ETHICS IN

BANKS &
FINANCIAL
INSTITUTIONS

K G KHULLAR

JAIIB,CAIIB,MCA

( Ex-Bank of India,PSB )
 ETHICS IN BANKS & FINANCIAL INSTITUTIONS BY- K G KHULLAR

ETHICS
 The word ‘Ethics’ is derived from the Ancient Greek word ēthikos- meaning character,
is the essence of values and habits of a person or group.
 It covers the analysis and employment of concepts such as right and wrong, good and
evil, and acting with responsibility.
 One of the meanings is 'Ethics' are the principles of conduct governing an individual or
a group.
 Another definition describes ethics as relating to what is good or bad and having to do
with moral duty and obligation.

Ethics is the integrity measures, which evaluates the values, norms and rules that constitute the
base for individual and social relationships, from a moral perspective. Professional ethic
regulates the relations between individuals within a professional group and their
relations with the community whereas, organizational ethic defines the code of conduct in an
organization.
Banks play unifying and intermediary roles between fundsupplying and fund-demanding sides of
the society, executing savings and investment functions. Due to their key role in the economy,
while working under the principles of profitability and productivity, banks are obliged to obey
ethical principles of banking profession and organizational ethic.
Within the objectives of improving the quality of banking services, making best use of the
available resources, and preventing unfair competition between banks, the banks are required to
regulate their relationship between other banks, with other institutions, and with their customers
and employees in compliance with certain ethical principles.

Business Ethics:
 Ethics in business refers to the application of day-to- day moral or ethical norms to
business. Business Ethics are the principles and standards that determine acceptable
conduct in business organizations.
 Business Ethics in a business organization relates to a corporate culture of values,
programs, enforcement and leadership.
 Business ethics is a set of principles or reasons which should govern the conduct of
business – at the individual firm Level or at the collective Industry Level, by the
application of ethical reasoning to specific business situations and activities.

Being ethical in business requires acting with an awareness of

1. Laws of the land,
2. Customs and expectation of the community
3. Principles of morality
4. Policies of the organization and
5. General concerns such as the needs of others and fairness.
a) How the products, services and actions of a business enterprise, can affect its stakeholders
(i.e. employees, customers, suppliers, shareholders and community society as a whole) either
positively or negatively.

1
 ETHICS IN BANKS & FINANCIAL INSTITUTIONS BY- K G KHULLAR

Difference Moral & Ethics-

Point Moral Ethics

Derived from Latin word MOS Derived from Greek word ETHIKOS or
1
meaning customs. ETHOS meaning character.
Is accepted from an authority say
2 Are personal principles/ attribute.
culture, religion i.e. defined by group.
3 Narrower scope Wider scope
Can be expressed as General rules & Cannot be expressed as General rules
4
statements & statements
Are absorbed as a child from family,
5 Are developed over a period of time.
schools, friends, etc.,
6 Societies have customs. People have character

Nature of Ethics
Ethics refers to standards of behaviour that tell us how human beings ought to act in the many
situations in which they find themselves as friends, parents, children, citizens, business people,
teachers, professionals, and so on. It is helpful to identify what ethics is NOT:
 Ethics is not the same as feelings. Feelings provide important information for our
ethical choices. And often our feelings will tell us it is uncomfortable to do the right thing
if it is hard.
 Ethics is not religion. Many people are not religious, but ethics applies to everyone.
Most religions do advocate high ethical standards but sometimes do not address all the
types of problems we face.
 Ethics is not following the law. A good system of law does incorporate many ethical
standards, but Law can deviate from what is ethical sometimes.
 Ethics is not following culturally accepted norms. Some cultures are quite ethical, but
others become corrupt or blind to certain ethical concerns. "When in Rome, do as the
Romans do" is not a satisfactory ethical standard.
 Ethics is not science. Social and natural science can provide important data to help us
make better ethical choices. But science alone does not tell us what we ought to do.
Science may provide an explanation for what humans are like. But ethics provides
reasons for how humans ought to act.

Fundamental Principles relating to Ethics.

The fundamental principles relating to ethics may be summarized as under:

1. The Principle of Integrity: It calls upon all accounting and finance professionals to strictly
follow honesty and straightforwardness while discharging their respective professional duties.
2. The Principle of Objectivity: This principle requires accounting and finance professionals to
stick to their professional and financial judgment.
3. The Principle of Confidentiality: This principle requires practitioners of accounting and
financial management to stop from disclosing confidential information related to their work.
4. The Principle of Professional Competence and due care: Finance and accounting
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 ETHICS IN BANKS & FINANCIAL INSTITUTIONS BY- K G KHULLAR

professionals need to update their professional skills from time to time in order to provide
competent professional services to their clients.
5. The Principle of Professional Behaviour: This principle requires accounting and finance
professionals to comply with relevant laws and regulations and avoid such actions which may
result in discrediting the profession.

