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SEMINAR REPORT - 1 -ETHICS IN FINANCE
The world community is earnestly and eagerly seeking answers to
fundamental questions relating to ethics and morality in the conduct
of businesses, in the light of corporate fraud that has been taking
place from time to time. All professionals play a dual role that of
being the principal and an agent to their customers in discharge of
their functions. Often there is conflict of interest in every aspect of
professional life, which represents an ethical dilemma or dharma
sankat, and they arise fundamentally due to conflicting roles played
by individuals and institutions.
The emphasis is how to live and deal effectively with such situations.
A number of factors such as natural environment, work culture,
protecting the consumers at large and issue revolving around
accounting and finance principles come into consideration and
therefore it is important to understand the ethical issues in business.
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, respect for others, fairness, and justice. They
relate to all aspects of life, including business and finance. Financial
ethics is, therefore, a subset of general ethics.
Ethical norms are essential for maintaining stability and harmony in
social life, where people interact with one another. Recognition of
others' needs and aspirations, fairness, and cooperative efforts to
deal with common issues are, for example, aspects of social behavior
that contribute to social stability.
PUNJABI UNIVERSITY REGIONAL CAMPUS FOR INFORMATION TECHNOLOGY &MANAGEMENT,MOHALICREATED BY:- GIRISH KAPOOR (MBA II SEM. IV)
SEMINAR REPORT - 2 -ETHICS IN FINANCE
In the process of social evolution, we have developed not only an
instinct to care for ourselves but also a conscience to care for others.
There may arise situations in which the need to care for ourselves
runs into conflict with the need to care for others. In such situations,
ethical norms are needed to guide our behavior.
As Demsey (1999) puts it: "Ethics represents the attempt to
resolve the conflict between selfishness and selflessness;
between our material needs and our conscience."
Ethical dilemmas and ethical violations in finance can be attributed to
an inconsistency in the conceptual framework of modern financial-
economic theory and the widespread use of a principal-agent model
of relationship in financial transactions. The financial-economic theory
that underlies the modern capitalist system is based on the rational-
maximizer paradigm, which holds that individuals are self-seeking
(egoistic) and that they behave rationally when they seek to
maximize their own interests.
The principal-agent model of relationships refers to an arrangement
whereby one party, acting as an agent for another, carries out certain
functions on behalf of that other. Such arrangements are an integral
part of the modern economic and financial system, and it is difficult
to imagine it functioning without them.
The behavioral assumption of the modern financial-economic theory
runs counter to the ideas of trustworthiness, loyalty, fidelity,
stewardship, and concern for others that underlie the traditional
principal-agent relationship. The traditional concept of agency is
based on moral values. But if human beings are rational maximizers,
then agency on behalf of others in the traditional sense is impossible.
PUNJABI UNIVERSITY REGIONAL CAMPUS FOR INFORMATION TECHNOLOGY &MANAGEMENT,MOHALICREATED BY:- GIRISH KAPOOR (MBA II SEM. IV)
SEMINAR REPORT - 3 -ETHICS IN FINANCE
As Duska (1992) explains it: "To do something for another in
a system geared to maximize self-interest is foolish. Such an
answer, though, points out an inconsistency at the heart of
the system, for a system that has rules requiring agents to
look out for others while encouraging individuals to look out
only for themselves, destroys the practice of looking out for
others".
The ethical dilemma presented by the problem of conflicting interests
has been addressed in some areas of finance, such as corporate
governance, by converting the agency relationship into a purely
contractual relationship that uses a carrot-and-stick approach to
ensure ethical behavior by agents.
In corporate governance, the problem of conflict between
management (agent) and stockholders (principal) is described as an
agency problem. Economists have developed an agency theory to
deal with this problem. The agency theory assumes that both the
agent and the principal are self-interested and aim to maximize their
gain in their relationship.
A simple example would be the case of a store manager acting as an
agent for the owner of the store. The store manager wants as much
pay as possible for as little work as possible, and the store owner
wants as much work from the manager for as little pay as possible.
This theory is value-free because it does not pass judgment on
whether the maximization behavior is good or bad and is not
concerned with what a just pay for the manager might be. It drops
the ideas of honesty and loyalty from the agency relationship
because of their incompatibility with the fundamental assumption of
rational maximization.
PUNJABI UNIVERSITY REGIONAL CAMPUS FOR INFORMATION TECHNOLOGY &MANAGEMENT,MOHALICREATED BY:- GIRISH KAPOOR (MBA II SEM. IV)
SEMINAR REPORT - 4 -ETHICS IN FINANCE
"The job of agency theory is to help devise techniques for
describing the conflict inherent in the principal-agent
relationship and controlling the situations so that the agent,
acting from self-interest, does as little harm as possible to
the principal's interest" (DeGeorge, 1992).
The agency theory turns the traditional concept of agency
relationship into a structured (contractual) relationship in which the
principal can influence the actions of agents through incentives,
motivations, and punishment schemes. The principal essentially uses
monetary rewards, punishments, and the agency laws to command
loyalty from the agent.
Most of our needs for financial services— management of retirement
savings, stock and bond investing, and protection against unfore-seen
events, to name a few—are such that they are better entrusted to
others because we have neither the ability nor the time to carry them
out effectively. The corporate device of contractualization of the
agency relationship is, however, too difficult to apply to the multitude
of financial dealings between individuals and institutions that take
place in the financial market every day.
Individuals are not as well organized as stockholders, and they are
often unaware of the agency problem. Lack of information also limits
their ability to monitor an agent's behavior. Therefore, what we have
in our complex modern economic system is a paradoxical situation:
the ever-increasing need for getting things done by others on the one
hand, and the description of human nature that emphasizes selfish
behavior on the other.
This paradoxical situation, or the inconsistency in the foundation of
the modern capitalist system, can explain most of the ethical
problems and declining morality in the modern business and finance
arena.
PUNJABI UNIVERSITY REGIONAL CAMPUS FOR INFORMATION TECHNOLOGY &MANAGEMENT,MOHALICREATED BY:- GIRISH KAPOOR (MBA II SEM. IV)
SEMINAR REPORT - 5 -ETHICS IN FINANCE
Finance and Accounts is perhaps the only business function which
accepts responsibility to act in public interest. Hence, a finance and
accounting professional’s responsibility is not restricted to satisfy the
needs of any particular individual or organization. While acting in
public interest, it becomes imperative that the finance and
accounting professional adheres to certain basic ethics in order to
achieve his objective.
Until recently, various surveys conducted globally had ranked finance
and accounting professionals very high in terms of professional
ethics. However, various accounting scandals witnessed during the
past few years have put a serious question mark on the role of the
finance and accounting professional in providing the right information
for decision making both within and outside their respective
organisations.
In companies such as Enron, WorldCom, Tyco, Global Crossing ,
Adelphia, Quest, Xerox and most of the late dotcoms, the accounting
information used by the Finance Department was false and
misappropriated.
What was the role of finance and accounting professionals in all these
high profile failures? Of course there were a few professionals who
PUNJABI UNIVERSITY REGIONAL CAMPUS FOR INFORMATION TECHNOLOGY &MANAGEMENT,MOHALICREATED BY:- GIRISH KAPOOR (MBA II SEM. IV)
SEMINAR REPORT - 6 -ETHICS IN FINANCE
were directly involved in fraudulent activities, however, the majority,
at most of the times, refused to challenge what they had already
known.
Enron is a classic example of such behaviour. Months before Enron
Corp declared bankruptcy, an employee of the name of Sherron
Watkins sent the company’s top executive (Kenneth Lay) a message
which had detailed information of the accounting hoax in the form of
the now famous ‘off the book liabilities’. However, instead of taking
note of what was mentioned in the message, the management of the
company demoted Sherron. It is well known now, that, like Sherron,
hundreds of finance and accounting employees at Enron knew about
the happenings but preferred to remain silent.
Hence, most of them did not lie, but neither did they disclose the
truth nor did they attempt to correct the misleading and confusing
information. Shouldn’t they have blown the whistle the way Sherron
did? Was the behaviour of these employees un ethical? Cases like
Enron exist in plenty e.g. World Com, Global Crossing, Xerox, Qwest
and many other companies have been known to have created
accounting entries with the sole purpose of making their financial
statements look attractive thereby inviting further investments from
unsuspecting individuals and organisations.
