1. Ethics in Finance
PGDM-Session 7

2. 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 matters

3. Ethical issues in Finance
Financial statements
Hostile Takeovers
Financial Markets
Insider Trading

4. 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 information.

5. 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

6. Ethical Audit
An audit that assess 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.

7. 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 financial information is both available and reliable

8. 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

9. 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

10. 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.

11. 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

12. Anti-takeover defense measures
Poison Pills
Green mail
Golden Parachute
People Pill

13. Poison Pills
An anti-takeover device used by company’s 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)

14. 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.

15. 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

16. Ethics & Greenmail
Target company may be forced to incur debts to raise funds to finance the buy back of shares at premium price

17. 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

18. 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 company’s long term value then they are acting unethically

19. 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.

20. 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

21. Thank You