Ethical Dilemmas.

Ethical Dilemma: A Ethical Dilemma is a situation where the decision – maker has to choose
between right and right.
For example, in Ramayana, Ram had to choose between two Dharmas –
(a) to abide by his Father’s words and proceed to the forest for 14 years, or
(b) to ignore his father’s words and rule the country as a Kshatriya Prince. Both these
alternatives constitute ’right action” by applying different yardsticks / viewpoints.

Ethical Dilemma in business: In business, the manager / decision – maker is faced with moral
and ethical decisions daily. He has to tackle ethical issue and choose between -
(i) right and wrong,
(ii) right and right. For example, in the case of a Salesperson, does offering a gift to a customer
constitute a bribe or sales promotion?

Some guidelines which one can address to ease ethical dilemmas are:-
(i) Define the Problem clearly
(ii) How it is Related to other parties?
(iii) The situations arise Over which issue?
(iv) To whom are you Bound to be loyal as person & as a member of organization.
(v) What will you Look at while making decisions?
(vi) What are the Expected results & how they are comparable with actual results?
(vii) Whom could your decisions or Main results of actions injure?
(viii) Can you Save the problem by discussing it with other affected parties?
(ix) Are you confident that your position will be as valid Over long period of time as it seems
means?
(x) Can you ask your boss, CEO, your family, society as a whole to Look upon your decisions?
(xi) What are the Various potentials of your actions?
(xii) Under what conditions would you allow Exceptions to your stand?

Workplace Ethics
 Application of ethics, to the decision concerning the employees in the organisation.
 Related to the hiring, promoting, wages etc. of the human resources.
 Extension of the personal standards, among the people, who comprise the work place.
 It requires abolition of all kinds of discrimination and exploitation.

Factors which influence the ethical behavior at work in an organization

1. Individual Moral Standards: If an individual has moral values, he will contribute to ethical
work place.

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 ETHICS IN BANKS & FINANCIAL INSTITUTIONS BY- K G KHULLAR

2. The management and co-workers have a very significant role in one’s ethical behaviour, at
work place either through authority or through behaviour.
3. Opportunity to Engage in Misconduct: If a company fails to offers proper punishment
against those who behave unethically, then workers misuse the opportunities available to him.

SOME EXAMPLES OF ETHICAL ISSUES FACED BY AN INDIVIDUAL AT THE

WORKPLACE:
a) Relationship with suppliers and business partners
b) Discrimination between suppliers
c) Bribery and immoral entertainment
d) Dishonesty in making and keeping contracts
e) Relationship with customers like:
i) Unfair pricing ii) Cheating customers
iii) Dishonest advertising iv) Research Confidentiality
f) Relationship with employees:
i) Discrimination in hiring and treatment of employees,
ii) Lack of good behaviour with employees
g) Management of resources:
i) Misuse of organizational funds
ii) Tax evasion

‘Discrimination’ in Employment
Meaning: In the context of ‘Work Place Ethics’, employment discrimination means
a) Treating people differently other than based on merit.
b) A form of injustice, which goes against the ‘formal principles of equality’.
Elements:
a) Merit is Ignored: Discrimination relates to decisions against one or more employees, which
are not based on individual merit, but on some other factors.
b) Prejudice: Making adverse decisions against employees, who belong to a certain class
c) Adverse Effect: This can result in a harmful or negative impact, on the interests of the
employees.

Commonly recognised employment discrimination practices.

1. Recruitment Practices:
a) Some firms rely only on the word-of-mouth referrals of the present employees, to recruit new
workers.
b) They tend to recruit only those racial and gender groups, which are already present in their
work force.
2. Screening Practices: If the job qualifications are not relevant to the job to be performed, then
they are discriminatory.
3. Conditions of Employment: Discrimination in terms and conditions include:
a) Not paying equal salaries to people for same work.
b) Not paying fair wages, based on industry standards.
c) Not providing proper working conditions to the workers.
d) Under payment to the work force.
4. Promotion Practices: When the employers give undue preference in promoting employees,

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 ETHICS IN BANKS & FINANCIAL INSTITUTIONS BY- K G KHULLAR

neglecting those who are otherwise eligible for promotion, then it becomes discriminatory.
5. Dismissal: Firing an employee on the basis of his race or gender or personal reasons is
discriminatory

Harassment at workplace.

 It means tormenting/disturbing, by subjecting to constant interference/intimidation

pressure/threat.
 Harassment can be done by superiors, colleagues or subordinates.
 The reasons could be many, like jealousy, hatred to persons of particular caste / group
etc.
 Harassments can be in many forms using abusive language, Insulting before others,
Intentionally denying leave, giving extra work etc.

