Overview of Ethics in Finance
Explain the major consideration of ethical finance in business.
Ethics pertains to what is right or wrong behaviour in regard to one’s integrity and principle as per society’s expectations. It is the application of the moral principle to one’s conduct in life. A variety of ethical question arises in the day-to-day life as well as in business related to justice, fairness, wrongness or righteousness. Ethics in finance are the part of the business as it involves plenty of transactions. Any malpractice intentional or unintentional may affect global economy. Therefore, in the present decade ethical finance is the new normal and it emerged from various cases of financial fraud such Enron’s scandal (Ferrell & Fraedrich, 2015). The aim of the essay is to explain the major consideration of ethical finance in business. The essay discusses in details the major aspects related to ethical practice in the business finance and elaborates how this practices relates to the responsibilities of business in the Global economy
There is the dire need of ethical considerations in business as the financial service industry affects everyone as someone or the other is the customer of the service. A global financial market is associated with the millions of transactions on a daily business. There is a chance of high unethical conduct in present age than in previous decades. It is because there is advancement of technology and internet based devices. It is easy to conduct financial fraud. Further, CEO of any business aims for achieving maximum profitability, while the shareholder’s interest is to gain maximum profit. At this point the higher level of the staff thinks of loophole in the system to make the unethical adjustments of financial numbers. The same was evident from the ENRON and FANNIE MAE (Boddy, 2017). These practices in turn impact the global economy as misappropriation of the funds and corruption affect the economic well being of the people. The adverse impact is beyond the financial loss. The reputation of the country is at stake as powerful bodies and government are also involved in some cases. It greatly affects the developing countries due to lack of resources and capacity to confront the problem. Further, there is huge cost incurred while trying to overcome the loss caused by the financial fraud (Gangi & Trotta, 2015).
Ethics in finance is centered on financial markets, financial services like banking and financial people in the organisations. In financial services say banking frauds are related to insufficient stocks, unauthorised extension to the credit facilities and many others (Ferrell & Fraedrich, 2015). Some of the ethical issues in business finance by the Accountant includes presenting the “true and the fair view” of the financial statement of the business operations (Gitman et al., 2015). It depends on the accountants how they choose to paint the enlightening or, misleading picture. There are various practices in the eyes of laws that are carried by the accountants which are recognised to be in the ethically grey areas. Creative accounting is known as common practice where data is created that is legally correct and morally dubious. It includes failure to write down inventories with the declined values or selling of assets with low cost basis. Eventually it inflates the profit figures or reduces the reported profits for smooth results. There are also manipulation of the assets and liabilities to hide problems or remain with the debt covenants (Akpanuko & Umoren, 2018). Another similar practice called the window dressing refers to the manipulation of the investment portfolio performance numbers. In another concept called as the insider trading a security is sold or purchased breaching the fiduciary duty, confidence, faith and relationship and trust in lieu of non-public, material information about security. In short these practices violate the fairness and integrity of the security markets. It is unfair to those lacking the privileged information. It causes inefficiencies in the markets and contributes to global financial crisis (Clouse et al., 2017).
Ethical Issues in Business Finance
Based on the above discussion it can be said that the ethics play an important role in the finance. The source of the ethical behaviour in business finance comes from the code of conduct for the accountants, auditors, insurance agent, bankers, brokers, and CFO. The core considerations of the ethics for business finance are accuracy, transparency, integrity, and timeliness (Sakalauskas et al., 2015). According to Gitman et al. (2015) there is huge responsibility of the financial mangers as they prepare reports, plan investment strategies, oversee accounting functions and perform direct cash management functions. They also participate in the branch management functions and thus required to uphold the highest ethical standards. It is necessary for the external and the internal stakeholders who are dependent on timely, transparent and complete financial documents to make decisions.
Accuracy is the important ethical consideration in business finance as it will help reflect the accuracy of the financial publications and fairness of the organisation’s functional condition. It will protect the organisation from accounting errors and potential financial fraud as in case of the Enron. There was a great discrepancy in accounting and balance sheets which damaged the shareholder’s interest who lost lump sum amount of money. Therefore, accuracy is an ethical consideration as it impacts the interest of the employees. Eventually lack of accuracy affects their confidence in the organizations financial system. This calls for documentation of the ethical guidelines for the financial managers by the organisation to help them maintain accurate records and books, ensure internal controls in accordance with the general accepted accounting principle (McAlister & Ferrell, 2016). Transparency is another ethical consideration in business finance. It reflects the performance of the company, its internal strength and weakness and in relation to peers. To maintain the trust and faith of the stakeholders, publicly traded companies are liable to submit periodic financial statements as well as disclose material information such as loss of major contact.
Timeliness is the other major consideration like transparency and accuracy as it helps to make the right decisions by the stakeholders. It will affect the sales if the company does not inform about the manufacturing difficulties on time. By not disclosing certain information on time the mangers may end up manipulating stock prices, by not disclosing certain relevant financial information (Boatright, 2010). To avoid fraud unimpeachable integrity must be considered in business finance and investment profession. It will foster the trust between the shareholders and the financial managers and the other participants in the global capital markets. There is a need to avoid prejudice, conflicts and bias. The business must engage in practice of disclosing real and apparent conflicts. For instance, ethical issues may arise due to structure of certain stock-based incentive compensation schemes (Gangi & Trotta, 2015).
