ethicalaspectsof financia

8/8/2019 ETHICALASPECTSOF FINANCIA

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ETHICALASPECTSOF

FINANCIALMANAGEMENT

Unethical activities and financial mismanagement always go together.

REASONS:

The following are the major reasons to the increase of unethical financial management.

(a) Ambition from all sections of society for disproportionate earnings.

(b) The coercive and corrupt practices by the government in terms of acts, policy and

procedures.

(c) The complex, arbitrary, time-consuming and one sided tax laws.

(d) The power of huge monopolistic organisations.

(e) The idea of socialistic pattern of society where intellectual and materialistic growth is

restricted.

(f) Too much of centralized control and the lack of empowerment. It should be

remembered that power corrupts and absolute power corrupts absolutely.

(g) Growth is aimed for the sake of growth. The economic aspects of growth are given

more important than the non-economic aspects like values and ethical principles.

(h) The social system is deteriorating in many major parts of the world.

(i) The concept of money illusion is prevailing in the minds of all people. Money illusion

advocates that for anything and everything money can be a compensator.

According to ethical standards, the first and foremost importance should be given to the

universe (SRISTI), then to the society (SAMASTI) and last only to the concerned

individual (VYAKTI). In contrast, in modern days people give more importance to

individual and then only for society and least for the universe.


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Some norms can be fixed for quality of solutions.

(a) Fully ethical and legal is considered a best solution.

(b) Fully ethical but not so legal is ethically acceptable.

(c) Fully legal but not ethical is a master minded solution but not acceptable.(d) Unethical and illegal combination is disastrous.

Ethical and economical combinations can be made in the

following manner:

(a) Fully ethical and most economical combination is the best.

(b) Fully ethical and not so economical is acceptable.

(c) Most economical and not ethical is dangerous.

(d) Neither ethical nor economical is disastrous.

Obiectives of financial management:

(1) Profit maximization:

Trying to get the best profit is the concern of any investment.(2) Wealth creation:

Investment made in terms of money should create wealth through the production of

goods and services.

(3) Utilisation of financial resources:

The existing financial resources have to be utilised to a great extent.

(4) Pavment of interest and dividends:

There should be the timely and prompt payment of interest and dividends to the investors.

A delayed payment is often considered as a denied payment.


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Unethical practices in finance:

(1) Cheating the investors by failing to invest in proper terms. The best example is the

chit companies in India.

(2) Delays in payments to vendors, dealers, and agents.

(3) Delays in payments of wages and incentives.

(4) Cheating employees regarding LTCs,education schemes for children and other

benefits.

(5) Lackof prompt repayment of interest and capital to banks.

(6) Hawala transactions in money movements.

(7) Making bogus bills of purchase to show higher costs.

(8) Encouraging private borrowing from the unorganised sector.

(9) Unorganised money lending.

(10) Opening of current accounts in different banks to make adjustments against loans by

earlier banks.

(ll) Misleading the investors by overstating profits.

(12)With the help of brokers, the share price is artificially hiked.

Insider trading:

Insider trading is the using of inside information to make a personal gain. A public issuer

or employee of a company is an insider.

The insider information is related to a public issue. It is not available in public. Insider

trading accounts for 10 percent of cases in the U.S.A. ENRON,GLOBALCROSSING

and IMCLONE, SYSTEMS INC., are some of the examples. In the case of IMCLONE

SYSTEMSINC., the U.S. Government rejected some drugs. Its C.E.O.Samuel Waksal

sold the shares after knowing the bad news. Others were late to know this news of

government rejecting some drugs of IMCLONESYSTEMSINC.

Arguments against insider trading:

(1) Since information is a property it cannot be stolen by a few people.


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(2) The insiders take an undue and unfair advantage of the information.

(3) The conflicts of interests breed a crisis of confidence. Creating a loss of confidence is

an unethical act.

(4) Insider trading affects the confidence of investors in the share market.

(5) Insider trading leads to inefficiency in the markets. If insider trading is practiced as a

general rule, it would drive out the market speculators who take risks on short-term

trades. Insider trading is creating an uneven playing filed to the market speculators. In

fact, speculation and insider trading are the problems of business ethics.

(6) The fairness and integrity of the securities markets are violated. It is unfair to those

who do not have the privileged information.

Financial engineering:

It refers to repackaging the services of financial intermediaries. Too much of

securitization is also leading to transformation of financial assets into securities than can

be traded. It is tools, tricks and insights. It is the application of mathematical tools to

financial problems and the management of financial risk.

Churning:

It is excessive or inappropriate trading for a client's account by a broker. Since the broker

is interested in commission, he practices churning. It is an unethical practice in financial

markets.

Monev laundering:

It is the process by which one conceals the existence, illegal source to make it appear

legitimate. The "dirty" money appears "clean". The profits of criminal activities are made

to appear legitimate.

Money launderers are big time criminals who operate through international networks

without disclosing their identity.

Money laundering is consisting of three stages:


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1. The first stage is consisting of the Placement of proceeds derived from illegal

activities. The movement of money from the place of the crime to a less suspicious and

more convenient place.

2. The second stage Lavering is the separation of proceeds from illegal source. Complex

transactions are designed to prevent the audit trial.

3. In the third stage of Integration. there is the conversion of illegal proceeds into

apparently legitimate business earnings. It is done by normal financial and commercial

operations. False invoices for the goods exported, purchasing of property and co-

mingling of money in bank accounts.

In money laundering a lot of intermediaries is used like lawyers, accountants and

businessmen. Sometimes, there is a misuse of non-profit organisations also.

Money laundering can have a range of severe macroeconomic consequences. There are

unpredictable changes in money demand, prudential risks to the soundness of banking

systems, and increased international capital flows.

Organized crime can infiltrate financial institutions and affect the socioeconomic

development of many countries.

Monev laundering in India:

The following are the important causes for money laundering in India.

(a) A reasonable amount of political and economic stability.

(b) Existence of major financial centers with access to banking facilities, communications

and financial markets.

(c) Lackof regulatory controls against money laundering.

(d) Presence of cash economy.

Reasons for hectic Hawala activities in India:

(1) Illegal imports.

(2) Proceeds of crimes.

(3) Corruption.


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(4) Tax evasion.

(5) Tourists-local expenses assured.

Sources of profit:

(1) Manipulation of exchange rate.

(2) Dealing of black market currency.

Nature of operations:

./ Drug profits .

./ Arms .

./ Precious stones - Gold.

./ Terrorism.

Casestudies in India

(1) Red Fort Blast Case- 2000:

Confession of prime accused - funds through Hawala transactions from Dubai.

(2) Bombav Blast Case-1993:

Hawala mode of payments.

(3) Physical smuggling.

(4) Invoice manipulation.

Some of the other unethical practices in financial services are illegal dividend payments,

tax evasion, alternative forms of payment to avoid rebating violations, misrepresentation

of facts, invasion of privacy and dubious claim settlement policies.

The avoidance of deception and fraud on the one hand and the introduction of

professionalism on the other hand can elevate financial markets. Business ethics requires

the financial transactions with integrity, fairness, competence, objectivity,

professionalism, diligence and respect for the confidence of clients.

ethicalaspectsof financia

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