Employer’s Responsibility:

 The employer is responsible for ensuring a fair working atmosphere.

 Sexual harassment is prohibited and the employer held responsible whether known or
not.
 A good ‘Redressal System’ and ‘Complaint Mechanism’ should be established.
 The employer should initiate immediate and appropriate disciplinary actions.

Concept of “Sexual harassment” in relation to work place

 Meaning: This could be verbal or non-verbal / physical contacts, which include
commenting, unwelcoming touching, requests / demands for sexual favours etc.
 Many times, harassment is subtle and very DIFFICULT TO PROVE.
 Consequences:
i) It cause great psychological harm, for defenseless employees.
ii) It violates an employee’s most basic Right of Freedom and Dignity.
iii) It deprives women of opportunities, which are available to male employees.
iv) It is a crude violation of moral standards of human’s right and justice.
v) Sexual harassment can cause substantial costs to the firm.
vi) It even results into high labour turnover.

Measures to ensure ethics in the Work place.

 Code of Conduct and Ethics:

a) Code of Conduct specifies actions in the work place.
b) Code of Ethics is general guidelines to the decisions about those actions.
 Compliance by Top Management: Not only subordinates but also executives should
follow standards of conduct.
 Integrated Ethics with Management: Ethical principles should be integrated with
management practices.
 Open Communication: The top management should explain the reasons for the
compliance of ethical practices and conduct training classes.

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 ETHICS IN BANKS & FINANCIAL INSTITUTIONS BY- K G KHULLAR

 Atmosphere of Trust: The employees must be encouraged to report the violations that
they come across by complaint box etc.
 Group - Decision Making: This can produce better quality decisions as they include
diverse interests and perspectives.
 Employee Participation:
a) When the management develop and implement ethical principle, they should include
employees.
b) Then they would easily oblige to adhere to it.
 Use of cross-functional teams when developing and implementing the ethics
management program. It’s vital that the organization’s employees feel a sense of
participation and ownership in the program if they are to adhere to its ethical values.
 Appointing an ombudsperson: The ombudsperson is responsible to help coordinate
development of the policies and procedures to institutionalise moral values in the
workplace. This establishes a point of contact where employees can go to ask questions
in confidence about the work situations they confront and seek advice

Banking ethics

Banking ethics is a specialized set of ethical standards and rules that should be followed in the
activities of financial institutions and employees of the banking sector.
But despite the simplicity of the definition, in the modern world, this concept becomes complex
and ambiguous. The importance of studying this subject is defined by the fact that the ethical
behavior of the bank and bank employees promotes banking. At present there are several
conceptions of banking ethics: general ethics, regulated ethics and ethical bank. The most
common practice is to regulate internal and external relations of banks and bank workers with
ethical codes. At the same time, studies show the existence of problems in the banking standards
of ethics, which negatively affects the financial institution

In banking ethics is a system of rules and standards of conduct for banking

institution and its staff.

The banking ethics are two levels of manifestation:

• Corporate banking ethics, that is, a set of ethical standards of conduct of
the bank as a legal entity;
• Bank etiquette - rules of conduct bank employee.

Depending on the scope can be distinguished two forms of banking ethics:

internal and external
Internal banking ethics contains rules of conduct between bank managers,
shareholders and employees. This type of ethics is designed to create a favorable
psychological climate and cultivation of the spirit of cooperation in the banks, avoiding
and resolving internal conflicts and prevent domestic bank fraud.

External banking ethics governs the conduct of bank managers and employees
with business representatives of the bank. It meant to create a positive image of

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 ETHICS IN BANKS & FINANCIAL INSTITUTIONS BY- K G KHULLAR

banking institutions, fostering collaboration, avoidance and resolution of external

conflicts of banks.

Basic principles of banking ethics

• Principle of mutual trust is of paramount importance to the successful operation of the business
system. Important and valuable offers are often contracted by telephone, without witnesses,
while the relationship between participants is dominated by the inviolable principle of mutual
trust;
• Principle of mutual benefit and interest means that none of the partners in a business
relationship should feel cheated
• Principle of good intentions is very important for business ethics and moral behavior. This
basically means that there is no intention to treat business partner in an immoral, if it relates to
fraud, theft or other undesired handling a business partner.
• Principle of business compromise and business tolerance refers to harmonize conflicting
interests of participants in the business process;
• Principle of ethical improvement of business behavior is availability business partner to accept
the mistake that was made as a result of his own actions. He should admit mistakes and to
respond in an appropriate manner
• Principle of demonopolization of one's own position as monopolistic behavior on the market
contains no ethical value market
• Principle conflict between their business interests of participants refers to the inability to relate
common personal interests, whilst having the same ethical values.

