ETHICS IN ACCOUNTING AND FINANCE

After finish this chapter, students should be able to:

` Discuss

and explain ethics in accounting and finance

UNDER WHAT CIRCUMSTANCES CAN A BANK OR FINANCIAL INSTITUTION DISCLOSES INFORMATION OR DOCUMENT OF CUSTOMERS ? Part XIII of the Banking and Financial Institutions Act 1989 provides that, no director or officer or employee of any bank or financial institution, whether during his tenure of office or during his employment, or thereafter, shall

give ,produce, reveal , publish or otherwise disclose

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to any person any information or document whatsoever relating to the affairs or account of any customer except such disclosure :
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which the customer, or his personal representative, has given permission in writing to disclose in a case where the customer is declared bankrupt, or, if the customer is a corporation, the corporation is being or has been wound up, in Malaysia, or outside Malaysia where the information is required by a party to a bona fide commercial transaction, or to a prospective bona fide commercial transaction, to which the customer is also a party, to assess the creditworthiness of the customer relating to such transaction, provided that the information required is of a general nature and does not enable the details of the customer's account or affairs to be ascertained

for the purpose of any criminal proceedings or in respect of any civil proceedings
between the bank or financial institution and its customer or his guarantor relating to the customer's transaction with the institution or between the bank or financial institution and 2 or more parties making adverse claims to money in a customer's account where the licensed institution seeks relief / compensation by way of inter pleader .

Three (3) primary areas of the finance function in an organization

Financial transactions

Accounting function

Auditing function
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1) Financial transactions.
The flow of money through an organization i.e. involve receiving money from customers and using that money to pay employees, suppliers, and all other creditors (taxes and the like) with hopefully enough left over to create a profit that can be either reinvested back into the business or paid out to owners/shareholders.

2) Accounting function
Keeps track of all the companys financial transactions by documenting the money coming in (credits) and money going out (debits) and balancing the accounts at the end of the period daily/weekly/monthly, quarterly, annually.

3) Auditing Functions ` The certification of an organizations financial statements, or books as being accurate by an impartial third-party professional. ` An organization can be large enough to have internal auditors on staff as well as using external professional typically certified professional accountants and /or auditing specialists.

*Internal auditors Roles ` According to Institute of Internal Auditors: Internal auditors are grounded in professionalism, integrity and efficiency. Thus, they: I. Make objective assessment of operations and share ideas for best practices; II. Provide counsel for improving controls, processes and procedures, performance and risk management, III. Suggest ways for reducing costs, enhancing revenues, and improving profits and, IV. Deliver competent consulting, assurance and facilitation services.

The potential ethical challenges presented by Generally Accepted Accounting Principles (GAAP).
GAAP The generally accepted accounting principles that govern the accounting profession not a set of laws and established legal precedents, but rather a set of standard operating procedures within the profession. Accountants face ethical challenges when requests are made for far more illegal practices such as falsifying accounts, underreporting income, overvaluing assets, and taking questionable deductions.

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A set of accurate financial statements that present an organization as financially stable, operationally efficient, and positioned for strong future growth can do a great deal to enhance the reputation and goodwill of an organization. The accounting/auditing firm is paid by the corporation, but it really serves the general public, who are in search of an impartial and objective review presents a clear ethical predicament / unpleasant situation

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Propriety information, also known as a trade secret, is information a company wishes to keep confidential. Proprietary information can include secret formulas, processes, and methods used in production. It can also include a company's business and marketing plans, salary structure, customer lists, contracts, and details of its computer systems. In some cases, the special knowledge and skills that an employee has learned on the job are considered to be a company's proprietary information.

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Definition ` Information that is not public knowledge (such as test results or trade secrets), conveyed by a manufacturer to an external party due to its position in the procurement process. The recipient is generally duty bound to desist from making unauthorized use of the proprietary information.

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Trade secret is any formula, pattern, device or compilation of information which is used in ones business and which gives him an opportunity to obtain an advantage other competitors who do not know or use it.

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Proprietary information is sensitive information that is owned by a company and which gives the company certain competitive advantages. Proprietary information assets are critical to the success of many, perhaps most businesses. The importance of this property, while too often not yet formally valued by many companies, is highly valuable. In todays highly competitive global marketplace, it is recognized by many managers that the intellectual assets of business are highly sought-after commodities.
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Company policies may prohibit directors, employees and agents from disclosing or using confidential or proprietary information outside the company or for personal gain, either during or after employment, without proper written company authorization to do so. Many companies reduce the risk of proprietary information and intellectual property loss by employing need to know policies; using screen savers and/or server passwords; and maintaining non-disclosure agreements.

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` 1. 2. 3.

There are at least 3 arguments for legally protecting trade secrets: Trade secrets are the intellectual property of the company; The theft of trade secrets is unfair competition, and; Employees who disclose trade secrets violate the confidentiality owed to their employers

E.g. Procter & Gamble having patented the baking technique of its Duncan Hines brand of homemade-style chocolate chip cookies a few yrs ago, it then sued three rival food chains, charging them with using the patented process to make Infringing cookies

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Insider trading is the trading of a corporation's stock or other securities (e.g. bonds or stock options) by individuals with potential access to nonpublic information about the company. In most countries, trading by corporate insiders such as officers, key employees, directors, and large shareholders may be legal, if this trading is done in a way that does not take advantage of nonpublic information.

