Ethical Issues in Financial Management and Corporate Governance
Financial ethics is a convincing area to discuss and observe the activities within the financial sector. It is the standards set that the professionals hold to operate their business and thus maintain confidence and trust with their colleagues, the public and their customers. Most careers in the financial sector interact and communicate with the customers and the public, and the money is endowed to the professionals of the financial sector so that they can help the customers generate income or find newer methods to use it with efficacy. Financial ethics is a very sensitive trust that has been violated several times and in different ways earlier. Countless news and stories exist about the professionals of the financial sector who have done fraud with organisations and individuals. After dealing with these crimes and violations, a code of ethics was later developed for financial industry professionals.
A code of ethics is defined as a set of guidelines which is planned to detain the individual who is responsible for the actions done by him and make sure that proper decisions are made by the financial professionals so that integrity and trust must be maintained. The code of ethics of an organisation, along with the Securities Exchange Commission, is discussed below.
- Employees must carry out their responsibilities with honesty, integrity, competence, diligence, care, and good faith.
- Material facts must not be misrepresented, and the independent judgement of the organisation must not be compromised.
- Apparent or actual conflicts of interest must be avoided in professional and personal relationships.
- Employees must comply with the rules and regulations and governmental laws of local, state and federal governments and other regulatory bodies.
- Employees are not allowed to take any action directly or indirectly to manipulate, mislead or coerce and influence the independent auditor of the organisation fraudulently in their performance or the review of the external financial reporting of the organisation.
- They also have to aid in producing final, timely, accurate and understandable external financial reporting and in different public communications organised by the organisation.
- Employing all reasonable measures to safeguard the confidentiality of the non-public information related to the organisation and its customers.
Most business organisations and financial professionals grip themselves to similar ethical codes, which ensure that all the events are above the board when the business is being conducted.
The last few decades have encountered some very high-profile incidents and scandals that gave rise to taking actions from the government of the United States to make sure that financial organisations and professionals were given responsibility for the actions which will ultimately harm the customers and the entire nation. One of the most popular scandals was Enron, which was responsible for hiding large amounts of losses and debts so that they could have a good price on the stocks of the company while, in reality, the firm was struggling to sustain itself. Several legislation pieces have explained the professionals of financial organisations and companies must behave and should give the responsibility of protection to whistleblowers. These individuals acquire an accurate understanding of all the wrongdoings in the financial sector and call for the attention of the public and the regulators. The legislation pieces are described below, along with their impact on financial management ethics.
- Gramm-Leach-Bliley Act – This act was one of the main drivers in releasing several rules and regulations based on the financial organisation just before the financial crisis of 2008. But, this act includes a significant service regarding the customers’ privacy. The GLB Act needs organisations to inform their clients regarding information-sharing practices and ensure that the customer’s data remains confidential.
- Patriot Act – This act came into force soon after the attacks of September 11 to expand the ability of the federal government to observe and check if there exists any terrorist activity in the United States. This law was mainly planned to monitor all the financial channels that can fund terrorist activities in the nation. It also helps motivate financial organisations to help share the information of the customers who are helping the terrorists by funding them or laundering money for encouraging terrorism. One of the most important requirements of the law is to confirm the identity of the customers who are opening a checking, investment or savings account with their organisation.
- Sarbanes-Oxley Act (SOX) is the most important legislation in the ethical regulation of financial management. This act came into law in 2002 when the high-profile cases of hiding losses and debts with the help of financial tactics ultimately came in the fall down of Enron, Tyco and Worldcom, where almost million dollars of investors lost their money. This act needs the public-traded companies to set the procedures for reporting appropriately, which helps keep the executives of high positions from interfering in between. This act also enacts laws for criminal activities if the officials discover any wrongdoing, thus safeguarding the whistleblowers from vengeance.