Whistleblowing

 Every organization desires honesty from and among its employees. The presence of
honesty allows for complete dedication to the organization’s mission and success. By
encouraging whistleblowing, the bank’s promote transparent structure and effective and
clear communication. Whistleblowing is a behavior that is often intensely motivated by
one’s ethics, as well as a desire to do good for the bank or the public.

 Employee reporting suspected wrong doing at work place is termed as whistle blowing.
 Officially a whistle blowing is called making a disclosure in the public interest.
 US Finance Experts define whistle blowing as “the disclosure by organizational members
(former or current) of illegal immoral or illegitimate practices under the control their
employees to persons or organizations that may be able to persons or organizations that
may be able to effect action”.
 Whistle blower is a person who reports or exposes illegal activity or misconduct
occurring in an organization. Misconduct may be in any form such as violation of
rules and regulation, fraud, health and safety violation, corruption, direct threat to public
interest.
 There are two types of whistle blower-Internal and External. Most of the whistle blower
opts for internal whistle blowing nothing but exposing or reporting the misconduct to
next superior, peer or higher authorities. External whistle blow is to report the
misconduct to media/press/lawyer/local or state government. Choosing the kind of

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 ETHICS IN BANKS & FINANCIAL INSTITUTIONS BY- K G KHULLAR

whistle blow is dependent on the depth of issues in the organization as well as on the
whistle blower
Internal Whistleblower – when the whistleblower reports the wrong doings to the officials
at higher position in the organization. The usual subjects of internal whistleblowing are
disloyality, improper conduct, indiscipline, insubordination, disobideince etc.

External Whistleblower - where the wrongdoings are reported to the people outside the
organization like media, public interest groups or enforcement agencies it is called external
whistleblowing.

 Whistle Blowers Protection Act, 2014 is an Act in the Parliament of India which
provides a mechanism to investigate alleged corruption and misuse of power by public
servants and also protect anyone who exposes alleged wrongdoing in government bodies,
projects and offices. The wrongdoing might take the form of fraud, corruption or
mismanagement. The Act will also ensure punishment for false or frivolous complaints.

Salient Features-

 The Act seeks to protect whistle blowers, i.e. persons making a public interest disclosure
related to an act of corruption, misuse of power, or criminal offense by a public servant.
 Any public servant or any other person including a non-governmental organization may
make such a disclosure to the Central or State Vigilance Commission.
 Every complaint has to include the identity of the complainant.
 The Vigilance Commission shall not disclose the identity of the complainant except to
the head of the department if he deems it necessary. The Act penalizes any person who
has disclosed the identity of the complainant.
 The Act prescribes penalties for knowingly making false complaints.

Ethics and technology

Privacy – the right to be left alone when you want to be, to have control over your own
personal possessions, and not to be observed without your consent

Confidentiality – the assurance that messages and information are available only to those who
are authorized to view them

Acceptable Use Policy- a policy that a user must agree to follow in order to be
provided access to a network or to the Internet

E-Mail Privacy Policy

 Organizations can mitigate the risks of email and instant messaging communication tools
by implementing and adhering to an e-mail privacy policy
 Details the extent to which e-mail messages may be read by others.

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 ETHICS IN BANKS & FINANCIAL INSTITUTIONS BY- K G KHULLAR

QUESTION BANK
1)Which of the following statements is/are correct?
(i)‘Ethics and morals are synonymous’.
(ii)‘Ethics and morals are different’
(iii)‘Ethics deals with individual character’
(a) Only i
(b) Only ii
(c) Both i& ii
(d) Both ii & iii
Explanation- D, Both 'ethics' and 'morals' deal with right and wrong conduct. But they are not
same. Ethics deals with individual character which is a personal attribute. Ethics is the response
of individual to a specific situation e.g. whether in this situation, it is ethical to state the truth.
Morals deal with customs set by groups or some authority like religion. Morals are general
principles e.g. you should speak truth.

2)Which of the following is NOT fundamental principles relating to ethics?

i)The Principle of Integrity
ii)The Principle of Objectivity
iii)The Principle of Subjectivity.
(a)Only i
(b)Only ii
(c)Only i& ii
(d)All i, ii and iii
Explanation – C, The fundamental principles relating to ethics may be summarized as under:
1. The Principle of Integrity: It calls upon all accounting and finance professionals to adhere to
honesty and straightforwardness while discharging their respective professional duties.
2. The Principle of Objectivity: This principle requires accounting and finance professionals to
stick to their professional and financial judgment.
3. The Principle of Confidentiality: This principle requires practitioners of accounting and
financial management to refrain from disclosing confidential information related to their work.
4. The Principle of Professional Competence and due care: Finance and accounting
professionals need to update their professional skills from time to time in order to provide
competent professional services to their clients.
5. The Principle of Professional Behaviour: This principle requires accounting and finance
professionals to comply with relevant laws and regulations and avoid such actions which may
result in discrediting the profession.

