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Ethics in Business
Disciplines: Finance and
Accounting
PRESENTED BY:
KRITIKA||MAHIMAJEET||MRINAL||NIDHI|| PRABHSIMRAN
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Contents

 Introduction
 Stock market
 Financial reporting
 Insider trading
 Conflict of interest
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Ethical Thought

 “The biggest corporation, like the

humblest citizen, must be held to
strict compliance with the will of the
people.”

- Theodore Roosevelt
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Ethical Thought

Earnings can be as pliable as putty

when a charlatan heads the company
reporting them.

- Warren Buffett
 What is accountability?

Accountability is arguably something that everyone should respect. It is a “gold”

concept that everyone agrees with and that it is widely used in political discourse since
it implies transparency and trustworthiness.

It can be of differing views. For example, an auditor views accountability as a financial

matter, whereas a politician sees accountability as a political issue.

It is also an “elusive concept” that can mean different things to different people.
 Business Ethics

Business ethics can simply be defined as:

“The collective actions of a business where issues of

right and wrong are addressed to evaluate the appropriate
and acceptable behavior, beneficial to the society as a
whole”.
 Ethics in Accounting and Finance

 Accounting is a business field in which accuracy and interpretation are both very

important .

 Small discrepancies can displace large sums of money , especially in large companies.

 Ethics is the practice of behavior that does not allow for intentionally inaccurate or false

accounting practices.

 This pertains not only to following the law , but also to interpreting financial data or clearly

and honestly as possible in all situations.

 Provides fair and accurate reporting of the financial position of a business.

 Ethical Issues:

Ethical issues

• Reporting False Income

• Falsifying Documents
• Allowing or taking Questionable Deductions
• Illegally Evading Income Taxes
• Engaging in Frauds
• Insider trading
• Stock Market
• Conflict of Interest
Ethical Audit

 An audit that assesses a business’s 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.
 Ethics in Finance

 In Finance

 Compliance with applicable law, rules and regulation

 Full, fair, accurate, timely and understandable
disclosure in reports and documents that the company
files with, or submits to , governmental agencies.
 Achieving responsible use of and control over all
assets of the company .
 Ethics in Accounting

 In accounting

 By joining their professional organizations , people

who work in the field of accounting agree to uphold
the high ethical standards of their profession
 These codes are positively stated and provide general
guidelines that professional accountant should strive to
follow
 These ethical code call for their members to maintain a
level of self – discipline that goes beyond the
requirements of laws and regulations
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Reasons for unethical behavior

• Manipulating accounting entries to show better result (window dressing) to raise

EMPHASIS ON further capital from the market.
SHORT TERM
RESULTS

• In the era of globalization and massive flow of capital accounting rule changing
faster than ever before. The rules become Complex. And complexity or difficulties
ACCOUNTING
RULES
become reason for unethical behavior

• Companies need to develop an environment where small ethical lapses are taken
IGNORING SMALL seriously so that they do not recur in the future
UNETHICAL
ISSUES
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Threats

Self- interest
threat

Advocacy
threat

Self review Familiarity

threat threat
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ETHICS IN STOCK
MARKET
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ETHICS IN STOCK
MARKET
 The fundamental ethical requirement of financial markets is
that they be fair. Fairness may be defined either substantively
or procedurally.
 SUBSTANTIVELY- when the price of a security reflects the
actual value
 PROCEDURALLY -when buyers are enabled to determine
the actual value of a security.
 finance ethics is concerned not only with individual conduct
but also with the operation of financial markets and financial
institutions.
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Why Ethical practice are important in
market?

 Investors intrinsically trust financial institutions with their

money and expect them to invest it with integrity.
 All market risks considered, investors expect the highest
return and put their faith in the hands of professionals.
 Upholding investor confidence is vital to the success of the
investment industry.
 High ethical standards are critical to maintaining the
public’s trust in financial markets and in the investment
profession.
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ETHICAL ISSUES IN STOCK
MARKET

 1) Self-interest sometimes morphs into greed and

selfishness, which is unchecked by self-interest at the
expense of someone else. This greed becomes a kind of
accumulation fever.
 2) Some people suffer from stunted moral
development: This happens in three areas: the failure to be
taught, the failure to look beyond one’s own perspective, and
the lack of proper mentoring.
 3) Some people equate moral behaviour with legal
behaviour, disregarding the fact that even though an action
may not be illegal, it still may not be moral.
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 4) Professional duty can conflict with company

demands. For example, a faulty reward system can induce
unethical behaviour. A purely self-interested agent would
choose that course of action that contains the highest returns
to himself or herself.
 5) Individual responsibility can wither under the
demands of the client. Sometimes the push to act
unethically comes from the client.
Regulatory framework and controls 19
facilitating fair market conduct

