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Ethical issues in Finance and Accounting

Group Members
Nazbul Hasan Khan
Kaustubh Mahajan Roma Mantri Juhi Maurya

Roll No.
85
86 87 88

Krupa Mehta

90

Introduction
Accounting and finance provides fair and accurate reporting of the financial position of a business. The major ethical issues occur in accounting and finance are reporting false income, falsifying documents, allowing or taking questionable deductions, illegally evading income taxes, engaging in frauds etc.

Ethics and Law


Both law and ethics focus on defining the perfect human behavior, but they are not the same. Law is the governments attempt to formalize rightful behavior, but it is rarely possible to enforce written laws. It depends on individual or business ethics to reduce unlawful incidents. Ethical concepts are more complex than written rules since it deals with human dilemmas that go beyond the formal language of law

The Equity Funding Fraud of 1973


Equity Funding Corporation of America(Equity) During nine year period at least $143 million of fictitious pretax income was generated Reported Net income $76 million instead of the real pretax losses totaling more than $67 million. Carried out by 10 executives includin CEO, CFO, controller and treasurer

Mayawatis brother Anand Kumar


The Economic Times 28th Jan 2013 Rs. 760 crore Only one company rest six after 2007 Sources of Funds unclear Issue of shares at huge premium Creation of cash reserves by forfeiture of advances paid by third parties Sale of undisclosed investments Issue of dividends

The Enron Scandal

Brief history about ENRON


ENRON was formed during 1985 by Kenneth Lay after merging Houston Natural Gas and InterNorth. It became the largest gas and electricity trader in North America. ENRON became the global leader in trading gas, electricity, broadband and even weather related derivatives. The companys earnings grew double digits every year for many years.

Good old days


The companys market capitalization approached $30 billion in august 1999. Later in 2000 ENRON became the 7th largest company in America with a market capitalization of nearly &70 billion

Causes of downfall
ENRON's complex financial statements were confusing to shareholders and analysts. In addition, its complex business model and unethical practices required that the company use accounting limitations to misrepresent earnings and modify the balance sheet to indicate favorable performance. According to McLean and Elkind in their book The Smartest Guys in the Room, "The ENRON scandal grew out of a steady accumulation of habits and values and actions that began years before and finally spiraled out of control. In an article by James Bodurtha, Jr., he argues that from 1997 until its demise, "the primary motivations for ENRON's accounting and financial transactions seem to have been to keep reported income and reported cash flow up, asset values inflated, and liabilities off the books."

The combination of these issues later resulted in the bankruptcy of the company, and the majority of them were perpetuated by the indirect knowledge or direct actions of Lay, Jeffrey Skilling, Andrew Fastow, and other executives. Lay served as the chairman of the company in its last few years, and approved of the actions of Skilling and Fastow although he did not always inquire about the details. Skilling, constantly emphasized meeting Wall Street expectations, advocated the use of mark-to-market accounting (accounting based on market value, which was then inflated) and pressured ENRON executives to find new methods to hide its debt. Fastow and other executives "...created off-balance-sheet vehicles, complex financing structures, and deals so bewildering that few people could understand them."

What ENRON has done


Engaged in unhealthy heavy borrowing and the dishonest practice of the CEOs: Unacceptable. Deliberately inflating the future cash flow: deceiving the business partners. By collaborating with the accounting firm, Arthur Anderson, in providing false financial statements to shareholders, investors, the public and the US government.

4 slides

EMPLOYEES AND SHAREHOLDERS


ENRON's shareholders lost $74 billion in the four years before the company's bankruptcy ($40 to $45 billion was attributed to fraud). As ENRON had nearly $67 billion that it owed creditors, employees and shareholders received limited, if any, assistance aside from severance from ENRON. To pay its creditors, ENRON held auctions to sell assets including art, photographs, logo signs, and its pipelines. More than 20,000 of ENRON's former employees during May 2004 won a suit of $85 million for compensation of $2 billion that was lost from their pensions. From the settlement, the employees each received about $3,100.

Sarbanes-Oxley Act
An act passed by U.S. Congress in 2002 to protect investors from the possibility of fraudulent accounting activities by corporations. The Sarbanes-Oxley Act (SOX) mandated strict reforms to improve financial disclosures from corporations and prevent accounting fraud. SOX was enacted in response to the accounting scandals in the early 2000s. Scandals such as ENRON, Tyco, and WorldCom shook investor confidence in financial statements and required an overhaul of regulatory standards.

Learnings from the ENRON case


You make money in the new economy in the same ways you make money in the old economy - by providing goods or services that have real value. Financial cleverness is no substitute for a good corporate strategy. The arrogance of corporate executives who claim they are the best and the brightest, "the most innovative," and who present themselves as superstars should be a "red flag" for investors, directors and the public. Executives who are paid too much can think they are above the rules and can be tempted to cut ethical corners to retain their wealth and perquisites. Government regulations and rules need to be updated for the new economy, not relaxed and eliminated.

The Issue
Coal allocation scam is a political scandal concerning the Indian government's allocation of the nation's coal deposits to Public Sector Entities (PSEs) and private companies. In a draft report issued in March 2012, the Comptroller and Auditor General of India (CAG) office accused the Government of India of allocating coal blocks in an inefficient manner during the period 2004-2009.

1972-2010- BACKGROUND TO COALGATE: HISTORY OF COAL ALLOCATIONS IN INDIA

FIRMS ELIGIBLE FOR A COAL ALLOCATION


Historically, the economy of India could be characterized as broadly socialist, with the government directing large sectors of the economy through a series of Five-year Plans.

