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Corporate GovernanceValues and Ethics
ETHICS IN
FINANCEBy :- SHIKHAR VERMA
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Ethics In Finance : Overview
All business dealings are involvefinance.[Even not for profit making organizations (NPO) are also deals in finance.]
Most of the ethical issues regardingfinance are concerned with financialreporting*.*[Is a formal record of the financial activities of a business, person, or other
entity.]
The internal financial reporting has to-
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Types of Finance
Corporate accounting andfinance, which refers to theaccounting practices reporting
through financial statements ofpublic limited companies isbroadly categorized as follow :-
1) Accounting.
2) Financial Management.
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Financial Accounting : What isAccounting ?
Accounting is the art of :-
Identifying
Recording
Classifying
Summarizing
Measuring
Interpreting
Communicating
All the information in a significant
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Financial Accounting
Financial accountancy is used toprepare accounting information forpeople outside the organization or
not involved in the day-to-dayrunning of the company.
It is basically concerned with thepreparation of financial statementsfor decision makers, such as :-
Stockholders
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Features of FinancialAccounting
Primarily historical.(Basically based on the data generated in the past.)
Designed and intended for use byshareholders, creditors, and publicregulators.
Reported publicly.
(Generally in the AGMs of the organization)
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Management Accounting
Management accounting ormanagerial accounting is concernedwith :-
The provisions and use ofaccounting information to managers
with in organizations.
To provide them with the basis to
make informed business decisions.
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Features of ManagementAccounting
Primarily forward-looking, instead of historical.
Designed and intended for use by managers withinthe organization, instead of being intended for useby shareholders, creditors, and public regulators.
Usually confidential and used by management,
instead of publicly reported.
Computed by reference to the needs of managers,often using management information systems,instead of by reference to general financial
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Financial Management
The management of the finances of abusiness organization in order toachieve financial objectives
The key objectives of financial
management would be to:
Create wealth for the business
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Elements of FinancialManagement
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Ethics In Finance Ethics in general is concerned with
human behavior that is acceptable or"right" and that is not acceptable or"wrong" based on conventional
morality.
General ethical norms encompass
truthfulness
honesty
integrity
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Unethical Activities inFinance
Insider Trading
Financial Deception
Churning
Suitability
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INSIDER TRADING
Insider trading is the trading of acorporation's stock or othersecurities (e.g. bonds or stock
options) by individuals with potentialaccess to non-public informationabout the company.
For example :- Rajat Gupta
Former Director
Goldman Sachs Grou
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FINANCIAL DECEPTION
Financial deception(or financial scam / financial fraud) isthe
Attractive but false presentation offinancial assets,
Transactions or schemes,
By manipulators whose real aim is topocket those investor's savings.
For example :- Satyam Scandal
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CHURNING
Churning is a slang term that isdefined as
Excessive trading on a client account by
a broker. The purpose of the activity is not to
benefit the investor,
But to generate additional commissionsfor the broker.
Also referred to as twisting,
The practice of churning is considered tobe hi hl unethical
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SUITABILITY
Suitability refers to the situation when abroker recommends to the clients thatyou buy or sell a particular security.
In making this assessment, the brokermust consider the clients risk tolerance,
other security holdings, financialsituation (income and net worth),financial needs, and investmentobjectives.
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examples of violations of thesuitability rules:
Recommending securities without having a reasonable
basis for the recommendation
Recommending securities without taking the client'sfinancial situation, needs and objectives into account
Recommending the same security to all clients
Failing to describe important facts and risks about thesecurity to each client
Making trades of excessive size in a client's account
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Way to Encourage Ethical Behaviour inFinancial Services
Organizations are making some arrangements for givingadvanced ethics education to its employees andworkers.
Decentralization in various steps involved in any deal.
Separation of different functions from one to many.
Time to time survey of the client.
Encouraging ethical behaviour to reduce pressurecreated by the corporate culture.
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