Ethics in Finance is a ground-breaking work in the emerging field of
finance ethics. The need for ethics in the personal conduct of finance
professionals and the operation of financial markets and institutions
can be seen in many. A broad range of practical issues in the financial
services industry, investment decision making, and corporate
financial management are explored, focusing on standards of fairness
in market transactions and the duties of fiduciaries and agents in
financial relationships. Among the topics covered are unethical sales
practices, personal trading by fund managers, the socially responsible
PUNJABI UNIVERSITY REGIONAL CAMPUS FOR INFORMATION TECHNOLOGY &MANAGEMENT,MOHALICREATED BY:- GIRISH KAPOOR (MBA II SEM. IV)
SEMINAR REPORT - 7 -ETHICS IN FINANCE
investment movement, insider trading and program trading, the
abuse of bankruptcy, and hostile takeovers.
Ethics in Finance also contains a critical examination of conception of
the theory of the firm in finance and the financial objective of firms.
Ethics in Finance provides a rigorous analysis of ethical issues in
finance that is suitable for students of finance and business ethics as
well as anyone involved in financial activities.
The concept of Ethics has been derived from the Greek word Ethos.
The word Ethos imbibes within itself both individual behaviour and
community culture. Various individuals would be having different
opinions on the same subject because of which what is perceived as
right by one may be considered wrong by the other. Hence, doing
what one thinks is right, may not always be the right thing to do! This
is the essence of the term ‘Ethics’ which may be defined
as ‘those moral principles which guide the conduct of individuals’
Irrespective of the differences of opinions amongst individuals, Ethical
behavior implies such course of actions which are taken after giving
due thought to their impact on the society and other stake holders.
Hence when accounting and finance professionals at Enron did not
report of the wrongs which they believed were being done at the top,
their behaviour amounted to being unethical in spite of the fact that
they were not directly involved in any of the fraudulent or
manipulative activities. In contrast, when Cynthia Cooper, Vice
President – Internal Audit of World Com found wrong accounting
entries resulting in inflated profits, she immediately reported the
matter to the Board of Directors, this, in spite of the fact that she was
reporting against seniors whom she had come to admire over the
PUNJABI UNIVERSITY REGIONAL CAMPUS FOR INFORMATION TECHNOLOGY &MANAGEMENT,MOHALICREATED BY:- GIRISH KAPOOR (MBA II SEM. IV)
SEMINAR REPORT - 8 -ETHICS IN FINANCE
past so many years of working together. These two examples
mentioned above provide an insight into the meaning of Ethical
dilemmas. Ethical Dilemmas exist when finance and accounting
professionals need to choose from amongst alternatives and there
are
(1) significant value conflicts among differing interests
(2) actual alternatives which can all be justified and
(3) significant consequences to all stakeholders.
Let us consider an example of finance and accounting professional
who has been asked to provide a profit forecast which needs to be
given to a banker for a much wanted loan to be utilized in launching a
new product. The company has not been doing well for the past few
years and without this loan there is a likelihood of its closing down.
However, the loan can only be availed if the banker is convinced that
the projected profitability shall be at least Rs 50,00,000 per annum.
An optimistic projection of the profits shows that if everything goes
extremely well the company may be able to make profits of Rs
50,00,000, however, a realistic assumption provides a much lower
figure.
In such a situation the concerned professional will need to resolve the
dilemma of the type of profit forecast to be provided to the banker. In
case he gives a realistic projection the company may not get the loan
and perhaps may need to close down. On the other hand if he makes
a optimistic projection, he may be misleading the banker. There is no
right answer to such a situation. Both actions proposed have got
there own risks.
PUNJABI UNIVERSITY REGIONAL CAMPUS FOR INFORMATION TECHNOLOGY &MANAGEMENT,MOHALICREATED BY:- GIRISH KAPOOR (MBA II SEM. IV)
SEMINAR REPORT - 9 -ETHICS IN FINANCE
The most frequently occurring ethical violations in finance relate to
insider trading, stakeholder interest versus stockholder interest,
investment management, and campaign financing. Business in
general and financial markets in particular are replete with examples
of violations of trust and loyalty in both public and private dealings.
Fraudulent financial dealings, influence peddling and corruption in
governments, brokers not maintaining proper records of customer
trading, cheating customers of their trading profits, unauthorized
transactions, insider trading, misuse of customer funds for personal
gain, mispricing customer trades, and corruption and larceny in
banking have become common occurrences.
Insider trading is perhaps one of the most publicized unethical
behaviors by traders. Insider trading refers to trading in the securities
of a company to take advantage of material "inside" information
about the company that is not available to the public. Such a trade is
motivated by the possibility of generating extraordinary gain with the
help of nonpublic information (information not yet made public). It
gives the trader an unfair advantage over other traders in the same
PUNJABI UNIVERSITY REGIONAL CAMPUS FOR INFORMATION TECHNOLOGY &MANAGEMENT,MOHALICREATED BY:- GIRISH KAPOOR (MBA II SEM. IV)
SEMINAR REPORT - 10 -ETHICS IN FINANCE
security. Insider trading was legal in some European countries until
recently. In the United States, the 1984 Trading Sanctions Act made it
illegal to trade in a security while in the possession of material
nonpublic information. The law applies to both the insiders, who have
access to nonpublic information, and the people with whom they
share such information.
Campaign financing in the United States has been a major source of
concern to the public because it raises the issue of conflict of interest
for elected officials in relation to the people or lobbying groups that
have financed their campaigns.
The United States has a long history of campaign finance reform. The
Federal Election Commission (FEC) administers and enforces the
federal campaign finance statutes enacted by the Congress from time
to time. Many states have also passed lobbying and campaign
finance laws and established ethics commissions to enforce these
statutes.
PUNJABI UNIVERSITY REGIONAL CAMPUS FOR INFORMATION TECHNOLOGY &MANAGEMENT,MOHALICREATED BY:- GIRISH KAPOOR (MBA II SEM. IV)
SEMINAR REPORT - 11 -ETHICS IN FINANCE
For a finance and accounting professional working
as consultant or auditor
A finance and accounting professional in public practice should take
reasonable steps to identify circumstances that could pose a conflict
of interest. Such circumstances may give rise to threats to
compliance with the fundamental principles.
For example, a threat to objectivity may be created when a
professional accountant in public practice competes directly with a
client or has a joint venture or similar arrangement with a major
competitor of a client.
For a finance and accounting professional working
as an employer
A finance and accounting professional has a professional obligation to
comply with certain fundamental principles which have been detailed
below. There may be times, however, when their responsibilities to an
employing organization and the professional obligations to comply
with the fundamental principles are in conflict.
PUNJABI UNIVERSITY REGIONAL CAMPUS FOR INFORMATION TECHNOLOGY &MANAGEMENT,MOHALICREATED BY:- GIRISH KAPOOR (MBA II SEM. IV)
SEMINAR REPORT - 12 -ETHICS IN FINANCE
Ordinarily, a finance and accounting professional should support the
legitimate and ethical objectives established by the employer and the
rules and procedures drawn up in support of those objectives.
Nevertheless, where compliance with the fundamental principles is
threatened, a finance and accounting professional must consider a
response to the circumstances.
As a consequence of responsibilities to an employing organization, a
finance and accounting professional may be under pressure to act or
behave in ways that could directly or indirectly threaten compliance
with the fundamental principles. Such pressure may be explicit or
implicit; it may come from a supervisor, manager, director or another
individual within the employing organization. A finance and
accounting professional may face pressure to:
• Act contrary to law or regulation.
• Act contrary to technical or professional standards.
• Facilitate unethical or illegal earnings management strategies.
• Lie to, or otherwise intentionally mislead (including misleading
by remaining silent) others, in particular:
The auditors of the employing organization; or♦
Regulators.♦
Issue, or otherwise be associated with, a financial or non-financial♦
report that materially misrepresents the facts, including statements
in connection with, for example:
The financial statements;♦
Tax compliance;♦
Legal compliance; or♦
Reports required by securities regulators.♦
PUNJABI UNIVERSITY REGIONAL CAMPUS FOR INFORMATION TECHNOLOGY &MANAGEMENT,MOHALICREATED BY:- GIRISH KAPOOR (MBA II SEM. IV)
SEMINAR REPORT - 13 -ETHICS IN FINANCE
A creation of a proper ethical environment requires a proper
understanding of the reasons which lead to un ethical behaviour.
Four such reasons are discussed below.,
1. Emphasis on short term results . This is one of the
primary reasons which has led to the downfall of many companies
like Enron and WorldCom. Manipulating accounting entries to depict
good profitability can help companies raise further capital from the
market.
