Ethics in Finance

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Ethics in Finance

• PGDM-Session 7

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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

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Ethical issues in Finance

• Financial statements
• Hostile Takeovers
• Financial Markets
• Insider Trading

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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.

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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

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Ethical Audit

• An 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 customers
• It measures business conduct against varied moral
  standards of the community.

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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

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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

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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

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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.

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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

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Anti-takeover defense measures

• Poison Pills
• Green mail
• Golden Parachute
• People Pill

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Poison Pills

• An anti-takeover device used by companys
  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)

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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.

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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

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Ethics Greenmail

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

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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

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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 companys long term value then they are
  acting unethically

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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.

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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

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• Thank You