 The Securities and Exchange Board of India (SEBI)

1. SEBI is vested with the responsibility of protecting the interests of
investors in securities and promoting the development of the securities
market.
2. SEBI has been given legislative, executive, and quasi-judicial powers
under the SEBI Act, 1992 to help it in fulfilling its duties.
3. SEBI had framed the SEBI (Prohibition of Fraudulent and Unfair Trade
Practices relating to Securities Markets) Regulations in 1995 to combat
market abuse related to “market manipulation”
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SCAM 1992

 The stock market scam of 1992 is considered one of the worst

violations of ethics in the Indian financial industry. Retail
investors lost money after the market was manipulated, and it
subsequently lost 72 percent of its value.
 The Harshad Mehta scam triggered many changes in India's
financial regulatory system. The Securities Laws (Amendments)
Act  was passed in 1995, widening SEBI's jurisdiction and
allowing it to regulate depositories, FIIs, venture capital funds and
credit-rating agencies.
 To secure investor interest, SEBI could also make it mandatory
for companies issuing securities to make disclosures.
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ETHICS: FINANCIAL
REPORTING
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Financial Reporting

 Financial reporting is a financial statement of any

organizations or companies which disclose the
financial status to the government, management and
investors
 Itis directly and indirectly related with accounting
and economics.
 It plays a crucial role in corporate governance
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Ethics in Financial Reporting

 Ethicsin accounting are concerned with

how to make good and moral choices in
regard to the preparation, presentation and
disclosure of financial information.
 During the 1990s and 2000s, a series of
financial reporting scandals brought this
issue into the forefront.
 Example : Enron, WorldCom
ETHICAL ISSUES IN 24
ACCOUNTING AND FINANCIAL
REPORTING

1. Fraudulent Financial
Reporting
2. Misappropriation of Assets
3. Disclosure Violations
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Fraudulent Financial Reporting

 Most common in the last two decades

 Fraudulent financial reporting is the misstatement of
the financial statements by company management.
 Usually, this is carried out with the intent of
misleading investors and maintaining the company's
share price.
 While the effects of misleading financial reporting
may boost the company's stock price in the short-
term, there are almost always ill effects in the long
run
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Misappropriation of Assets

 The most common ethical issue in accounting on an individual

employee level
 Misappropriation of assets is the use of company assets for
any other purpose than company interests.
 Also known as stealing or embezzlement, misappropriation of
assets can occur at nearly any level of the company and to
nearly any degree.
 For example, a senior level executive may charge a family
dinner to the company as a business expense, a line-level
production employee may take home office supplies for
personal use
 Satyam Computers
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Disclosure Violations

 Disclosure violations are errors of ethical omission

 Can be considered as a part of fraudulent financial
reporting
 Company executives must walk a fine line; it is
important for management to protect the
company's proprietary information
 Ifthis information relates to a significant event, it
may not be ethical to keep this information from
the investors.
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ENRON

• Enron's leadership fooled regulators with fake holdings and off-the-

books accounting practices.
• Enron used special purpose vehicles (SPVs), or special purposes entities
(SPEs), to hide its mountains of debt and toxic assets from investors and
creditors.
• The price of Enron's shares went from $90.75 at its peak to $0.26 at
bankruptcy.
• The company paid its creditors more than $21.7 billion from 2004 to
2011.
• David Duncan was the principal accounting professional employed by
Arthur Andersen ordered to shred over a ton of papers related to Enron
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The Satyam Scam in 2009

 Famously known as “Indian Enron”

 Fake invoices and bills: Fake invoices and bills were
created using software applications such as 'Ontime' that
was used for calculating hours put in by an employee
 Web of companies: A web of 356 investment companies
was used to allegedly divert funds from Satyam
 The cash so raised was used to purchase several thousands
of acres of land across Andhra Pradesh to ride a booming
realty market
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ETHICS: INSIDER
TRADING
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INSIDER TRADING

It is defined as : “Buying or selling a

company’s stock on the basis of inside
information about the company.”
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INSIDE INFORMATION

The information that is not available to general public outside

the company is termed as insider trading. But if this
information is available to general public, it would have a
significant impact on the price of company’s stock.
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EXAMPLE

Someone learns that a company is about to receive a multi-

billion dollar contract from government. By learning this
news, he buys several shares of the company, knowing that
the value of share will rise. Such type of purchasing stock is
considered to be as insider trading.
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Rakesh Agarwal vs. SEBI