2. Ignoring small unethical issues : It is a known fact that
most often the compromises we make start small however they lead
us to large problems. Similarly, companies need to develop an
environment where small ethical lapses are taken seriously so that
they do not repeat in the future. Otherwise, toleration of such small
lapses could lead to larger problems.
3. Economic cycles : When Enron was doing well , no one had
bothered to understand its actual financial position. There were no
question marks on its financial statements. However, when the
PUNJABI UNIVERSITY REGIONAL CAMPUS FOR INFORMATION TECHNOLOGY &MANAGEMENT,MOHALICREATED BY:- GIRISH KAPOOR (MBA II SEM. IV)
SEMINAR REPORT - 14 -ETHICS IN FINANCE
economy took a downward turn, finance and accounting managers
took decisions which were compromises over the established code of
conduct. This was done to reflect a financial position which would
keep the investors in the market satisfied. All this resulted in a huge
crisis and the ultimate fall of this US Giant.
Hence, to prevent disclosure of ethical problems in times of
depression, company need to be extremely careful and vigilant
during good times.
4. Accounting rules : In the era of globalisation and massive
cross border flow of capital, accounting rules are changing faster than
ever before. The rules have become more complex and it is difficult
to identify deviations from these complex set of requirements.
The complexity of these principles and rules and the difficulty
associated with identifying abuse are reasons which may promote un
ethical behaviour.
PUNJABI UNIVERSITY REGIONAL CAMPUS FOR INFORMATION TECHNOLOGY &MANAGEMENT,MOHALICREATED BY:- GIRISH KAPOOR (MBA II SEM. IV)
SEMINAR REPORT - 15 -ETHICS IN FINANCE
Certain fundamental principles need to be adhered with for behaving
in an ethical manner. These principles have been summarised below;
1. The principle of Integrity
The dictionary meaning of integrity is veracity. Accordingly, the
principle calls upon all accounting and finance professionals to adhere
to honesty and straight forwardness while discharging their
respective professional duties. In addition the following acts of
responsibility would help comply with the Integrity principle,
a) Avoid being involved in activities which would impair the
goodwill of the organization
b) Communicate adverse as well as favourable information with
those concerned
c) Refuse any gift or favour which could influence actions taken or
to be taken
d) Refuse to get involved in any activity which would adversely
affect the achievement of an organizations objective.
e) Avoid conflicts and advise related parties on apparent conflicts
which could arise in the future.
PUNJABI UNIVERSITY REGIONAL CAMPUS FOR INFORMATION TECHNOLOGY &MANAGEMENT,MOHALICREATED BY:- GIRISH KAPOOR (MBA II SEM. IV)
SEMINAR REPORT - 16 -ETHICS IN FINANCE
2. The principle of objectivity
This principle requires accounting and finance professionals to stick
to their professional and financial judgement. They should not allow
bias,conflicting interests or undue influence of others to override their
business judgements . They should communicate information fairly
and objectively in such a way that the communication with he end
user is complete and transparent.
3. The principle of confidentiality
This principle requires practitioners of accounting and financial
management to refrain from disclosing confidential information
related to their work. Such information may be however be disclosed
to their subordinates and care should be taken that the latter
maintains confidentiality. The only exception to this principle is when
there are requirements to disclose information under a legal
obligation or because of some statutory ruling.
4. The principle of professional competence and due
care
Finance and accounting professionals have a need to update their
professional skills from time to time. This has assumed a greater
significance in the modern day competitive environment where
updated knowledge and skill shall ensure that the client or employer
receives competent professional services based upon current and
contemporary developments in the
related areas.
5. The principle of professional behaviour
This principle requires accounting and finance professionals to
comply with relevant laws and regulations and avoid such actions
which may result into discrediting the profession.
PUNJABI UNIVERSITY REGIONAL CAMPUS FOR INFORMATION TECHNOLOGY &MANAGEMENT,MOHALICREATED BY:- GIRISH KAPOOR (MBA II SEM. IV)
SEMINAR REPORT - 17 -ETHICS IN FINANCE
Ethical issues in the financial services industry affect everyone,
because even if one doesn’t work in the field, but one is a consumer
of the services. The public seems to have the perception that the
financial services sector is more unethical than other areas of
business. This misperception persists for several reasons.
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.
“This business that we’re talking about is really big. It is, to be
precise, $50 trillion in assets. It’s growing 8 percent a year, which is
more than twice as fast as the gross domestic product. “It’s also
highly profitable. The financial services sector of the S&P 500
represents 20 percent of this index’s market capitalization. These
companies are making a lot of money serving one.”
PUNJABI UNIVERSITY REGIONAL CAMPUS FOR INFORMATION TECHNOLOGY &MANAGEMENT,MOHALICREATED BY:- GIRISH KAPOOR (MBA II SEM. IV)
SEMINAR REPORT - 18 -ETHICS IN FINANCE
So, 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.”
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. But ethical
lapses do occur, mainly 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 one 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.
For example, swaps (where two communication companies agree to
exchange the right to use excess bandwidth on their networks) fall
into this category. Each company recognizes the income generated in
the quarter earned and defers the expenses through capitalizing
them as an asset and logging the cost as a recognized expense over
time, resulting in an inflated bottom line. This is what happened at
Qwest during the first three quarters of 2001, when the company was
selling $870 million of capacity, while at the same time buying $868
million of capacity. These swaps appeared to be round-trip
transactions, which served no purpose other than to inflate Qwest’s
revenues.
“Companies were making money out of their finance department—
not from selling products, not from doing what the company did, not
PUNJABI UNIVERSITY REGIONAL CAMPUS FOR INFORMATION TECHNOLOGY &MANAGEMENT,MOHALICREATED BY:- GIRISH KAPOOR (MBA II SEM. IV)
SEMINAR REPORT - 19 -ETHICS IN FINANCE
from fulfilling the company’s mission, but from playing around with its
asset mix,”.
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,’ or something like that. And it never gets
questioned. Now if the fundamental purpose never gets questioned,
the ethics never get questioned, because the fundamental purpose of
something gives one the reason for its existence.
It tells you whether one is doing it well or not. It's the ultimate ethical
question: What's it purpose?”
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. “One 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.
For example, IRS regulations repeatedly single out actions with “no
legitimate business purpose” (like swaps.) “If one is doing things with
no legitimate business purpose in order to avoid taxation, what is he
doing? He is violating the spirit, is one not? One is staying within the
letter, but there’s no purpose there except to get one around the
law,” he said.
PUNJABI UNIVERSITY REGIONAL CAMPUS FOR INFORMATION TECHNOLOGY &MANAGEMENT,MOHALICREATED BY:- GIRISH KAPOOR (MBA II SEM. IV)
SEMINAR REPORT - 20 -ETHICS IN FINANCE
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,” he said.
For example, consider the misguided practice of selling indexed
annuities to the elderly. If a company is paying a high commission for
that product, say 15 percent, versus a lower commission for a more
appropriate product, say 3 percent, a salesperson may disregard the
needs of the client and/or assume that the company supports this
product and its applicability by its willingness to pay five fold the
compensation. “Sooner or later, people are going to give in to that
temptation. The purely self-interested agent is just responding to the
reward system that is in place,”
“One needs to take a look at what one is rewarding.” In general,
organizations get exactly what they reward. They just don’t realize
that their rewards structures are encouraging dysfunctional or
counter-productive behavior or turn a blind eye to the outcome
5) Individual responsibility can wither under the demands of the
client. Sometimes the push to act unethically comes from the client.
How many people expect their accountants to pad their expenses
where possible? How many clients expect their insurance agents to
falsify their applications or claims? “That’s the temptation—you like
your client, you’ve gotten to know your client, you really want to help
your client out—that’s just another conflicting loyalty,”
Suggestions for improvements in the industry to encourage more
ethical behavior. “In the financial services industry, the main work is
that people who do business are, for the most part, highly ethical
people trying to do the right thing most of the time. Most of them are
trying to help their clients achieve their financial objectives. But how
PUNJABI UNIVERSITY REGIONAL CAMPUS FOR INFORMATION TECHNOLOGY &MANAGEMENT,MOHALICREATED BY:- GIRISH KAPOOR (MBA II SEM. IV)
SEMINAR REPORT - 21 -ETHICS IN FINANCE
could this be better, because clearly, even if one is right, there are
still a lot of issues and problems in the business?”
First of all, consumers need to be better informed. “It is the
responsibility to take control of their own financial security,” which
doesn’t mean one needs to know everything about the product one is
buying in advance, but “one should read enough to know what some
of the right questions are to ask.” Ask those insightful questions of an
advisor whom you know, trust, and who has the proper credentials, if
applicable.