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However, the term is frequently used to refer to a practice in which an insider or a related party trades based on material non-public information obtained during the performance of the insider's duties at the corporation, or otherwise in breach of a fiduciary or other relationship of trust and confidence or where the non-public information was misappropriated from the company.

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For example, illegal insider trading would occur if the chief executive officer of Company A learned (prior to a public announcement) that Company A will be taken over, and bought shares in Company A knowing that the share price would likely rise. For example, illegal insider trading would occur if the chief executive officer of Company A learned (prior to a public announcement) that Company A will be taken over, and bought shares in Company A knowing that the share price would likely rise.

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In US and many other jurisdictions, however, "insiders" are not just limited to corporate officials and major shareholders where illegal insider trading is concerned, but can include any individual who trades shares based on material non-public information in violation of some duty of trust. This duty may be imputed / put responsibility; for example, in many jurisdictions, in cases of where a corporate insider "tips" a friend about non-public information likely to have an effect on the company's share price, the duty the corporate insider owes the company is now imputed to the friend and the friend violates a duty to the company if he or she trades on the basis of this information.

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The auditors form a significant part of the overall mechanism for the protection of the public especially shareholders and the corporate governance process. (Ben Pettet, Company Law, Longman Law Series, 2001, page 203 )

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They have an important statutory function which establishes them as a kind of independent checking mechanism. Audit serves as a reasonable assurance as to the truth and fairness of a companys financial information and enhances the reliability of accounts verified by the independent third party. Corporate Law Reform Committee for the Companies Commission of Malaysia, A Consultative Document (No 12), Auditors Roles and Responsibilities, December 2007, page 19

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In Malaysia, the laws governing audit and auditors are the Companies Acts 1965, the provisions of the Listing Requirements of the Stock Exchange and the By-laws (on professional conduct and ethics) issued by the Malaysian Institute of Accountants
Corporate Law Reform Committee for the Companies Commission of Malaysia, A Consultative Document (No 12), Auditors Roles and Responsibilities, December 2007, page 19

Malaysian Institute of Accountants set up by laws on professional conduct and ethics : By-Law B-1: Professional Independence
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i) There is a particular need, therefore, for a firm to ensure that its objective approach to any assignment is not endangered as a consequence of any personal relationship. A dependent child of a member although no longer a minor may affect objectivity. (ii) Financial involvement with a client may affect objectivity. Such involvement can arise in a number of ways of which a shareholding in a company upon which the firm is retained to report is a typical example. (iii) In Malaysia, the appointment of an auditor is also governed by the Companies Act, 1965

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(iv) The provisions of by-law B-1.3(1)(a) above are not intended to preclude a beneficial holding in an authorised unit trust or listed investment trust which holds shares in a client company, except where the unit or investment trust is itself a client on which the member or his firm reports. (v) To ensure an objective approach to assignments, member firms are expected to ensure that their employees who are involved in the audit engagement whether directly or indirectly, do not hold any interest in the client. Member firms are expected to take the necessary measures to ensure compliance.

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"Due diligence / due care/ caveat emptor is a term used for a number of concepts involving either an investigation of a business or person prior to signing a contract, or an act with a certain standard of care. It can be a legal obligation, but the term will more commonly apply to voluntary investigations.

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In business transactions, the due diligence process varies for different types of companies. The relevant areas of concern may include the financial, legal, labor, tax, IT, environment and market/commercial situation of the company. Other areas include intellectual property, real and personal property, insurance and liability coverage, debt instrument review, employee benefits and labor matters, immigration, and international transactions.

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Auditors have to abide to rules and procedures set up by the professional body like the Malaysian Institute of Accountants. Generally the various heads of liabilities are as follows : 1. liability to the company from contracted duties 2. liabilities to shareholders or the company due to failure of auditors to exercise a reasonable standard of care in doing their work. 3. liability to Registrar of Companies, the company or shareholders due to or default or negligence in performing the statutory duties under the Companies Act 1965

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Most of the time when we hear the term conflict of interest, it is in connection with an elected public official or judge. This is because people in positions of power are more likely to face charges of a conflict of interest at some point in their careers. Many of the decisions they make must not be tainted by the possibility of favoritism or personal gain. It is not unusual for public officials to divest themselves of anything which could even be construed as a conflict of interest, including stocks, pensions, board memberships and former clients.

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Def : Conflict of interest is a situation where one relationship or obligation places you in direct conflict with an existing relationship or obligation.
x Simply meeting the needs of your organizations stakeholders can present conflicts of interest when you consider the possibility that what is best for your shareholders may not be best for your employees and community. x Selling a product that has the potential to be harmful to your customers represents a conflict of interest. x Selling a product that has the potential to be harmful to the environment also carries a conflict of interest.

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