Running head: ETHICAL ISSUES IN FINANCE

Ethical Issues in Finance

By

Romy Reyes

Saint Thomas University

Instructor: The Reverend Professor Raúl Fernández-Calienes, Ph.D.

MAN 510-11 Management Ethics

2015 A1 Term

March11, 2015
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Abstract
The thought of ethics and finance is not a subject in the minds of many people in the financial
world. There are issues that people in the world of finance deal with that relate to ethical issues.
These issues relate to various questions on the approach of ethical issues and values. The
questions include whether the approaches are different in the professional and personal lives of
individuals. Do ethical issues differ in the financial sector? What are the dominant ethical issues
in the current financial crises? How do professional in the financial sector interpret their role
towards ethical standards and values in all situations?

Keywords: financial sector, behavioral, ethical issues

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Table of Content

Abstract------------------------------------------------------------------------------------------------------------------ 2

Introduction-------------------------------------------------------------------------------------------------------------- 4

Ethics in the financial sector------------------------------------------------------------------------------------------- 5

Role of the financial crises-------------------------------------------------------------------------------------------- 6

The role of economics-------------------------------------------------------------------------------------------------- 8

The role of the society-------------------------------------------------------------------------------------------------- 8

Lack of transparency--------------------------------------------------------------------------------------------------- 8

Conflict of interest------------------------------------------------------------------------------------------------------ 9

Conclusion--------------------------------------------------------------------------------------------------------------- 9

References-------------------------------------------------------------------------------------------------------------- 10
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Ethical issues in finance

Introduction
Maintaining ethical behavior and virtues is a task that everyone struggles with because of
the temptation to do wrong. Many people struggle with the issues differently, thereby defining
ethical issues in their own ways (Tota & Shehu, n.d). Consequently, it draws the question
whether individual standards of fairness, sensitivity, honesty, and values are conclusive or do the
change occasionally. It is imperative that these traits are more evident in other than such as the
trait of honesty (Boatright, 2008). Does it then mean that some people are honest at all times or
their honesty is dependent on their prevailing circumstances or dilemmas? Research indicates
that there are no absolute honest or dishonest people. The level of honesty changes with the
dilemma these people face. Ethics in finance is essential because it provides the guidance
behavior and decision-making.
It means that ethical behavior is under the influence of the prevailing situation.
Essentially, there are situations that may be extreme and may overpower people’s composure and
ability to portray ethical behavior. For instance, some people resolve to cheat to get their way in
a situation that requires that thy uphold ethics. The situation may be difficult to a point that a
person may uphold ethical values because of the risk of losing (McGee, 2012). On the other
hand, there are people that may not see any harm in losing and uphold their ethical values. In
business, some people tend to cheat to get lucrative contracts that seem difficult to get by
upholding ethical values (Tota & Shehu, n.d). The same is evident in finance, especially where
firms conceal financial information to present a different image to investor. Some players in the
financial sector disregard ethical values because it guarantees them investment opportunities that
may not be achievable through ethical means.
The results mean that some people cheat when presented with opportunities while others
cheat when the stakes are high and they stand to lose (Boatright, 2008). It also means that
people’s value system in their personal or professional lives is subject to change based on
circumstances. There is an element of double standards when it comes to self-imposed standards
that some people uphold. Some people tend to be stricter and defensive about the standards they
set because it touches on their personal lives (Tota & Shehu, n.d). In addition, some people are
less concerned about ethical issues in their work places. The difference in the application of
ethical behavior does not sense because ethics ought to apply in all dimensions.
It is notable that people take their ethical values and how the resolve the ethical dilemmas
everywhere. It is also evident how the professional and personal nature of the dilemma
determines how they resolve them (Tota & Shehu, n.d). Individuals demonstrate double
standards in dealing with ethical issues in their professional and personal lives. It shows that
there is a need for a set professional code of standards or values to deal with the ethical issues
(Boatright, 2008). The codes of conduct need to provide a general guidance on how professionals
in the sector ought to behave. It is also essential in discharging the essential decisions that needs
to influence the ethics of most of the professionals.
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Ethics in the financial sector