Other suggestions included:
• Incentive compensation better aligned with customers’
interests, rather than agents’
• more industry trade associations supporting ethics initiatives
• the Center for Ethics in Financial Services growing in influence
and impact
Ethics of CARE(CREDIT ANALYSIS ANDRESEARCH ENTERPRISES)
• Integrity & Transparency : A commitment to be ethical,
sincere and open in our dealings.
• Pursuit of excellence: A commitment to strive relentlessly to
constantly improve ourselves.
• Fairness: Treat clients, employees and other stakeholders
fairly.
• Independence: We pride our independence, are unbiased and
fearless in expressing our opinion
PUNJABI UNIVERSITY REGIONAL CAMPUS FOR INFORMATION TECHNOLOGY &MANAGEMENT,MOHALICREATED BY:- GIRISH KAPOOR (MBA II SEM. IV)
SEMINAR REPORT - 22 -ETHICS IN FINANCE
• Thoroughness: We like to do rigorous analysis and research
on every assignment that we take.
Financial transactions typically take place in organized markets, such
as stock markets, commodities markets, future or options markets,
currency markets and the like. These markets presuppose certain
moral rules and expectations of moral behaviour. The most basic of
these is a prohibition against fraud and manipulation, but, more
generally, the rules and expectations for markets are concerned with
fairness, which is often expressed as a level playing field. The playing
field in financial markets can become “tilted” by many factors,
including unequal information, bargaining power and resources.
In addition to making one-time economic exchanges, participants in
markets also engage in financial contracting whereby they enter into
long term relations. These contractual relations typically involve the
assumption of fiduciary duties or obligations to act as agents, and
financial markets are subject to un is itself an ethical value because
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ethical conduct when fiduciaries and agents fail in a duty. In the
standard model of contracting, the terms of a contract specify the
conduct required of each party and the remedies for non compliance.
In short ,there is little ”Wiggle Room” in a well written contract.
However, many contractual relations in finance and other areas fall
short of this ideal, because actual contracts are often vague,
ambiguous, incomplete or otherwise problematic. The result is
uncertainty and disagreement about what constitutes ethical (as well
as legal) conduct.
Much of the necessary regulatory framework for financial markets is
provided by law. The Securities Act of 1933 and the Securities
Exchange Commission (SEC) constitute the main regulatory
framework for markets in securities and particular financial
investment institutions, such as banks, mutual funds and pension and
insurance companies are governed by industry specific legislation.
EQUITY AND EFFICIENCY
The main aim of financial market regulation is to ensure efficiency,
but markets can be efficient only when people have confidence in
their fairness and equity. Efficiency achieving the maximum output
with the minimum input-which is a simple definition of efficiency-
provides the general welfare. A society is generally better off when
capital markets, for example, allocate the available capital to its most
productive uses. People will participate in capital markets, however,
only if the markets are perceived to be fair, that is fairness has value
as a means to the end of efficiency.
FAIRNESS IN MARKETS
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What constitutes fairness in financial markets? Fairness is not a
matter of preventing loses. Markets produce winners and losers and
in many cases the gain of some persons comes from an equal loss to
others (although market exchanges are typically advantageous to
both parties). In this respect, playing the stock market is like playing
a sport. The aim is not to prevent losses but only to ensure that the
game is fair. Still, there may be good reasons for seeking to project
individual investors from harm, even when the harm does not involve
unfairness. Just as bean balls are forbidden in baseball (but playing
hardball is okay), so too are certain harmful practices prohibited in
the financial market place.
The regulation of financial markets protects not only individual
investors, but also the general public. The stock market crash of
1929, which prompted the first securities legislation, profoundly
affected the entire country. Everyone is harmed when financial
markets do not fill their main purpose but become distorted by
speculative activity or disruptive trading practices. The deleterious
effect of stock market speculation is wryly expressed by John
Maynard Keynes’s famous quip: “when the capital development of a
country becomes a by-product of the activities of a casino, the job is
likely to be ill-done.” More recently, the question of whether junk
bonds or programs trading pose risks to the stability of the financial
markets has been a subject of dispute.
The possible ways in which individual investors and members of
society can be treated unfairly by the operation of financial markets
are many, but the main kinds of unfairness are the following:
Frauds and Manipulation:- One of the main purposes of securities
regulation is to prevent fraudulent and manipulative practices in the
sale of securities. The common law definition of fraud is the willful
misrepresentation of a material fact that causes harm to a person
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who reasonably relies on the misrepresentation. Section 17(a) of
1933 Securities Act and Section 10(b) of the 1934 Securities
Exchange Act both prohibit anyone involved in the buying or selling of
securities from making false statements of a material fact, omitting a
fact that makes a statement of material facts misleading or engaging
in any practice or scheme that would serve to defraud.
Investors-both as buyers and as sellers- are particularly vulnerable to
frau because the value of financial instruments depends almost
entirely on information that is difficult to verify. Much of the important
information is in the hands of issuing firm and so antifraud provisions
in securities law place an obligation not only on buyers and sellers of
a firm’s stock, for example, but also on the issuing firm. Thus, a
company that fails to report bad news may be committing fraud, even
though the buyer of that company’s stock buys it a previous owner
who may or may not be aware of the news. Insider trading is
prosecuted as a fraud under section 10(b) of the Securities Exchange
Act on the grounds that any material non public information ought to
be revealed before trading.
Manipulation generally involves the buying or selling of securities for
the purpose of creating a false or misleading impression about the
direction of their price so as to induce other investors to buy or sell
the securities. Like fraud, manipulation is designed to decive others,
but the effect is achieved by the creation of false or misleading
appearances rather than by false or misleading representations.
Fraud and manipulation are addressed by mandatory disclosure
regulations as well as by penalties for false and misleading
statements in any information released by a firm. Mandatory
disclosure regulations are justified, in part, because they promote
market efficiency. Better informed investors will make more rational
investment decisions and they will do so at lower overall cost. A
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further justification, however, is the prevention of fraud and
manipulation under the assumption that good information drives out
bad. Simply put, fraud and manipulation are more difficult to commit
when investors have easy access to reliable information.
Equal information:- a “level playing field” requires not only that
everyone play by the same rules, but also that they be equally
equipped to compete. Competition between parties with very unequal
information is widely regarded as unfair because the playing field is
tilted in favor of the player with superior information. When people
talk about equal information, however they may mean that the
parties to a trade actually possess the main information or have
equal access to information.
That everyone should posses the same information is an unrealizable
ideal and actual markets are characterized by great information
asymmetries. The average investor cannot hope to compete on equal
terms with a market pro and even pros often possess different
information that leads them to make different investment decisions.
Moreover, there are good reasons for encouraging people to acquire
superior information for use in trade. Consider stock analysts and
other savvy investors who spend considerable time,effort and money
to acquire information. Not only are they ordinarily entitled to use this
information for their own benefit (because it represents a return on
an investment), but they perform a service to everyone by ensuring
that stocks are accurately priced.
The possession of unequal information strikes us as unfair, then only
when the information has been illegitimately acquired or when its use
violates some obligation to others. One argument against insider
trading, for example, holds that an insider has not acquired the
information legitimately but has stolen( or “misappropriated”)
information that rightly belongs to the firm. In this argument, the
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wrong fullness of insider trading consists not in the possession of
unequal information but in violating a moral obligation not to steal or
a fiduciary duty to serve others. Insider trading can also be criticized
on the grounds that others do not have the same access to the
information, which leads us to the second sense of equal information,
namely equal access.
The trouble with defining equal information as having equal access
to information is that the notion of equal access is not absolute but
relative. Any information that one person possesses could be
acquired by another with enough time, effort and money. An ordinary
investor has access to virtually all of the information that a stock
analyst uses to evaluate a company’s prospects. The main difference
is that the analyst has faster and easier access to information
because of an investment in resources and skills. Anyone else could
make the same investment and thereby gain the same access-or a
person could simply “buy” the analyst’s skilled services. Therefore,
accessibility is not a feature of information itself but a function of the
investment that is required in order to obtain information.
Although efficiency and fairness both support attempts to reduce
information asymmetries in financial markets, exactly what fairness
or justice requires is not easy to determine. Consider, for example,
whether a geologist, who concludes after careful study that a widow’s
land contains oil, would be justified in buying the land without
revealing what he knows. A utilitarian could argue that without such
opportunities, geologists would not search for oil and so society as a
whole is better off if such advantage taking is permitted. In addition,
the widow herself, who would be deprived of a potential gain, is
better off in a society that allows some exploitation of superior
knowledge. A difficult task for securities regulation, then is drawing a
line between fair and unfair advantage taking when people have
unequal access to information.