3)Mr. XYZ is a CEO of a pharmaceutical company. His R&D department, while

experimenting with a chemical molecule, sees the possibility that the molecule may be
developed into a drug for a rare, painful, life-threatening genetic disease that afflicts only
one child in ten million. But to develop the drug, his company may have to invest huge
sums of the shareholders’ money, despite the drug not having wide saleability. Mr. XYZ is
confronted by an ethical dilemma.
Which of the following points should he address to resolve the issue?

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 ETHICS IN BANKS & FINANCIAL INSTITUTIONS BY- K G KHULLAR

a) Defining the problem clearly.

b) How to define the problem if you stood on the other side of the fence?
c)Whom could your decision or action injure?
d)All of the above
Explanation- D, Mr. XYZ is in a situation where he has to choose between carrying on the
development of a drug for a painful and life threatening disease which afflicts one in ten million
and the action of spending huge sum of shareholders’ money for such development. As we can
see, both are positive and ethically right choices. As a socially responsible person he has to think
in terms of eliminating a serious illness but at the same time he must be careful in dealing with
shareholders’ money. This is a classic case of an ethical dilemma. Such an ethical dilemma must
be resolved by addressing the following points:
1. Defining the problem clearly.
2. How to define the problem if you stood on the other side of the fence?
3. How did the situation arise?
4. To whom are you loyal as a person and as a member of the organization?
5. What is your intention in making this decision?
6. How does this intention compare with the probable results?
7. Whom could your decision or action injure?
8. Can you discuss the problem with the affected parties before you make your decision?
9. Are you confident that your position will be as valid over a long period?
10. Could you disclose without any doubt your decision or action to your boss, your CEO, the
Board of Directors, your family, society as a whole?
11. What is the symbolic potential of your action if understood? Misunderstood?
12. Under what conditions would you allow exceptions to your stand?

4) In Kochi branch of South India Gramin Bank, Mr. Raju a new Probationary Officer,
went to cashier’s cabin for some work leaving his system and user ID open. Another
employee Mr. Anand on pretext of checking balance comes to Raju’s system and
authorized an entry by debiting branch’s income head and crediting a customer’s account.
The transaction was entered by Mr. Anand from his login ID. Now, the branch manager
while checking the vouchers and matching with system noticed this unauthorized work
done by Mr. Anand and issued a show cause notices to both Raju and Anand. BM also
discussed this matter with manager of another nearby branch. Who among the following
have performed unethically?
a)Mr. Raju
b)Mr. Anand
c)Mr. BM
d)All of the above
Explanation- D, It is well known fact that we are solely responsible for any work done from our
User ID in the branch. We most often very casually or sheer out of trust hand over our system to
any colleague. But being a banker we don’t know the intentions of that particular staff. If any
unauthorized work is done then both maker and checker are equally responsible. In this case Mr.
Raju had worked unethically by leaving his seat for longer duration without logging out from his
ID and also his ID is involved for unauthorized entry. Then Mr. Anand has obviously worked
unethically by working on Mr. Raju’s system and that too with other malign intentions. Lastly

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 ETHICS IN BANKS & FINANCIAL INSTITUTIONS BY- K G KHULLAR

Mr. BM has also worked unethically. Though he did the right job by issuing show cause to both
the staff members. But friends, when this kind of unethical issues happen in any branch then BM
must have acted as whistle-blower and reported the matter to immediate higher authority. That
is regional /zonal / controlling offices in this case. Thus all three members performed
unethically. So the correct option for this question is option D

5) ‘In the long run those business firms which do not respond to society’s needs favourably
will survive.’
The above statement is –
a) Correct
b) Incorrect
c)Can’t say.
Explanation – B, Incorrect. Society gives business its license to exist and this can be amended or
revoked at any time if it fails to live up to society’s expectations. Therefore, if a business intends
to retain its existing role and power it must respond to society’s needs constructively

6) With respect to Relationship with employees, which of the following are some of the
ethical issues faced?
a) Discrimination in hiring, promoting, etc
b) Unequal treatment
c)Only A
d)Both A & B
Explanation – D, Check theory under examples of ethical issues faced by an individual in the
workplace.