Ethics in corporate governance is the policy and process of an organisation that deals with the problems and hurdles concerned with the conduct and administration of everyday business. It is important to understand that organisations exist primarily to develop or manufacture a good or product which ultimately helps generate benefits for the organisation. Yet, the organisation’s intent should be balanced with taking over the control of the organisation, and this step will make sure that the organisation is getting benefits without using any domain of unethical behaviour. Earlier, most organisations have taken advantage of their market positions to hold back the competition or even give threats to the local public. Thus, ethics in corporate governance persists so that they can safeguard the public from this occurrence.
The policy of corporate governance also has to cover the conduct of the senior employees of the organisations, for instance, the Board of Directors (BoD), the Chief Executive Officer (CEO), as well as the other senior employees of the organisation who are frequently seen as free from the normal policies of the organisation or the company.
Corporate governance is considered a complicated matter subject which consists of many difficulties. One of the most significant portions of corporate governance mainly focuses on accountability, mechanisms of control and auditing, and fiduciary duty. Investors are anxious regarding the company’s earnings and performance, while bad corporate governance is considered a signal of bigger issues or complexities with the organisation. For instance, before Enron`s collapse, the organisation and its traders inflated the energy cost artificially in some of the states of the United States, which ultimately increased the organisation’s profit margins. This incident was not only responsible for the downfall of the company, but this incident made a clear and transparent indication of failing of internal controls of the organisation, which generally meant that much larger abuses than the previous one could happen in the coming times, which will eventually lead the organisation to collapse it.
Issues in Financial Management and Corporate Governance
A good financial management control policy is considered significant for better corporate governance. Most unethical practices are mainly noticed in the particular field of financial management, pressuring the governments and the regulators that affect the internal and external stakeholders.
Several unethical issues that occurred in the financial activities of the organisation are –
- Fact concealment – In the scam of Satyam, the realistic financial position was kept out of sight of others while the unrealistic position in finance was visible in an orderly manner so that they could be indicated as the real value.
- Activities of money laundering – Activities of money laundering are considered unethical, illegal, and a criminal offence. This activity mainly converts the money from illegal activities into legal ones by taking help from bank channels to impact these activities.
- Fund diversion and misappropriation – Most organisations involving corporates take advantage of loans, yet they need to utilise the funds for the loan granted; instead, the fund was used to fulfil the different purposes of production. The funds are increased against the encumbrance of products and goods. Yet, the funds availed as loans are not utilised for manufacturing products and goods; however, they are invested in the real estate sector or the capital market to earn higher profit margins. Although the loan repayment is appropriate, the organisation`s activities remain unethical because of funds misappropriation.
- Lack of internal control of the organisation – Because of the weaker internal controls within the organisation to a certain extent, loans appear as non-performing assets several times. Several unethical practices such as funds misappropriation and diversion, loans granted to opposing collaterals are of lesser value and inferior quality, corruption and so on not only impact the bank`s performance but help increase the extent of the non-performing assets.
- Non-compliance with legal and regulatory framework – Most of the compliance complexities are faced by banks by not adhering to the rules, regulations and policies of the banks. These rules and regulations for non-compliance have developed directions to convert illegal money to legal with the help of banking channels, which makes the banks feel embarrassed and face the risk of losing their reputation.
As the enforcement of the law is remedial and reactive, ethics is considered the very initial stage of defence against the problem of corruption. One of the main features of Corporate Governance is to make the rules and regulations for the government. It is also concerned with the values, ethics, and values of the organisations that are used to run their company. Thus, it all depends upon the trust between the organisation and various stakeholders, which lasts a long time. The failure of the company only sometimes employs good corporate governance. Yet, when good corporate governance does not persist, like the standards of governance, questionable practices and the failures of massive corporate sectors will keep occurring without any doubt. Whenever it is the time to make ethics in the company, it is very important to keep in mind the statements of the mission and vision, core values, code of conduct and general principles of business all have to work together to form good ethical management in the business. An ethical program working efficiently needs to keep focusing on the good values of the organisation. Linkages are measured to understand how the representatives will become life and thus comprehend the values and codes of association. Structure and spirit must also persist together in accurate proportion to handle and maintain the ethical climate ideally.
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