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Equal Bargaining Power:- Generally, agreements reached by
arm’s-length bargaining are considered to be fair, regardless of the
actual outcome. A trader, who negotiates a futures contract that
results in a great loss for example, has only himself or herself to
blame. However, the fairness of bargained agreements assumes that
the parties have relatively equal bargaining power. Unequal
bargaining power can result from many sources- including unequal
information, which is discussed above-but other sources include the
following factors.
A) Resources:- In most transactions, wealth is an advantage. The
rich are better able than the poor to negotiate over almost all
matters. Prices of groceries in low income neighborhoods are
generally higher than those in affluent areas, for example,
because wealthier customers have more options. Similarly,
large investors have greater opportunities. They can be better
diversified; they can bear greater risk and thereby obtain
higher leverage, they can gain more from arbitrage through
volume trading; and they have access to investments that are
closed to small investors.
B) Processing Ability:- Even with equal access to information,
people vary enormously in their ability to process information
and to make informed judgments. Unsophisticated investors
are ill advised to play the stcok market and even more so to
invest in markets that only professional understand. Fraud
aside, financial markets can be dangerous places for people
who lack an understanding of risks involved. Securities firms
and institutional investors overcome the problem of people’s
limited processing ability by employing specialists in different
kinds of markets and the use of computers in program trading
enables these organizations to substitute machine power for
gray matter.
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C) Vulnerabilities:- investors are only human and human beings
have many weaknesses that can be exploited. Some regulation
is designed to protect people from the exploitation of their
vulnerabilities. Thus, consumer protection legislation often
provides for “cooling off” period during which shoppers can
cancel an impulsive purchase. The requirements that a
prospectus accompany offers of securities and that investors be
urged to read the prospectus carefully serve to curb
impulsiveness.
Efficient Pricing:- Fairness in financial markets includes efficient
prices that reasonably reflect all available information. A fundamental
market principle is that the price of securities should reflect their
underlying value. The mandate to ensure “fair and orderly” markets-
set forth in Securities Exchange Act of 1934- has been interpreted to
authorize invention to correct volatility or excess price swings in stock
markets. Volatility that results from a mismatch of buyers and sellers
is eventually self correcting, but in the meantime, great harm may be
done by inefficient pricing. Individual investors may be harmed by
buying at too high a price or selling at too low price during periods of
mispricing. Volatility also affects the market by reducing investor
confidence, thus driving investors away and some argue that the loss
of confidence artificially depress stock prices. At its worst, volatility
can threaten the whole financial system.
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There are many issues to consider when deciding to invest ethically.
This section seeks to explain more about these issues and provide
clarification on the wide range of strategies and methodologies
employed by fund managers when deciding ethical strategies. This
should be used in conjunction with our inter-active tools to assist you
in deciding on the most appropriate asset allocation when considering
which ethical funds to invest in.
What is ethical investment?
Ethical Investment has been defined as putting your money where
your morals are, or investing according to your beliefs. The term
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"ethical investment" has been in circulation for over 20 years, since
the first ethical fund was launched in 1984. The idea behind the
ethical philosophy is that the fund manager will pick companies that
have the potential to do well both socially and financially. The roots of
SRI can be traced back to the nineteenth century where religious
orders such as Quakers and Methodists were concerned with issues
such as temperance and fair employment. At the beginning of the
1900s the Methodist Church decided to invest in the stock market
whilst specifically avoiding companies involved in alcohol and
gambling. This trend accelerated as more churches, charities and
individuals began to take ethical considerations into account when
investing. The first ethical fund in the UK was launched in 1984 by
Friends Provident.
Ethical investment allows individuals, companies and charities to
invest in a socially responsible way, without compromising their
beliefs and principles. Most investment wrappers (ISAs, pensions etc)
will allow you to choose a fund that suits your beliefs, so that one can
make a positive statement with their money. The careful selection
processes involved in ethical investment can help to identify
companies that have the potential to do well, both socially and
financially. An ethical fund manager will judge stocks on both their
positive and negative attributes, examples of which are shown below:
A) Government legislation of pension funds have contributed to
making ethical investment an issue for pensioneer trustees.
Pensioneer trustees now have to disclose the extent to which social,
ethical and environmental issues are taken into account when
constructing fund asset allocations.
Ethical fund managers now have considerable influence in the policy
making decisions of multinational companies. This makes running a
business without a robust SRI policy is against the commercial
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interest of companies who can be held to account by shareholder
engagement.
Companies who attract negative publicity and fines because of poor
ethical practices will are increasingly in the spotlight and will under
perform. Well run companies with a good SRI policy will not be
tarnished by future issues and are likely to be attrative for investors
along with start-up companies producing sustainable energy products
as alternatives to relying on unsustainable fossil fuels.
B) Investing in environmental solutions:- There is growing
acceptance that environmental problems are not going to
disappear. In fact, current trends show that they are
growing in importance. Green investment focuses on investing in
companies responding to environmental challenges, either by
developing a product or service which solves an environmental
problem, or by working to limit their impact on the environment.
Green investment seeks competitive advantage by spotting trends in
environmental technologies at an early stage.
The massive increase in environmental regulation over recent
decades has fuelled a greater understanding of green issues. For a
growing number of companies these regulations represent a growth
market largely unaffected by economic cycles. Increased consumer
awareness for environmental issues creates new market for products
such as organic food or renewable energy.
C) Retail:- Companies that put principles and systems in place to deal
with supply chain issues such as child labour and sustainable timber
are, for example, GUS and Argos. Sainsbury was named Organic
Supermarket of the year from 2002 to 2004 by the UK Soil
Association as an example of a company embracing the use of
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organic and fair-trade products. US food retailer, Wholefoods Market,
specialises in organic foods.
D) Clean energy:- With an increasing focus
on climate change and energy security,
over 48 countries worldwide have
developed policies promoting renewable
energy. Global energy demand is expected
to rise over 50% by 2030 according to the International Energy
Agency. Investments are made in technologies such as wind, solar
and fuel cells, as well as emissions reduction.
E) Sustainable living:- Rising obesity and a focus on food quality have
resulted in health-conscious consumers paying more attention to the
food they buy and what they eat. Sales of organic food are now worth
more than £1.12bn to UK retailers and the market is growing at twice
the rate of the general grocery market. Combined with an ageing
population, the trend for healthy lifestyles has created investment
opportunities in organic food, complimentary medicines and
healthcare.
F) Environmental Services:- Increasing health, safety and
environmental regulation across the globe has resulted in new
markets for companies providing solutions to environmental and
social problems. Examples include environmental consultancies and
companies providing specialist equipment that minimises the risk of
safety incidents.
G) Long-term performance from environmental solutions:- The
publication of the World Energy Outlook in November 2005 by the
International Energy Agency (IEA) prompted wide-ranging
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international press coverage. It highlighted the need to reduce our
global dependence on fossil fuels. While environmental concerns, in
particular climate change, have been central to this debate, the issue
that has dominated headlines of late is the concern over the long-
term sustainability of non-renewable fossil fuels. This is particularly so
in light of an increase in demand for this type of energy from
countries such as China and India. Unsustainable energy trends
means alternatives must be found In its latest World Energy Outlook,
the IEA stated that global energy demand is expected to rise by more
than 50% by 2030. The Agency warned that current trends are
unsustainable and that if renewable energy sources are not tapped,
oil prices will soar on increased demand and greenhouse gas
emissions will rise by an estimated 52% by 2030.
H) Increased legislation will mean further growth opportunities:- As
concern grows over global greenhouse gas emissions, governments
around the world are setting policy initiatives to promote and
encourage the development and use of cleaner energy. Examples
include the EU Renewable Energy Directive and EU Emissions Trading
Scheme. The Chinese government has stated that 15% of all China's
energy must come from sources other than fossil fuels by 2020. The
successful outcome of the recent climate change talks in Montreal
has sent a clear signal that the future lies in clean and more
sustainable technologies.
The growth potential of renewable energy sources will attract a wide
investment audience As businesses embrace these changes there will
be more opportunities for growth in this sector. Fifteen years ago
there were no quoted companies operating in the alternative energy
sector. Now there are over 75 companies worldwide operating in
either the solar, wind, or fuel cell area and many more at an
unquoted level. These companies are of interest to all investors, not
just those with an ethical focus.
