Ethics in Finance

PGDM-Session 7

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

Ethical issues in Finance

Financial statements

Hostile Takeovers

Financial Markets
Insider Trading

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.

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

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.

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

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

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

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.

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

Anti-takeover defense measures

Poison Pills

Green mail

Golden Parachute

People Pill

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)

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.

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

Ethics & Greenmail

Target company may be forced to incur

debts to raise funds to finance the buy
back of shares at premium price

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

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

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.

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

Thank You