7) Which of the following are the Factors which influence the ethical behaviour at work-
a) Individual moral standards
b) The influence of managers and co-workers
c)Internal politics
d)Only A and B
Explanation- D, Factors which influence the ethical behaviour at work- Ethical decisions in an
organization are influenced by three key factors:
1. Individual moral standards: One may have great control over personal ethics outside
workplace.
2. The influence of managers and co-workers: The activities and examples set by co-workers
along with rules and policies established by the firm are critical in gaining consistent ethical
compliance in an organization.
3. The opportunity to engage in misconduct: If a company fails to provide good examples and
direction for appropriate conduct; confusion and conflict will develop and result in the
opportunity for unethical behaviour.

8)‘Promotion policies based on individual merit and not purely on the basis of seniority is
discriminatory’
What can say about above statement?
a) The statement is correct

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 ETHICS IN BANKS & FINANCIAL INSTITUTIONS BY- K G KHULLAR

b) The statement is incorrect

c)The statement is only partially correct
d)The statement is partially incorrect
Explanation- B, Incorrect: Discrimination is action based on prejudice resulting in unfair
treatment of people. To discriminate socially is to make a distinction between people on the basis
of class or category without regard to individual merit. Examples of such discrimination include
racial, religious or gender-based discrimination. Distinctions between people which are based
just on individual merit (such as personal achievements, skill or ability) are generally not
considered socially discriminatory. So seniority alone cannot be the deciding factor for
promotion, if the senior person is not fit for the job.

9) The ___________is responsible to help & coordinate development of the policies and
procedures to institutionalise moral values in the workplace.
a) Ombudsmen
b) Ombudsperson
c)Ombudswoman
d)Ombudsmanager
Explanation – B, The ombudsperson is responsible to help & coordinate development of the
policies and procedures to institutionalise moral values in the workplace. This establishes a
point of contact where employees can go to ask questions in confidence about the work situations
they confront and seek advice

10) ‘Window-dressing of financial statements will not be useful in the long run’
The above statement is -
a) Correct
b) incorrect
c) Partially Correct
d) Partially incorrect
Explanation – A, In window-dressing, efforts are made to show a 'good balance sheet' by
manipulating accounting entries. This can help companies to boost their market image and
obtain further capital from the market for some time. Window dressing is on the assumption that
next year performance will be better and accounts will be regularised next year. Window
dressing can go on for 2 or 3 years but not more. It will lead to the downfall of the company in a
few years.

11) ‘Ensuring fair treatment to whistle blowers will help in creating good ethical
accounting environment in a business enterprise’.
The above statement is -
a) Correct
b) incorrect
c) Partially Correct
d) Partially incorrect
Explanation – A, A whistle blower is an employee/person who reports fraud, mismanagement or
unethical practices to the appropriate levels of management. Fair treatment and appreciation of
whistle blowers is necessary to check fraud. This will help in creating good accounting
environment in a business enterprise.

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 ETHICS IN BANKS & FINANCIAL INSTITUTIONS BY- K G KHULLAR

12) Which of the following is one of the reasons for unethical behavior among banking
professionals?
a) Emphasis on short term results
b) Ignoring small unethical issues
c)Economic cycles.
d)All of the above
Explanation – D, The reasons which lead to unethical behavior are as follows:
(i) Emphasis on short term results.
This is one of the primary reasons which has led to the downfall of many companies like Enron
and WorldCom.
(ii) Ignoring small unethical issues.
It is a known fact that most of the compromises we make are small but however they lead us into
committing large infractions. And ignoring minor lapses, lead to bigger and more huge mistakes.
(iii) Economic cycles.
In good times, companies are relaxed in their accounting procedures or disclosures, as there is a
pervasive feel-good effect. But when times of hardship follow, then the hit taken by them is
almost fatal, as was proved in the Enron case. So companies need to watch out for economic
cycles and be vigilant in good times as well as bad.
(iv) Accounting rules.
In the era of globalization and massive cross border flow of capital, accounting rules are
changing faster than ever before. The rules have become more complex and it is difficult to
identify deviations from these complex set of requirements. The complexity of these principles
and rules and the difficulty associated with identifying abuse are reasons which may promote
unethical behaviour.

13) If a banker has a problem in identifying unethical behaviour or resolving an ethical

conflict, the first action (s)he should normally take is to
A. Consult the board of directors.
B. Discuss the problem with his or her immediate superior.
C. Notify the appropriate law enforcement agency.
D. Resign from the bank.
Explanation - Answer (B) is correct.
Ethical Professional Practice states that the member should first discuss an ethical problem with
his or her immediate superior. If the superior is involved, the problem should be taken initially to
the next higher managerial level.