In the financial sector, ethics is a subject that requires the attention of many professionals
because of its complexity. Judging by the numerous issues that are evident in the financial sector,
the question that lingers in one’s mind is whether there is a greater temptation to stray from
ethical ways (Tota & Shehu, n.d). One also wonders whether the power to engage in unethical
behaviors is greater in the financial sector than another sector. Here, the discussion concerning
the tendency of people to engage in unethical practices to succeed is dominant. There is a
tendency of many people to disregard values and engage in behaviors that focuses in enriching
personal interests.
There is a general understanding that the financial sector revolves around trust. The
argument makes more sense especially for those in the banking sector. Essentially, some
institutions in the financial sector deal with billions dollar and most of their customers rely on
trust to be able to fulfill their needs. As a result, institutions such as banks rely on trust to give
their customers loans on the belief that they will repay the loans on time (McGee, 2012).
Consequently, millions of financial transactions take place every day based on trust. In fact,
many transactions and the success of the financial sector would not be possible in the absence of
the trust and honesty between institutions and their customers.
However, numerous cases relate to breach in the traits of honesty and trust that the
financial sector mainly upholds. The case of Nick Leesson remains in history as one of the most
unbelievable. He caused the collapse of most of the vulnerable banks in England through his
unconventional strategies that led to their immediate failure (Tota & Shehu, n.d). It happened in
the mid-1990s when financial sector was undergoing substantial transformation. It led to a
financial crisis that crippled operations at most vulnerable banks in the country.
The financial fraud in the New York Stock Exchange (NYSE) that led to the loss of
millions of dollars invested by many individuals is another memorable case. The former NYSE
head developed a Ponzi scheme that he used to loot the life savings of most of the people who
invested in it. He also used the scheme to loot from several charitable institutions that took part
in developing social capital (Tota & Shehu, n.d). Enron’s case involved a multibillion-dollar
fraud that led to the loss of billions of investor’s money. The case is substantially complicated
because of the level of fraud and stakeholders that took part in it. Numerous other cases exist, but
the two stands out as the cases that breached the traits of trust and honesty to destabilize the
financial sector.
There are people that believe that ethics and finance are subjects that have no relationship
because main goal of finance is to make money. It does not matter how the money comes as long
as one keeps on making the money. In fact, the judgment of one's status and recognition is
because of how much money or profits an individual makes (Tota & Shehu, n.d). The argument
is that people who rise through the ranks of finance have to compromise their values and others
to succeed. The top management uses their foot soldiers in ways that may be immoral to ensure
that they achieve their goals (McGee, 2012). Many people subscribed to this notion bear the
opinion that there are no standard rules or ethics applicable in the financial sector. It is all about
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making as many profits as one can to rise through the ranks of financial practice. Their belief is
that ethics is a practice that belongs to other professions.
Inherently, many people in the field of finance do not show much interest in ethical issues
as is evident in other professions. The financial sector presents several opportunities to make so
much money that one may not make in other professions (McGee, 2012). The fact that there are
large sums of money involved means that there may be greater occurrences of unethical behavior
(Knill, n.d). There have been numerous cases of insider trading where the suspects were caught
taking part in such trading activities. These and other scandals are evidence that the financial
sector is prone to unethical behaviors.
Most of the fraudsters depend on the support they receive from offshore banks to conceal
their operations using their privacy laws. Some people engage in window dressing of accounts to
portray that a company may be performing well financially, which may not be the case. The case
of Satyam is an indication of a how a trusted professional took advantage of stakeholders and
committed fraud for over ten years (Knill, n.d). The stakeholders only realized that their money
disappeared recently in the face of the recent financial crisis.
The solution lies in instilling good morals, fairness, decency, honesty and goodness,
which would in turn motivate other people to be decent and honest. It applies to all professionals
including those in the financial sector that face numerous cases of unethical behavior. Notably,
the financial sector is a reflection of the nature of the society in which it operates. In fact,
changing the society’s perception is a significant step towards improving the financial sector.
Being a reflection of the nature of the society, there is a need to work hard to improve the
