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Ethics in Finance

PGDM-Session 7

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Characteristics of Management

Prone to Fraud

Unduly aggressive financial Targets

Domination by person or group without

controlsAggressive accounting practice to keep stock

prices high

Pressure to reduce tax liabilities Major performance related compensation

Non-Financial personnel involved in accounting

matters

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Ethical issues in Finance

Financial statements

Hostile Takeovers

Financial Markets

Insider Trading

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Fraud in Financial Statements

Fictitious Revenues

Concealed Liabilities and Expenses

Fraudulent Asset Valuations Improper or Fraudulent Disclosures or

Omissions

Creative accountingform offraudulent financial reporting so as toprovide misleading information.

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Duties of an Auditor

To give an accurate statement to themembers 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

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Ethical Audit

An audit that assess a businesss structures, procedures,systems and policies.

It measures the extent to which the activities of abusiness comply with the standards it has publiclydeclared to its external customers

It measures business conduct against varied moral

standards of the community.

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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 increasesbusiness performance by assessing them against the ethicalbusiness objective

To improve the quality of governance by evaluating theperformance and ensuring that financial information is bothavailable and reliable

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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 overthe account with intent to generate commissionsrather than to benefit client

Unsuitability Unfairness in Markets

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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

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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 shareholderstheir rights.

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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

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Anti-takeover defense measures

Poison Pills

Green mail

Golden Parachute

People Pill

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Poison Pills

An anti-takeover device used by companysmanagement to make takeoverprohibitively expensive for the bidders

Company under target changes AOA sothat group of Shareholders have special

rights to buy and sell preferred stock athighly favorable prices (At times belowmarket price)

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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 fromunwanted takeover bids.

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Greenmail

It occurs where a potential takeover agent purchasesstock in a company

After the purchases have totaled five percent the agentmust 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 toprevent a shareholder from taking over the company

Takeover agent ends up selling the shares back tocompany at an increased or higher negotiated price

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Ethics & Greenmail

Target company may be forced to incur

debts to raise funds to finance the buy

back of shares at premium price

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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

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People Pill

Management threatens that in event of atakeover the entire management teamwill resign

If managers act in their own interestrather than companys long term valuethen they are acting unethically

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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.

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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

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Thank You