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Investing in environmental solutions is becoming
increasingly important to all investors. Whilst
climate change is the most prominent
environmental issue in the news at the moment,
there are many other reasons why a green approach
to investing can pay for investors. Over the last 30
years environmental issues on a broader scale have
increasingly moved to centre stage as there is wide acceptance that
environmental problems are not going to disappear. Other
environmental problems, particularly those associated with scarcity of
water, natural resources and pollution, are believed to be amongst
some of the greatest issues facing the world today. From an
investment perspective, the need to reduce dependence on fossil
fuels means that the renewable energy industry is a long-term
structural-growth story.
I) Environment policy delivers improvements:- Environment policy has
been seen as one of the success stories of the European Union
bringing improvements in areas such as cleaner air and safer drinking
water. In the UK, DEFRA (the Department of the Environment, Food
and Rural Affairs) is responsible for approximately 30% of all
legislation coming from Europe, more than any other government
department. In addition to increasing legislation, enforcement against
offenders is also being stepped up In the US, federal initiatives like
the Superfund program, which aims to clean up hazardous waste
sites, have raised the financial stakes for businesses. This pattern is
being repeated around the world. For example, in its latest five year
plan, China announced a significant increase in environmental and
health and safety regulation. These issues are set to remain high on
the political agenda.
J) Environmental consultants:- The trend for increasing regulation
creates opportunities for consultancies. Their specific knowledge and
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expertise allows them to provide advice and develop solutions for
companies who are subject to regulation and don't have sufficient
expertise in-house. Wind energy is essential if the UK Government is
going to meet its target of 20% reduction in carbon dioxide emissions
by 2010. This rapidly growing sector of the global electricity
generation market and has averaged 28% annual growth for the past
five years. A key new area of growth in the next few years is off-shore
wind power.
FUND RAISING EXECUTIVE
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A. They shall be responsible for conducting activities in
accordance with accepted professional standards of accuracy,
truth and good faith.
B. They shall encourage institutions they serve:
• To conduct their affairs in accordance with accepted
principles of sound business and financial management,
and accounting procedures
• To use donations only for the donors' intended purposes.
• To comply with applicable local, provincial and federal
laws.
C. They shall recommend to the institutions they serve, only those
fund-raising goals which they believe can be achieved, based
on their professional experience, and an investigation, and
rational analysis of the facts.
D. They shall work for salary, retainer or fee, not a commission. If
employed by a fund-raising organization, the organization shall
operate in its client/consultant relationship on the basis of a
predetermined fee, and not a percentage of funds raised.
E. They shall make full disclosure to employers, clients or, if
requested, potential donors, all relationships which might pose
or appear to pose possible conflicts of interest. As fundraising
executives they will neither seek, nor accept, "finder's fees".
F. They shall hold confidential, and leave intact, all lists, records
and documents, acquired in the service of current or former
employers, and clients.
G. The public demeanor shall be such, as to bring credit to the
fund-raising profession.
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UNDERWRITER
A. They shall provide advice and service which
are in the client's best interest.
• One who possessing a specific body of knowledge which
is not possessed by the general public has an obligation
to use that knowledge for the benefit of the client and to
avoid taking advantage of that knowledge to the
detriment of the client.
• In a conflict of interest situation the interest of the client
must be paramount.
• They must make a conscientious effort to ascertain and
to understand all relevant circumstances surrounding the
client.
• They have to accord due courtesy and consideration to
those engaged in related professions who are also
serving the client.
• They have to give due regard to any agent principal
relationship which may exist between the member and
such companies as he may represent.
B. They shall respect the confidential
relationship existing between client and member.
• Competent advice and service may necessitate the client
sharing personal and confidential information with the member.
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Such information is to be held in confidence by the member
unless released from the obligation by the client.
C. They shall continue his education
throughout his professional life.
• To advise and serve competently, a member must continue to
maintain and to improve his professional abilities.
• Continuing Education includes both the member adding to his
knowledge the practice of his profession; and, the member
keeping abreast of changing economic and legislative
conditions which may affect the financial plans of the insuring
public.
• They may continue his education through formal or informal
programs of study or through other professional experiences.
D. They shall render continuing advice and
service.
• Advice and service, to be competent, must be ongoing as the
client's circumstances change and as these changes are made
known to the member.
• A client with whom a member has an active professional
relationship is to be informed of economic and legislative
changes which relate to the client-member relationship.
• To enhance the public regard for professional designations and
allied professional degrees held by members .
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E. A member shall obey all laws governing his
business or professional activities.
• Business activities are non-personal activities carried on
outside the life insurance community; professional activities are
non-personal activities carried on within the life insurance
community.
• A member has a legal obligation to obey all laws applicable to
his business and professional activities.
F. They shall avoid activities which detract
from the integrity and professionalism.
Activities which could present a violation of this Profession
might include:
(1) Failure to obey a law unrelated to the member's business or
professional activities.
(2) Impairing the reputation of another practitioner.
(3) Unfairly competing with another practitioner.
(4) Actions which result in the discrediting their own reputation.
FINANCIAL ANALYST
A. Act with integrity, competence, diligence, respect, and in an
ethical manner with the public, clients, prospective clients,
employers, employees, colleagues in the investment profession
and other participants in the global capital markets.
B. Place the integrity of the investment profession and the
interests of clients above their own personal interests.
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C. Use reasonable care and exercise independent professional
judgment when conducting investment analysis, making
investment recommendations, taking investment actions, and
engaging in other professional activities.
D. Practice and encourage others to practice in a professional and
ethical manner that will reflect credit on themselves and the
profession.
E. Promote the integrity of and uphold the rules governing, capital
markets.
F. Maintain and improve their professional competence and strive
to maintain and improve the competence of other investment
professionals.
AUDITOR
A) Integrity
• Shall perform their work with honesty, diligence, and
responsibility.
• Shall observe the law and make disclosures expected by the
law and the profession.
• Shall not knowingly be a party to any illegal activity, or engage
in acts that are discreditable to the profession of internal
auditing or to the organization.
• Shall respect and contribute to the legitimate and ethical
objectives of the organization.
B) Objectivity
• Shall not participate in any activity or relationship that may
impair or be presumed to impair their unbiased assessment.
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This participation includes those activities or relationships that
may be in conflict with the interests of the organization.
• Shall not accept anything that may impair or be presumed to
impair their professional judgment.
• Shall disclose all material facts known to them that, if not
disclosed, may distort the reporting of activities under review.
C) Confidentiality
• Shall be prudent in the use and protection of information
acquired in the course of their duties.
• Shall not use information for any personal gain or in any
manner that would be contrary to the law or detrimental to the
legitimate and ethical objectives of the organization.
D) Competency
• Shall engage only in those services for which they have the
necessary knowledge, skills, and experience.
• Shall perform internal auditing services in accordance with the
International Standards for the Professional Practice of Internal
Auditing.
• Shall continually improve their proficiency and the
effectiveness and quality of their services.
FINANCIAL PLANNERS
A) They should endeavor as professionals to place the public
interest above their own.
B) They should seek continually to maintain and improve their
professional knowledge, skills, and competence.
C) They should obey all laws and regulations and avoid any
conduct or activity which could cause unjust harm to those
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who rely upon the professional judgment and skill of the
members.
D) They should be diligent in the performance of their
occupational duties.
E) They should assist in improving the public understanding
of financial planning.
F) They should assist in maintaining the integrity of the Code
of Professional.
BANK LOAN & CREDIT OFFICERS
There are two cardinal principles in the exchange of credit
information: confidentiality and accuracy of inquiries and replies. This
includes the identity of inquirers and sources which cannot be
disclosed without their permission. Adherence to these and the other
principles embodied in this Code is essential, since offenders
jeopardize their privilege to participate further in the exchange of
credit information.
Confidentiality, as it is used here, is based on the reliance placed
upon the fidelity of another with whom information is being
exchanged. A trust is placed in all parties involved that the
information has been requested for a legitimate purpose and will not
be used indiscriminately. When conducting investigations, the
identity of the Inquirer should not be divulged without its
authorization. Similarly, the identity of the source of the information
should not be made known without its authorization. The facts
presented must be accurate because the bank reference is one of the
most pertinent sources of credit information. When discussing data,
favorable or unfavorable, the responding bank must give a reply that
is restricted to or based on fact. If a discrepancy is discovered within
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a reasonable time after an inquiry has been answered and is
considered to be significant in relation to the purpose of the inquiry, it
is prudent and ethical that the discrepancy be disclosed to the
inquirer.
It is expected that, as a matter of professional courtesy, no liability
will be attached to or result from the good faith exchange of
information. If the information is for a customer, it should be
screened according to the customer's needs, credit sophistication,
and ability to handle the information discreetly.