14) Rashid, a new accounting clerk at a private bank, that had recently terminated several
employees due to budgetary cutbacks, accidentally viewed his manager’s monthly payslip.
Not realizing that the payslip included an annual bonus, Rashid erroneously multiplied the
gross pay by 12 to find annual earnings. Rashid was amazed that his manager appeared to
earn more than twice the local average for employees in a manager’s position. Rashid
discussed this situation with a friend, who is a recently terminated employee of the bank
who now worked for a local newspaper. As a result of this discussion, the manager’s

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 ETHICS IN BANKS & FINANCIAL INSTITUTIONS BY- K G KHULLAR

“outrageous” salary was made public. Which one of the standards of Ethical Practice did
Rashid’s actions violate?
A. Competence.
B. Confidentiality
C. Integrity.
D. Credibility.
Explanation – B, The standard of confidentiality states each member has a responsibility to
(1) keep information confidential except when disclosure is authorized or legally required,
(2) inform all relevant parties regarding appropriate use of confidential information and monitor
subordinates’ activities to ensure compliance, and
(3) refrain from using confidential information for unethical or illegal advantage.

15) Jaspal was recently tried and convicted in court for producing and selling illegal
narcotic drugs. None of the activity occurred during work hours, and Jaspal performed
duties as a clerk without incident during the period of illegal activity.
Jaspal has argued that because the illegal activity was unrelated to Jaspal’s service as a
clerk, no ethical violation had been committed. Which provision of the Ethical Practice is
most likely to apply to Jaspal’s illegal actions?
A. Competence.
B. Confidentiality.
C. Integrity.
D. Credibility.
Explanation – C, The integrity standard states that each member has a responsibility to abstain
from engaging in or supporting any activity that might discredit the profession. Being convicted
of producing and selling illegal narcotic drugs is an activity that would discredit the profession.

16) An branch manager has frequent business contact with customers, suppliers, and
creditors in the course of performing professional duties. Which of the following
circumstances would most likely threaten the manager’s adherence to the ethical principles
and standards of Ethical Practice?
A. The manager accepted two World Cup tickets from a supplier and flew to the stadium in the
company’s jet along with a number of the supplier’s executives.
B. The manager speaks quarterly with analysts regarding the company’s past performance and
future prospects.
C. The manager attends a professional conference where the manager goes out to dinner and
socializes with managers from other companies in the industry.
D. The manager attends a charity event at the invitation of the company’s audit firm, which
bought two tables of tickets to support the event.
Explanation – A, The manager’s acceptance of two World Cup tickets from a supplier and flying
to the stadium in the company’s jet along with a number of the supplier’s executives would
threaten the manager’s adherence to the integrity standard. The integrity standard states that
each employee has a responsibility to mitigate actual conflicts of interests, regularly
communicate with business associates to avoid apparent conflicts of interest, and advise all
parties of any potential conflicts. In order to avoid conflicts of interest, employees should refuse
any gift, favour, or hospitality that would influence or appear to influence their actions.

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 ETHICS IN BANKS & FINANCIAL INSTITUTIONS BY- K G KHULLAR

17) Which of the following statements describe the importance of a whistleblowing

framework in maintaining an ethical organizational culture?
I. It provides measurable feedback for determining whether employees are following a
code of ethics.
II. It creates opportunities to enhance and improve internal controls.
III. It empowers management to become better role models for employees.
IV. It helps to identify potential errors or risks at each task level within the organization.
A. I and II only.
B. II and IV only.
C. III and IV only.
D. I, III, and IV only
Explanation – A, The collection, analysis, and summarization of ethics issues can provide
insight into the operation of its code of ethics and the degree to which employees are following
it. In addition, tracking and monitoring issues raised through a whistleblowing framework
creates opportunities to enhance and improve internal control. For instance, a large number of
fraud cases are reported through a whistleblowing framework, which can highlight areas where
internal controls were lacking.

18) An organisation has to behave ethically because it has to exist in the:

a. Competitive environment
b. Non- Competitive environment
c. Relaxed environment
d. Dull environment

19) Sexual harassment, affirmative Action, discrimination on the bases of age, gender, race,
religion, disabilities, weight refers to:
a. Ethics in Marketing
b. Production
c. Compliance
d. Discrimination at workplace

20) Which one of the following is a true statement regarding organizational ethics?
A. As long as officer and employee behaviour meet the requirements of the law, the organization
can be considered to have a functioning system of ethical behaviour.
B. A strong sense of ethics on the part of employees who are in the best position to appropriate
cash and other assets is the most vital part of a functioning system of ethical behaviour.
C. If an organization has a strong code of ethical conduct in place, the role of employee training
can be downplayed.
D. Paying attention to “whistle-blowers” plays a significant role in maintaining an effective
ethical atmosphere.

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 ETHICS IN BANKS & FINANCIAL INSTITUTIONS BY- K G KHULLAR

Explanation – D, A whistleblowing framework is an important component in maintaining an

ethical organizational culture. An effective feedback system includes having a confidential
framework for employees to report possible violations of the organization’s code of ethics and to
receive advice on the ethical aspects of challenging decisions. Statistics show that a large
number of occupational fraud cases are detected through an employee “hotline” or other
reporting methods.