In this famous case, Rakesh Agarwal, the Managing Director of ABS

Industries Ltd. (ABS), was involved in negotiations with Bayer A.G (a
company registered in Germany), regarding their intentions to takeover
ABS.
It was alleged by SEBI that prior to the announcement of the acquisition,
Rakesh Agarwal, through his brother in law, Mr. I.P. Kedia had purchased
shares of ABS from the market and tendered the said shares in the open
offer made by Bayer thereby making a substantial profit.
The SEBI directed Rakesh Agarwal to deposit Rs. 34,00,000 with
Investor Education & Protection Funds of Stock Exchange, Mumbai
and NSE.

Ethics in insider trading
Defend
 It ensures stock prices reflect to the
true value of the stock.
 It does not harm any one.
 It has an advantage over others in the
market is not wrong in itself and is
common with experts
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Criticize
 The information the insider uses is
not for his or hers so stolen.
 Trading on inside information has
harmful effects on the stock market
and increases the cost of buying and
selling stocks.
 The advantage of the inside trader is
not like the advantage of an expert
because unlike the expert’s it is based
on theft.
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Penalties

 The SEBI Act provides for penalties as high as Rs 25 crore or three

times the amount of profits made out of insider trading, whichever
is higher.

 The Act also prescribes that insider trading is punishable with a

prison term of up to 10 years.
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Recent News

 Axis Bank Pays Rs41.43 Lakh while United India Insurance Pays
Rs10.13 Lakh as Settlement.
 Kishore Biyani of Future Group accused of insider trading for
purchases of Future Retail shares made in March 2017.
 SEBI comes out with disclosure format under insider trading rules
 SEBI detects 119 cases of insider trading in 2019 and 2020, the
highest ever
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CONFLICT OF INTEREST
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 A conflict of interest exists where a person holds a position

of trust that requires that he exercises judgment on behalf of
others, but where his personal interests and/or obligations
conflict with those of others.
 Conflicts of interest can also arise when a person’s ethical
obligations in her or his professional duties clash with
personal interests.
 Example - Agency Problem.
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Conflict of Interest:
Finance & Accounting

 The ethical issues and potential for conflicts

surrounding accounting practices go far
beyond merely combining services. They may
include underreporting income, falsifying
documents, allowing or taking questionable
deductions, illegally evading income taxes,
and engaging in fraud.
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 The financial relationship between public accounting firms

and their audit clients:
Because audits are paid for by audited clients, there is an
inherent conflict found simply in that financial arrangement.
 Conflicts between services offered by public accounting fi
rms:
Because many public accounting firms offer consulting services
to their clients, there are conflicts in the independence of the
firm’s opinions and incentives to generate additional consulting
fees.
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Example

 Certified public accountants (CPAs)

have a professional responsibility to the
public. But they work for clients whose
financial interests are not always served
by full, accurate, and independent
disclosure of financial information.
Even more dangerously, they work
daily with and are hired by a
management team that itself might have
interests that conflict with the interests
of the fi rm represented by the board of
directors. Thus, real and complex
conflicts can exist between professional
duties and a professional’s self-interest.
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 The lack of independence and expertise of audit

committees.
 Self-regulation of the accounting profession:
Because the accounting industry has historically self-
regulated, oversight has been lax, if any.
 Lack of shareholder activism:
Given the diversity of ownership in the market based on
individual investors, collective efforts to manage and oversee
the board are practically nonexistent.
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 Board are practically nonexistent.

 Short-term executive greed versus long-term shareholder wealth:
Executive compensation packages do not create appropriate incentive
systems for ethical executive and board decision making.
Example: “Enron paid about $681 million in cash and stock to its 140
senior managers, including at least $67.4 million to former chairman and
chief executive Kenneth Lay, in the year prior to December 2, 2001,
when the company fi led for bankruptcy. Not bad for a company that saw
its stock decline from $80 in January of 2001 to less that $1 when filing
for bankruptcy.”
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 Executive compensation schemes: Stock options and their accounting

treatment remain an issue for the accounting profession and the
investment community because, though meant to be an incentive to
management and certainly a form of compensation, they are not treated
as an expense on the income statement. They also tend to place the
incentives, again, on short-term growth rather than long-term
sustainability.
 Compensation schemes for security analysts: Investment banking
analysts have an interest in sales; this is how they generate the
commissions or fees that support their salaries. However, the sale is not
always the best possible transaction for the client, generating potential
conflicts.
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