Key Ethical Considerations in Business Finance
Ethical decision making is other core consideration as per the code of ethics set by financial service council. Enron ethical issue was associated with unethical decision making by the leaders and financial mangers. Global financial crisis to a great extent has been attributed to the lack of ethical perspective of the leaders and financial mangers. It must be promoted through the intensive training and championing employees in whistle-blower-type and confidence reporting (FCA, 2018).). There must be an adequate arrangement for managing conflicts and confidentiality issues arising from the external or internal interests. There must be stringent guidelines set by the organisation to safeguard information, avoid misuse of data, update with latest cyber security. Such practices will help fulfil the paramount interest of the clients (Baxter, 2010; Boatright, 2010).
According to the code of ethics of the financial counsellors in Australia, the counsellor must respect the belief system of the customers coming in their contact and empower them to take control of their financial situations. Instead of emphasising on the personal and business profit, the counsellor must truly guide the customers to make the informed choices. The counsellor must implement the principle of the equality, fairness, and consistency. They must not involve in discrimination in regards to age, gender, culture, ethnicity, or others. The counsellors are ethically obliged to maintain effective customer relationship boundaries. Breaching confidentiality of the customer’s financial information, leads to legal charges. To avoid any conflicts of interest, the financial counsellors must not put their own interest in others for personal or professional benefits. They must demonstrate honesty, competency, reliability and authenticity in the professional relationships. Lack of demonstration of such behaviour has been found to be rooted in global economy crisis (Fsc.org.au, 2018; Saha, 2013).
Global financial system relied only in the financial markets indicating the fragility of the system due to financial fraud. These ethical practices are thus related to global economy, because the financial crisis is underpinned by the ethics fundamentals. Finance business taking accountability of the fraud indicates the inappropriate regulatory measures, failure of the governance model, which implies the institutions like World Bank for restructuring the regulatory institutions, and creation of new economy model. The return to protectionism is possible only by strict implementation of the above mentioned ethical practices. It will help sustain the globalised financial environment. Breach of this code of ethics has caused developed countries to lower their banking rates in response to the financial fraud. They are now implementing null- approximating interest rates. Financial crisis is of global nature and thus have affected the majority of the world economies. It is due to interdependence of the financial institutions to the securitization. It allows the accession of the foreign real estate markets by the investors. Unethical practice in business finance thus affects the global economy (Trabelsi, 2011).
The essay has discussed the core ethical considerations of the business finance. The major aspects of the ethical practice that were found to affect the business are accuracy, transparency, timeliness, integrity, respect, empowerment, non-discrimination, advocacy, professionalism, social justice and confidentiality of the information. These practices are related with responsibilities of business in the Global economy. There is an increasing rate of the economic crimes implying for global legal framework to counter the financial crimes.
References
Akif ICKE, M. (2011). Global Financial Crisis from an Ethical Perspective. Research Journal of Internat?onal Stud?es. Issue 19. 82-95.
Akpanuko, E. E., & Umoren, N. J. (2018). The influence of creative accounting on the credibility of accounting reports. Journal of Financial Reporting and Accounting, (just-accepted), 00-00.
Baxter, M. (2010). The New Economics: Ethics and Morals, or is it Bunkum? https://www.investmentandbusinessnews.co.uk/economic-ideas (21.10.2012)
Boatright, J. (2010). Finance Ethics – Critical Issues in Theory and Practice. New Jersey: John Wiley & Sons.
Boddy, C. R. (2017). Enron Scandal. Encyclopedia of Business and Professional Ethics, 1-4.
Clouse, M., Giacalone, R. A., Olsen, T. D., & Patelli, L. (2017). Individual Ethical Orientations and the Perceived Acceptability of Questionable Finance Ethics Decisions. Journal of Business Ethics, 144(3), 549-558.
FCA. (2018). The Australian financial counselling- Code of ethical practice. Retrieved from https://www.financialcounsellingaustralia.org.au/FCA/media/CorporateMedia/Code-of-Ethical-Conduct-Final-Pdf-feb-2012.pdf
Ferrell, O. C., & Fraedrich, J. (2015). Business ethics: Ethical decision making & cases. Nelson Education.
Fsc.org.au. (2018). FSC Standard No 1: Code of Ethics & Code of Conduct. Retrieved from https://www.fsc.org.au/_entity/annotation/43479aae-df53-e811-814f-70106fa11a21
Gangi, F., & Trotta, C. (2015). The ethical finance as a response to the financial crises: an empirical survey of European SRFs performance. Journal of Management & Governance, 19(2), 371-394.
Gitman, L. J., Juchau, R., & Flanagan, J. (2015). Principles of managerial finance. Pearson Higher Education AU.
McAlister, D. T., & Ferrell, O. C. (2016). Corporate governance and ethical leadership. In Business ethics: New challenges for business schools and corporate leaders (pp. 68-93). Routledge.
Saha, M. (2013). The ethical dimensions of financial crisis in the world of globalized finance.
Sakalauskas, L., Kalsyte, Z., Vaiciulyte, I., & Kupciunas, I. (2015). The relationship between the transparency in provision of financial data and the change in investors’ expectations. Engineering Economics, 26(1), 33-39.
Trabelsi, M. A. (2011). The impact of the financial crisis on the global economy: can the Islamic financial system help?. The Journal of Risk Finance, 12(1), 15-25
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