21) Which of the following is one of Social Sins listed by Mahatma Gandhi
(i) Politics without Principles
(ii) Wealth without Work
(iii) Commerce without Morality
(iv) Knowledge without Character
a) All of the above
b) Only (i) and (ii)
c)Only (ii) and (iv)
d)None of the above
Explanation – A, Mahatma Gandhi, Father of India, promoted non-violence, justice and
harmony between people of all faiths. He stressed that people follow ethical principles and listed
following seven Social Sins:
(i) Politics without Principles
(ii) Wealth without Work
(iii) Commerce without Morality
(iv) Knowledge without Character
(v) Pleasure without Conscience
(vi) Science without Humanity
(vii) Worship without Sacrifice.

22) A Banker who fails to perform professional duties in accordance with relevant
standards is acting contrary to which one of the following standards?
A. Competence.
B. Confidentiality.
C. Integrity.
D. Credibility.
Explanation - Answer (A) is correct.
One of the responsibilities of a banker under the competence standard is to “maintain an
appropriate level of professional expertise by continually developing knowledge and skills.”
(S)he must also “perform professional duties in accordance with relevant laws, regulations, and
technical standards.” The third requirement under this standard is to “provide decision support
information and recommendations that are accurate, clear, concise, and timely.”

23) a banker has a responsibility to recognize professional limitations. Under which

standard of ethical conduct would this responsibility be included?
A. Competence.
B. Confidentiality.
C. Integrity.
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 ETHICS IN BANKS & FINANCIAL INSTITUTIONS BY- K G KHULLAR

D. Credibility.
Explanation - Answer (A) is correct.
The competence standard pertains to a banker’s responsibility to “recognize and communicate
professional limitations or other constraints that would preclude responsible judgment or
successful performance of an activity.”

24) If a banker has a problem in identifying unethical behaviour or resolving an ethical

conflict, the first action (s)he should normally take is to
A. Consult the board of directors.
B. Discuss the problem with his or her immediate superior.
C. Notify the appropriate law enforcement agency.
D. Resign from the company.
Explanation - Answer (B) is correct.
Ethical Professional Practice states that the member should first discuss an ethical problem with
his or her immediate superior. If the superior is involved, the problem should be taken initially to
the next higher managerial level.

25) Jyothi , a staff accountant, becomes aware of an off-balance-sheet bank account where
funds have been diverted with offsetting credits approved by his immediate supervisor. His
immediate supervisor refuses to discuss it and suggests Jyothi forget about it. Which one of
the following should be Jyothi’s next course of action in this circumstance?
A. Put concerns in writing to the immediate supervisor and copy the company’s independent
auditor.
B. Discuss concerns with the level of management above the immediate supervisor.
C. Communicate concerns confidentially to the company’s independent auditor.
D. Communicate concerns confidentially to the company’s external legal counsel.
Explanation - Answer (B) is correct.
In applying the Standards of Ethical Professional Practice, it may be necessary to identify
unethical behaviour or resolve an ethical conflict. When faced with ethical issues, it is important
to follow an organization’s established policies on the resolution of such conflict. If these
policies do not resolve the ethical conflict, the first option involves discussing the issue with the
immediate superior. However, when it appears that the supervisor is involved, the issue should
be presented to the next level.

26) Madurai Small Savings Bank Ltd.’s code of conduct states, “Our employees are our
most valuable asset.” Which one of the following policies best illustrates that management
strives to provide leadership by example in ethical matters concerning employees?
A. The bank relies on supervisors rather than manuals to train employees in their
responsibilities.
B. Final terms on all major credit proposals and bulk deposits are negotiated only by
management.
C. Management and the board of directors meet annually at a luxury resort for a strategic
planning conference.
D. Management declines to accept bonuses earned in any year in which no raises are given to
employees.
Explanation - Answer (D) is correct.

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 ETHICS IN BANKS & FINANCIAL INSTITUTIONS BY- K G KHULLAR

This illustrates that management does not hold themselves to a different standard than
employees. This shows that the company values its employees.

27) Which one of the following ethics-related actions by management is least effective in
encouraging acceptance by employees of an organization’s code of ethics?
A. Management appoints an ethics officer to monitor and report to management on employee
compliance.
B. Management follows ethical principles in decisions made on behalf of the organization
C. Management keeps promises and commitments made to employees, customers, and vendors.
D. Management supports employees in adhering to ethics standards.
Explanation - Answer (A) is correct.
This approach does not involve employees at all and projects the image that employees need to
be supervised because they are likely to be unethical. This can discourage some employees.

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