Saturday, February 27, 2016

Ethics in Finance And Accounting

Business Ethics
Business ethics (also corporate ethics) is a form of applied ethics or professional ethics that examines ethical principles and moral or ethical problems that arise in a business environment. It applies to all aspects of business conduct and is relevant to the conduct of individuals and entire organizations.

Fundamentally, finance is a social science discipline. The discipline borders behavioral economics, sociology, economics, accounting and management. Finance ethics is overlooked for mainly one  reason—issues in finance are often addressed as matters of law rather than ethics.
Ethics in Finance:
The public seems to have the perception that the financial sector is more unethical than other areas of business, this misperception persists for several reasons.

Ø  First of all, the industry itself is quite large. It encompasses banks, securities firms, insurance companies, mutual fund organizations, investment banks, pensions funds, mortgage lenders—any company doing business in the financial arena. Because of its vast size, the industry tends to garner lots of headlines, many of which tout its ethical lapses.
Ø  With trillions of dollars of assets, billions of transactions every year—every day probably—when a small percentage of them is inappropriate, the absolute numbers are still pretty big.
Ø  The industry is also highly regulated, so it’s likely that a higher percentage of these bad transactions are identified and reported, perhaps more so than in other less regulated industries.

Five reasons why these misdeeds may happen.

1) Self-interest sometimes morphs into greed and selfishness, which is unchecked self-interest at the expense of someone else. This greed becomes a kind of accumulation fever. If you accumulate for the sake of accumulation, accumulation becomes the end, and if accumulation is the end, there’s no place to stop. The focus shifts from the long-term to the short-term, with a big emphasis on profit maximization.

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.
Business schools, too often reduce everything to an economic entity. They do this by saying the fundamental purpose of a business is to make money, maximize profit, or the really jazzy words ‘maximize shareholder value’ , if the fundamental purpose never gets questioned, the ethics never get questioned.

3) Some people equate moral behavior with legal behavior: disregarding the fact that even though an action may not be illegal, it still may not be moral. “You ought to remember that the reason for all laws is that the moral agreement begins to break down, and the way to get other people in line is to legislate so that we can stipulate punishments”. Yet some people contend that the only requirement is to obey the law. They tend to ignore the spirit of the law in only following the letter of the law.

4) Professional duty can conflict with company demands:  For example, a faulty reward system can induce unethical behavior. A purely self-interested agent would choose that course of action which contains the highest returns to himself or herself and not for client.

5) Individual responsibility can wither under the demands of the client. Sometimes the push to act unethically comes from the client. How many clients expect their insurance agents to falsify their applications or claims?

Some of the suggestions included:
  • incentive compensation better aligned with customers’ interests, rather than agents’ 
  • more industry trade associations supporting ethics initiatives
  • consumers need to be better informed

Ethics in Accounting:
Ø  The term accounting ethics was developed by Luca Pacioli
Ø  In the present business scenario when there has been so much of accounting misdeeds and the corporate collapses, have spread negative vibes among the people concerning the profession of accounting.
Ø  In order to improve the image of accounting as a profession and also to prevent fraudulent accounting from taking place the organizations, the accounting firms as well as the governments have started fomenting ethics among the accountants and have introduced various regulations within the accounting profession.  

The people who use the financial statements, the share holders, the stock holders are just a few among the many who use the statements that are prepared by the accountants and then later on verified by the auditors. Thus it becomes imperative for the accountants to present a true as well a fair opinion on the current financial standings of the company. Although it might not be beneficial for the company as such, still the accountant has to keep in mind the larger interest of the public who solely rely on the reports prepared by the accountants.  

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