CH 8 Financial Ethics

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 business’s 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 company’s
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 company’s 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

CH 8 Financial Ethics

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Ethics in Finance

 It measures the extent to which the activities of a

 It measures business conduct against varied moral

 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

 To improve the quality of governance by evaluating the

 This information has not been disclosed to

 It violates equality of opportunity

 Reasons for opposition are as follows:

 Protecting their own interests

 Company under target changes AOA so

 Poison pills are prohibited in Britain by

 Use of poison pills are ethical if they are

 Target company may be forced to incur

 Presence of parachute allows management

 If managers act in their own interest

 They convert the company into a private

 Unethical activities can involve leaking

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