmails to prevent a shareholder from taking over the companyTakeover agent ends up selling the shares back to company at an increased or higher negotiated price

Buy BackPurchase of its own shares by the CompanyBring down public holding and increases promoter holdingA listed Company may buy back its own shares by any of the following methods:Through tender offer;From open market though:Book building processStock exchange

People PillManagement threatens that in event of a takeover the entire management team will resignIf managers act in their own interest rather than companys long term value then they are acting unethically