In keeping with this centralized approach, between 1972 and 1976, India nationalized its coal mining industry, with the state-owned companies Coal India limited(CIL) and Singareni Collieries Company (SSCL) being responsible for coal production.

This process culminated in the enactment of the Coal Mines (Nationalisation) Amendment Act, 1976, which terminated coal mining leases with private lease holders. Even as it did so, however, Parliament recognized that the nationalized coal companies were unable to fully meet demand, and provided for exceptions, allowing certain companies to hold coal leases: 1976. Captive mines owned by iron and steel companies. 1993. Captive mines owned by power generation companies. 2007: Captive mining for Coal gasification and liquid faction.

THE COAL ALLOCATION PROCESS


In July 1992, Ministry of Coal, issued the instructions for constitution of a Screening Committee for screening proposals received for captive mining by private power generation companies. The Committee was composed of government officials from the Ministry of Coal, the Ministry of Railways, and the relevant state government. A number of coal blocks, which were not in the production plan of CIL and SSCL, were identified in consultation with CIL/SSCL and a list of 143 coal blocks were prepared and placed on the website of the MoC for information of public at large. Companies could apply for an allocation from among these blocks. If they were successful, they would receive the geological report that had been prepared by the government, and the only payment required from the allocatee was to reimburse the government for their expenses in preparing the geological report.

COAL ALLOCATION GUIDELINES


The guidelines for the Screening Committee suggest that preference be given to the Power and Steel Sectors (and to large projects within those sectors). They further suggest that in the case of competing applicants for a captive block, a further 10 guidelines may be taken into consideration: status (stage) level of progress and state of preparedness of the projects; net worth of the applicant company (or in the case of a new SP/JV, the net worth of their principals); production capacity as proposed in the application; maximum recoverable reserve as proposed in the application; date of commissioning of captive mine as proposed in the application; date of completion of detailed exploration (in respect of unexplored blocks only) as proposed in the application; technical experience (in terms of existing capacities in coal/lignite mining and specified end-use); recommendation of the administrative ministry concerned; recommendation of the state government concerned (i.e., where the captive block is located); track record and financial strength of the company.

RESULTS OF COAL ALLOCATION PROGRAM


Given the inherent subjectivity in some of the allocation guidelines, as well as the potential conflicts between guidelines it is unsurprising that in reviewing the allocation process from 1993 to 2005 the CAG says that "there was no clearly spelt out criteria for the allocation of coal mines. 2005: the Expert Committee on Coal Sector Reforms provided recommendations on improving the allocation process, 2010: the Mines and Minerals (Development and Regulation) Act, 1957 Amendment Bill was enacted, providing for coal blocks to be sold through a system of competitive bidding. The foregoing supports the following conclusions: The allocation process prior to 2010 allowed some firms to obtain valuable coal blocks at a nominal expense The eligible firms took up this option and obtained control of vast amounts of coal in the period 2005-09 The criteria employed for awarding coal allocations were opaque and in some respects subjective.

Allegations of the CAG Report


First charge
The most important assertion of the CAG Draft Report : Government had the legal authority to auction the coal, but chose not to do so. Any losses as a result of coal allocations, then, between 2005 and 2009 are seen by the CAG as being the responsibility of the Government.

Second Charge
If the most important charge made by the CAG was that of the Government's legal authority to auction the coal blocks, the one that drew the most attention was certainly the size of the "windfall gain" accruing to the allocatees. On pp. 3234 of the Draft Report, the CAG estimates these to be 1,067,303 Crore.

Reactions
Media report (TOI Report) Allegations against different people involved
S. Jagathrakshakan Ajay Sancheti Premchand gupta Naveen Jindal

Opposition Party

Investigations that followed


CBI Investigation IMG Final CAG Report Governments response Matter reaches Supreme Court Parliamentary session Charges against Reliance

WHY HAS CAG RAISED QUESTIONS?


CAG says Anil Ambani owned Reliance power got undue benefit of Rs. 29,033 crore when govt. allowed use of surplus coal from blocks allotted to Sasan Power Plant for its other project. Chitrangi Plant would supply power at higher tariff Rs.2.45-Rs.3.702 per unit than Sasans Rs.1.196 per unit, though it would get coal at same price as Sasans UMPP.

Why was a third mine allocated to Sasan Project by snatching it from State-owned NTPC, when it was not established that two previous mines would be insufficient to generate 3,960 MW of Power.

COMPANYS DEFENCE
No condition was violated.
The decision of permitting use of surplus coal for power generation was ratified by EGOM.

Reliance Power had no role in allotment of coal-reserves to Sasan UMPP.


Audit Observations do not completely take into account the extant policy and precedents.

OBSERVATIONS
Government unduly benefitted Private Power Developers in awarding of UMPPs. Developers misused and diverted coal made available to them. Of the four UMPPs currently operational, three are owned by Anil Ambanis Reliance Power (RPL) and one by Tata power. Mundra and Krishnapatnam UMPPs have land in excess of 1538 acres and 1096 acres. EGOM allowed the excess land to be retained by the developers instead of utilizing the same for other public purpose.

What Law states


Regulatory authorities
CBI SERIOUS FRAUD INVESTIGATION OFFICE Central Vigilance Commission Central Economic Intelligence Bureau Directorate of Enforcement Economic Intelligence Council

Offences
Fraud Bribery and corruption Insider Dealing and Market abuse Money laundering and Terrorist financing

Financial record keeping

Conclusion
Duty of Government Duty of opposition Duty of Company Duty of investors Duty of corporate Auditors and investment bankers Duty of regulatory authorities Duty of individuals