Chapter 7

Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.
Chapter 7
Ethical Issues in
Financial Management
Business Ethics and Corporate Governance, 2e A. C. Fernando

Financial and Management Accounting
• Financial Accounting is defined as reporting of the

financial position and performance of a firm
through financial statements issued to external
users on a periodic basis.
• Management or Cost Accounting is the process of
identifying, measuring, analysing, interpreting, and
communicating information for the pursuit of an
organization's goals.

Financial Management
• Financial management encompasses resource

management and finance operations.
• Resource management is the efficient and effective
deployment of an organization's resources such as
financial resources, inventory, human skills, production
resources, or information technology when needed.
• Financial operations is providing financial advice and
guidance, support of the procurement process, providing
pay support, and providing disbursing support .

Ethical Issues in Finance
Ethics in finance can be developed around three broad

themes:
• In financial markets
• In financial services industry (including banking and
insurance)
• By financial people in organizations

Frauds in the Financial Sector
Legal authorities define fraud as a crime that “involves the

use of dishonest or deceitful conduct in order to obtain
some unjust advantage over someone else”.
Frauds include:
•Financial services sector, i.e., credit card fraud, cheque
fraud and other types of identify-related fraud;
•Insurance fraud
•Telecommunication-related fraud
•Securities-related fraud
•Computer-related fraud

Types of Bank Frauds
• Unauthorized extension of credit facilities;

• Pledging of spurious goods;
• Hypothecating goods to more than one bank;
• Inflating the value of goods;
• Removing goods with the connivance or negligence of
bank employees;
• Pledging of goods belonging to a third party;
• Accepting obsolete and inadequate stocks;

Types of Bank Frauds (Contd.)
• Frauds in deposit accounts are opening of bogus accounts,

forging signatures of introducers, and collecting through
such stolen accounts or forged cheques or bank drafts.
• Frauds are also committed in the area of granting
overdraft facility in the current accounts of customers
• Credit card fraud
• Phishing

Measures against Bank Frauds
• Prevention of Money Laundering Act, 2002

 Reporting of Cash and Suspicious Transactions
 Types of Reports: Cash Transaction Reports (CTR),
Suspicious Transaction Report (STR), Counterfeit
Currency Report (CCR)
 Reporting to RBI
 Other guidelines are also given under the Act to curb
the menace of money laundering
 Compliance o Anti-Money Laundering Standards
• The Banking Ombudsman Scheme, 2006

Constraints to Ethical Practices in
Indian Nationalized Banks
1. Tenure of CEOs,
2. Remuneration of CEOs and
3. Accountability without autonomy.

Frauds in Insurance Sector
We can identify three types of fraud in the insurance industry:

1. Internal fraud against the insurer perpetrated by an
employee;
2. Policy holder/claims fraud committed against the insurer,
in the purchase and/or execution of an insurance product
by obtaining wrongful coverage or payment; and
3. Intermediary fraud committed against the insurer or policy
holders by intermediaries – independent broker/agent.

Frauds in Insurance Process
The possibility of fraud is prevalent during any one of the

three stages in the insurance process:
a.Policy proposal stage;
b.Policy contract stage; and
c.Claim process stage.
Frauds are also seen in the non-life insurance sector.

Combating Insurance Fraud
The following measures can be adopted to combat fraud in

the insurance sector:
1.Collection of proper evidence
2.Need for regulation
3.Regulation of allied services
4.Need for judicial cooperation
5.Insurers should aim at conviction

Combating Insurance Fraud (Contd.)
6. Need for transparency and fair play

7. Insurers’ coalition
8. Building consumers’ awareness
9. Rewards for whistle-blowers
10. Effective legislation and judicial action

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Copyright © 2012 Dorling Kindersley (India) Pvt. Ltd.

Business Ethics and Corporate Governance, 2e A. C. Fernando

• Financial Accounting is defined as reporting of the

Business Ethics and Corporate Governance, 2e A. C. Fernando

• Financial management encompasses resource

Business Ethics and Corporate Governance, 2e A. C. Fernando

Ethics in finance can be developed around three broad

Business Ethics and Corporate Governance, 2e A. C. Fernando

Legal authorities define fraud as a crime that “involves the

Business Ethics and Corporate Governance, 2e A. C. Fernando

• Unauthorized extension of credit facilities;

Business Ethics and Corporate Governance, 2e A. C. Fernando

• Frauds in deposit accounts are opening of bogus accounts,

Business Ethics and Corporate Governance, 2e A. C. Fernando

• Prevention of Money Laundering Act, 2002

Business Ethics and Corporate Governance, 2e A. C. Fernando

Business Ethics and Corporate Governance, 2e A. C. Fernando

We can identify three types of fraud in the insurance industry:

Business Ethics and Corporate Governance, 2e A. C. Fernando

The possibility of fraud is prevalent during any one of the

Business Ethics and Corporate Governance, 2e A. C. Fernando

The following measures can be adopted to combat fraud in

Business Ethics and Corporate Governance, 2e A. C. Fernando

6. Need for transparency and fair play

Business Ethics and Corporate Governance, 2e A. C. Fernando

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