Adherence to these and the other principles embodied in this Code of
Ethics is essential. Violations of the Code could damage the
reputation of offending banks and individuals and may have an
adverse effect on the customer. If banks or individuals demonstrate
an inability and/or unwillingness to handle and exchange credit
information responsibly, they risk losing the privilege.
Each inquiry should specifically indicate its purpose and the amount
involved. One of the most important elements of an inquiry is its
purpose. The bank receiving the inquiry has a right to know why the
information is needed. If no purpose is given, the bank has no
obligation to respond. Knowing and understanding the purpose of an
inquiry places the recipient in a better position to respond with the
type and amount of information needed to satisfy the inquirer. When
the purpose of the inquiry is solicitation, acquisition, merger,
competition, or existing or intended legal action, reply is at the
discretion of the bank of account.
The inquirer should state the initial steps taken, as well as the
information on hand, in order to avoid duplication of effort. Inquiries
may be initiated either by telephone or in writing. In the interest of
timeliness, many member banks regularly accept telephone inquiries.
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The legitimate use of credit information is to assist an inquirer who
expects to extend credit or otherwise rely on the subject of the
inquiry in business dealings. An inquiry should not be answered
without first determining its legitimacy and establishing the identity
of the inquirer.
For example, when receiving a telephone inquiry, information should
not be disclosed on the first call unless the inquirer is known and
identified. A return call may be used to establish the identity of the
inquirer.
In the majority of instances, a specific amount is involved in the
transaction which generates an inquiry. When initial trade credit is
involved and no amount is established, the inquiring party should be
asked for the normal size of its transactions. A range of figures such
as $500-$1,000 or $50,000-$60,000 is acceptable. It is unacceptable
to use fictitious figures or to inflate the amount involved to induce the
responding bank to provide details beyond what may be necessary to
answer the inquiry suitably. If for some reason there is no amount
involved, the inquirer should state this in a manner which would
logically satisfy the respondent as to the overall purpose of the
inquiry. A proper inquiry should contain the following:
A) SUBJECT: The subject of the inquiry should be identified as
completely as possible including full name, address, and names of the
principals.
B) PURPOSE: The reason for the inquiry should be given in sufficient
detail to allow the recipient to make an appropriate response.
C) EXPERIENCE: If the inquirer has had experience with the subject,
a summary of that experience should be provided. Doing this creates
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a true exchange of information and helps to eliminate duplication of
effort.
D) REQUIREMENTS: The inquirer should be specific about the
information required to satisfy the needs of the inquiry, such as
deposit relationships, loan experience, financial information,
assessment (of) management, etc.
E) OTHER: Any other factors relevant to the inquiry should be
disclosed.
Responses should be prompt and disclose sufficient material facts
commensurate with the purpose and amount of the inquiry. Specific
questions should be given careful and frank replies. Prompt and
accurate replies are signs of dependability and professionalism that
help the users of the information conduct business on a timely basis.
It is appropriate to respond using the same method in which the
request is presented, depending on the nature of the inquiry.
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In light of the various corporate scandals mentioned above, the
following three points need tobe addressed for creating a sound
ethical environment in any company. They are,
1. Ensuring that employees are aware of their legal and
ethical responsibilities.
Ethical organisations would have policies to train and motivate
employees toward ethical behaviour. This would require initiation
from the top. A number of companies, both in the West and in India
have been known for their quality and soundness of their Ethics
programmes. Companies like Raytheon make ethics training
compulsory for everyone. Similarly Texas
Instruments has a well drafted Ethics programme from as long as
1961. In India Wipro was amongst the pioneers to establish an
organised set of beliefs which would guide business conduct. This was
done as early as 1970s. In the process the company has established
an Integrity manual which helps employees take ethical decisions
when faced with choices.
2. Providing a communication system between the
management and the employees so that any one in the
company can report about fraud and mismanagement without
the fear of being reprimanded
Ethical organisations need to provide facilities for employees through
which they could communicate with responsible positions for
reporting frauds, mismanagement or any other form of non routine
detrimental behaviour. In India Wipro has introduced a helpline
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comprising of senior members of the company who are available for
guidance on any moral, legal or ethical issues that an employee of
the company may face.
3. Ensuring fair treatment to those who act as whistle
blowers.
This is perhaps the most important and sensitive issue. When Sherron
had raised questions at Enron, she was demoted. Similar fate would
have met all those who had followed Sherron. Fair treatment to
whistle blowers is a basic necessity to check fraud. It is re assuring
that two of the three persons of the year, selected by the popular
Time magazine were accountants from Enron and World Com who
had dared to blow the whistle, however, needless to say that the
appreciation is much more needed from within the company rather
than outside.
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The dynamic environment in which businesses operate today may
usher a broad range of circumstances because of which compliance
with the above mentioned fundamental principles may potentially be
threatened. Such threats may be classified as follows:
(a) Self-interest threats, which may occur as a result of the financial
or other interests of a finance and accounting professional or of an
immediate or close family member;
(b) Self-review threats, which may occur when a previous judgment
needs to be reevaluated by the finance and accounting professional
responsible for that judgment;
(c) Advocacy threats occur when a professional promotes a position
or opinion to the point that subsequent objectivity may be
compromised;
(d) Familiarity threats occur when a finance and accounting
professional has close relationships in the work environment and such
relationships impair his selfless attitude towards work.
(e) Intimidation threats occur when a professional may be prohibited
from acting objectively by threats, actual or perceived.
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EXAMPLES OF CIRCUMSTANCES CREATING ABOVE MENTIONED
THREATS.
Circumstances leading to the actual happening of the various threats
are given below.
A) Self interest threat for finance and accounting
professionals working as consultants or auditors
• A financial interest in a client or jointly holding a financial
interest with a client.
• Undue dependence on total fees from a client.
• Having a close business relationship with a client.
• Concern about the possibility of losing a client.
• Potential employment with a client.
• Contingent fees relating to an assurance engagement.
B) Self interest threat for finance and accounting
professionals working as an employee
• Financial interests, loans and guarantees in the company the
professional is working.
• Incentive compensation arrangements
• Inappropriate personal use f corporate assets.
• Concern over employment security
• Commercial pressure from outside the employing organisation
C) Self review threat for finance and accounting professionals
working as consultants or auditors
• The discovery of a significant error during a re-evaluation of the
work of the finance and accounting professional.
• Reporting on the operation of financial systems after being
involved in their design or implementation.
• Having prepared the original data used to generate records
that are the subject matter of the engagement.
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• A member of the assurance team being, or having recently
been, a director or Officer of that client.
• A member of the assurance team being, or having recently
been, employed by the Client in a position to exert direct and
significant influence over the subject matter of the
engagement.
D) Self review threat for finance and accounting professionals
working as an employee
Such threats occur when business decisions or data is subjected to
review and justification is required to be given by the same
professional who was responsible for taking such decisions or
preparing that data.
E) Advocacy threat for finance and accounting professionals
working as consultants or auditors
• Promoting shares in a listed entity* when that entity is a
consultancy or a financial statement audit client.
• Acting as an advocate on behalf of an assurance client in
litigation or disputes with third parties.
F) Advocacy threat for finance and accounting professionals
working as an employee.
When furthering the legitimate goals and objectives of their
employing organizations finance and accounting professionals may
promote the organization’s position, provided any statements made
are neither false nor misleading. Such actions generally would not
create an advocacy threat.
G) Familiarity threats for finance and accounting
professionals working as consultants or auditors
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• A member of the engagement team having a close or
immediate family relationship with a director or officer of the
client.
• A member of the engagement team having a close or
immediate family relationship with an employee of the client
who is in a position to exert direct and significant influence over
the subject matter of the engagement.
• A former partner of the firm being a director or officer of the
client or an employee in a position to exert direct and
significant influence over the subject matter of the
engagement.
• Accepting gifts or preferential treatment from a client, unless
the value is clearly insignificant.
• Long association of senior personnel with the assurance client.
H) Familiarity threats for finance and accounting
professionals working as an employee
• A finance and accounting professional, in a position to influence
financial or non financial reporting or business decisions having
an immediate or close family member who is in a position to
benefit from that influence.
• Long association with business contacts influencing business
decisions.
• Acceptance of a gift or preferential treatment, unless the value
is clearly insignificant.
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I) Intimidation threat for finance and accounting
professionals working as consultants or auditors
• Being threatened with dismissal or replacement.
• Being threatened with litigation.
• Being pressured to reduce inappropriately the extent of work
performed in order to reduce fees.