perception of the society towards the financial sector (Knill, n.d). Consequently, the society must
first embrace ethical values and practices to replicate them into the financial sector.
Role of the financial crises
The financial crises witnessed throughout history present various occurrences of ethical
issues. Essentially, financial crises have hurt and caused the closure of many businesses in the
global markets (McGee, 2012). Financial crises change the fortunes of businesses instant and
make it feel as though the business developed on shaky grounds. The phenomenon is contrary to
the belief of many stakeholders who believe that their investment is safe. Financial crises cause a
break down in the values that exist in the financial sector. These values are trust and honesty,
which forms the backbone of the financial sector (McGee, 2012). Many stakeholders lose their
trust in business, the financial sector, business people investors and investment consultants,
politicians and the media.
Most of the exposed structures of the financial sector demonstrate how the financial
sector functions. For instance, the Mortgage Based Assets (MBA) investment was full of
promises that unsuspecting investors were willing to partake. Essentially, the investors thought
that the values of the homes would only increase thereby making the values of the loans lucrative
(McGee, 2012). Although there was an inherent risk of losing, the investors went ahead to invest
in them. The phenomenon of subprime banking was an idea that required substantial research to
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ascertain. As a result, the asset prices fell significantly to a point that it was not possible to
recover the investment.
All operations involving the investors and other stakeholders were above board and
legally correct. However, it is essential to note that an individual’s behavior is not subject to the
regulations and the laws set by the prevailing practice. People’s behavior is subject to the ethical
values and morals that they uphold in relation to their professional practice. It means that people
should uphold their code of conduct more strictly to ensure that they deliver to the best of their
ability (Rossouw, 2012). Ethics in the financial sector revolves around values such as fairness,
honesty, trust, morality and ethical correctness.
On the other hand, the contrary behavior means that people are under the influence of
other motives including making of quick profits, increased opportunities and various information
asymmetries. Many questions emerge regarding the conduct of some of the players of financial
crises. For instance, in the MBA, it may be useful to find out whether the investment advisors
advised investors of inherent fell in prices. It is also necessary to establish whether the
investment advisors played their role in alerting investors of the risks, they were undertaking
(McGee, 2012). It is also necessary to establish whether credit rating agencies compromised their
standards before making proper considerations. Consequently, most of the professionals that
took part in the transaction were legally correct by meeting all the regulatory standards.
However, they were wrong because they did not uphold ethical practice in their decision-
making. These failures to act in ways that were morally incorrect led to various fraud cases that
subsequently led to the loss of billions of dollars (McGee, 2012). Morality plays a significant
role especially in developing an environment that is free from financial fraud. It is the duty of the
professional in the financial sector to ensure that everything is legal.
Several issues also emerged because of the financial crises. An issue such as a moral
hazard is something that not many people identify with but it happens in the banking sector. It
refers to a situation where the institutions share costs with stakeholders while they privatize the
profits. The situation is true especially when the government bails out these organizations to
restore them back to their strong positions (Knill, n.d). It is also evident in both private and
public owned banks, where the common trend is to share big paychecks between top
management and stakeholders when the banks make good profits. On the other hand, there is a
tendency for banks to refer to the public whenever loses occur to share the burden. The public
also shoulders the cost of the bailout that seeks to save the bank from failing.
Businesses in the financial sector are substantially different from ordinary businesses
because of the risk-taking factor. Seemingly, businesses in the financial sector are keen on
sharing the costs incurred in their transactions. Their concern is to ensure that their stakeholders
reap the maximum from their profits, but involve the public when they make loses (Knill, n.d). It
is in the interest of banks and other financial institutions to ensure that they maintain public trust
at all times. They can only achieve this by upholding ethical practices in their decision making
especially where there is a public interest (McGee, 2012). Many businesses in the financial
sector hold public funds in trust because of the belief their customers have on them.
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The role of economics

