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

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

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
structures,
policies.

that assess
procedures,

a businesss
systems and

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

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

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

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 companys
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