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Ethics in Finance


Ethics in Finance PGDM-Session 7 ... performance related compensation Non-Financial personnel involved in accounting ... lucrative benefits to its top executives such ... – PowerPoint PPT presentation

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Title: Ethics in Finance

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

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

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
  • To determine the type of training necessary for
  • 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

Ethical Issues in Financial Markets
  • Deception act of misrepresenting relevant
  • 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.

  • 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
  • Management of target company sends greenmails to
    prevent a shareholder from taking over the
  • Takeover agent ends up selling the shares back to
    company at an increased or higher negotiated

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
  • 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