The role of economics in ethical practice also plays a significant role especially in the
direction economic study has taken. Essentially, economists possess the knowledge to predict the
future of the financial sector and they should have predicted the financial crises (The value of
money: Ethics and the world of finance, 2006). Economics has assumed the role of natural
science rather than a social science that it would have been. The assumptions of mathematical
and scientific models made it difficult to understand the outcomes of human behavior (Knill,
n.d). The determination of the outcome is precisely beyond exact predictions. The role of the
mathematical models is evident in understanding economic dimensions and analyses in
achieving optimal results.
Carrying these models to real life situations led to a failure because it could not predict
the outcomes of human activity. The prediction was only possible by human behavior, which is a
social science economics should have assumed. Economic studies seek to provide guidance on
the best ethical values to uphold in both accounting and financial practice (Knill, n.d). It upholds
ethical practice using valuable instruments in the practice of finance. Economics requires that
one understands the concepts of moral philosophy to have an understanding of the ethical
foundations of market operations.
Economics has to do with fulfilling public interest but not arranging to fulfill personal
interests. There is a need for the society to have concern for one another by upholding sympathy
as a moral duty to become stable. The rule is something that has since diminished over the years
because the society has become more capitalistic. In addition, economics has moved to science
that does not uphold values to one that supports capitalist tendencies.
The role of the society
The society plays a significant role in helping determine the future of ethics in the
financial world. The regulatory authority also has an essential role to play in the financial sector.
The financial regulatory authority can play its role by providing financial literacy to everyone as
a way of financial inclusion (Prasad, 2012). The main aim of having an inclusive system is to
provide access to the financial services to people in remote areas. It also plays an essential role in
educating people on the type of services that poor people can get through the inclusion. Notably,
the fact that the poor have access to financial institutions, it means that they can easily take part
in financial transactions.
Lack of transparency
The inherent lack of transparency in the financial sector is an issue that many people have
to deal with on several occasions. Many deals take place in secrecy and it only comes out once
there is an explosion of fraud after the end of the transactions. Business transactions should be
above board especially for the companies in the public domain. They need to ensure that they
demonstrate transparency to ensure that the public has sufficient knowledge of what is happening
(Prasad, 2012). Many private organizations that do not function with the balance sheet choose
whichever information to expose to the public. It amounts to the lack of transparency because it
is difficult to evaluate the performance of the organization especially in the absence of essential
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data (Knill, n.d). As a result, certain information released by some organizations may be
misleading especially if one intends to make investments in the business.
Conflict of interest
The issue of conflict of interest is common among many businesses epically those that
portray self-serving behaviors. Some of the demonstrate behaviors that demonstrate conflict of
interest among several stakeholders especially conflicts that are inherent between different
groups. The focus of many stakeholders in the financial sector is to maximize profits and
commissions in the short term without regard to the outcome (Prasad, 2012). The result means
that other stakeholders such as investors, bondholders, employees and the society may suffer in
the long term. The reason for their suffering is that the focus of their shareholders was on the
making quick profits.
Conclusion
In conclusion, everyone encounters ethical dilemmas every day and they resolve the
dilemmas differently. It is also clear that everyone has his or her definition of ethical values and
upholds them self-evidently. It is not clear whether people in the financial sector are less ethical
as people in other professions (Prasad, 2012). However, the presence of more opportunities to
make quick money brings about the temptation to engage in unethical behavior. As a result, there
could be many occurrences of unethical behavior because of succumbing to the temptation.
There is a need for top management and leaders in the financial sector to take responsibility to
uphold ethical practices. The society also has an essential role to play especially in showing
regard to one another as it reflects the behavior of the financial sector. This goes a long way in
changing the perception of ethics in the financial sector.

References
Boatright, J. (2008). Ethics in finance (2nd ed.). Malden, MA: Blackwell Pub.
Knill, A. (n.d.). The value of country-level perceived ethics to entrepreneurs around the world.
The European Journal of Finance, 209-237.
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McGee, R. (2012). The ethics of tax evasion perspectives in theory and practice. New York, NY:
Springer.
Prasad, V. (2012). Ethics and auditing: An international perspective. International Journal of
Finance and Accounting, 63-68.
Rossouw, G. (2012). Global business ethical perspectives on capitalism, finance and corporate
responsibility: The impact of the global financial crisis of 2008. Asian Journal of
Business Ethics, 63-72.
Tota, I., & Shehu, H. (n.d.). The dilemma of business ethics. Procedia Economics and Finance,
555-559.
The value of money: Ethics and the world of finance. (2006). Choice Reviews Online, 44-1454.