J) Intimidation threat for finance and accounting
professionals working as employees
• Threat of dismissal or replacement of the finance and
accounting professional or a close or immediate family member
over a disagreement about the application of an accounting
principle or the way in which financial information is to be
reported for external use as well as for decision making
purposes.
• A dominant personality attempting to influence the decision
making process, for example with regard to the exclusion of
irrelevant costs from projected cost estimates.
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It is important to have safeguards which may increase the likelihood
of identifying or deterring unethical behavior. Such safeguards, which
may be created by the finance and accounting profession, legislation,
regulation or an employing organization, shall ensure an ethical
environment. Safeguards that may eliminate or reduce the
abovementioned threats to an acceptable level fall into two broad
categories:
(a) Safeguards created by the profession, legislation or regulation;
and
(b) Safeguards in the work environment.
A) Some of the safeguards created by the profession,
legislation or regulation are as follows
• Educational, training and experience requirements for entry
into the profession.
• Continuing professional development requirements.
• Corporate governance regulations.
• Professional standards.
• Professional or regulatory monitoring and disciplinary
procedures.
• External review by a legally empowered third party of the
reports, returns, communications or information produced by
concerned professionals.
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B) Safeguards in the work environment are as follows.
• The employing organization’s systems of corporate oversight or
other oversight structures.
• The employing organisation’s ethics and conduct programs.
• Recruitment procedures in the employing organisation
emphasizing the importance of employing high caliber
competent staff.
• Strong internal controls.
• Appropriate disciplinary processes.
• Leadership that stresses the importance of ethical behavior and
the expectation that employees will act in an ethical manner.
• Policies and procedures to implement and monitor the quality
of employee performance.
• Timely communication of the employing organisation’s policies
and procedures, including any changes to them, to all
employees and appropriate training and education on such
policies and procedures.
• Policies and procedures to empower and encourage employees
to communicate to senior levels within the employing
organization any ethical issues that concern them without fear
of retribution.
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While evaluating compliance with the fundamental principles, a
finance and accounting professional may be required to resolve a
conflict in the application of fundamental principles. The following
needs to be considered, either individually or together with others,
during a conflict resolution process,
(a) Relevant facts;
(b) Ethical issues involved;
(c) Fundamental principles related to the matter in question;
(d) Established internal procedures; and
(e) Alternative courses of action.
Having considered these issues, a finance and accounting
professional should determine the appropriate course of action that is
consistent with the fundamental principles identified. The professional
should also weigh the consequences of each possible course of
action. If the matter remains unresolved, the professional should
consult with other appropriate persons within the firm* or employing
organization for help in obtaining resolution. During times where a
matter involves a conflict with, or within, an organization, finance and
accounting professional should also consider consulting with those
charged with governance of the organisation, such as the board of
directors.
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It may be in the best interests of the professional to document the
substance of the issue and details of any discussions held or
decisions taken, concerning that issue. If a significant conflict cannot
be resolved, a professional may wish to obtain professional advice
from the relevant professional body or legal advisors, and thereby
obtain guidance on ethical issues without breaching confidentiality.
For example, a professional accountant may have encountered a
fraud, the reporting of which could breach the professional
accountant’s responsibility to respect confidentiality. The professional
accountant should consider obtaining legal advice to determine
whether there is a requirement to report.
If, after exhausting all relevant possibilities, the ethical conflict
remains unresolved, a professional should, where possible, refuse to
remain associated with the matter creating the conflict. The
professional may determine that, in the circumstances, it is
appropriate to withdraw from the engagement team or specific
assignment, or to resign altogether from the engagement, the firm or
the employing organization.
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In the broadest sense, a fraud is a deception made for personal gain.
Fraud is a crime, and is also a civil law violation. Many hoaxes are
fraudulent, although those not made for personal gain are not
technically frauds. Defrauding people of money is presumably the
most common type of fraud.
In criminal law, fraud is the crime or offense of deliberately deceiving
another in order to damage them – usually, to obtain property or
services unjustly. Fraud can be accomplished through the aid of
forged objects.
Fraud can be committed through many methods, including mail, wire,
phone, and the internet (computer crime and internet fraud).
Bank fraud is a federal crime in many countries, defined as planning
to obtain property or money from any federally insured financial
institution. It is sometimes considered a white-collar crime.
Frauds in the financial sector can be categorized broadly as:
A) Frauds by insiders
B) Frauds by outsiders
FRAUDS BY INSIDERS FRAUDS BY OUTSIDERSRogue Traders Forged and Altered Cheque
PUNJABI UNIVERSITY REGIONAL CAMPUS FOR INFORMATION TECHNOLOGY &MANAGEMENT,MOHALICREATED BY:- GIRISH KAPOOR (MBA II SEM. IV)
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Fraudulent Loans Stolen ChequeWire Fraud Accounting FraudForged Documentation Bill Discounting FraudUninsured Deposits Cheque kittingTheft of Identity Payment Card FraudDemand Draft Fraud Booster Cheques
Stolen Payment CardsSkimming Credit Card InformationImpersonation Fraudulent loan ApplicationPrime Bank FraudFictious Bank Officer Phishing Money Laundering
Various Financial Frauds
J.P. Morgan Chase
J. P. Morgan Chase & Co. was formed with the merger of The Chase
Manhattan Corporation and J.P. Morgan & Co. Inc., What may have
seemed like an indicator of continued prosperity for this industry
giant instead brought hard times for the firm. A year after the
merger, energy provider Enron declared bankruptcy, and few banks
had as many dealings with them as J.P. Morgan Chase. They face
numerous lawsuits from their shareholders, those of Enron, and other
parties involved in the deals.
Why is J. P. Morgan accused of fraud?
Though Merrill Lynch’s involvement with Enron was publicized more
highly than that of other investment firms, the bankrupt energy
company is accused of receiving loans from many sources, one of
which was J.P. Morgan. This has led to several lawsuits.
One suit has been filed by insurance companies that stood to lose
money for insuring transactions between Enron and J.P. Morgan. The
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insurance companies allege that they should not be liable for deals
that J.P. Morgan executives knew to be shams.
J.P. Morgan is also being sued in the Enron shareholder suit that
includes as defendants Enron executives, Arthur Andersen LLP, a
number of banks, and several law firms. Enron shareholders believe
that J.P. Morgan helped Enron take out loans that were disguised as
purchases and trades.
At the same time, J.P. Morgan faces lawsuits from its own
shareholders, who claim that the company didn’t properly inform
them of how much it stood to lose in its dealings with Enron.
Finally, a group of banks that combined to make an enormous loan to
Enron in its dying days is considering filing suit against J.P. Morgan. At
issue is whether or not J.P. Morgan organized the loan so that it could
be repaid for some of its loans to Enron, fully aware that the company
would soon declare bankruptcy.
What is the current status?
The lawsuit filed by the ten insurance companies has been settled.
The plaintiffs, originally on the hook for about $1 billion to J.P.
Morgan, have agreed to pay about 60 percent of it.
J.P. Morgan executives have been questioned about their roles in the
fall of Enron, but, to date, no criminal charges have been filed against
them.
Morgan Stanley
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Morgan Stanley is one of the largest investment banking firms in USA.
The global securities market is one of Morgan Stanley’s primary
business arenas. The firm serves both individual and institutional
investors. Along with several other high-profile firms, Morgan Stanley
has recently endured a number of questions about conflicts of
interest and potential fraud.
When was the possible fraud discovered ?
Top Wall Street firms have recently been required to pay large fines
to regulators for alleged partiality in their stock reports to investors.
In December 2002, a preliminary agreement was reached with 12
U.S. investment banks in which they agreed to pay a combined total
of over 1 billion dollars. The Securities and Exchange Commission
(SEC) and state regulators brought accusations against the banks in
the preceding months, alleging that investment banks had let
conflicts of interest color their stock reports.
Morgan Stanley has also been individually targeted by the world’s
leading luxury item maker, LVMH. The leadership at LVMH has
accused Morgan Stanley of allowing a conflict of interest to interfere
with its research reporting. Gucci, a long-time rival of LVMH, has close
ties with Morgan Stanley. While LVMH claims that this relationship
caused Morgan Stanley to unfairly spin its stock reports to investors,
Morgan Stanley is vehemently denying any accusation of fraud. The
lawsuit by LVMH was filed in a French court in November.
What type of fraud is alleged to have been committed ?
The charges filed by the SEC and state regulators against a host of
investment banks are roughly synonymous to the accusations against
Morgan Stanley by LVMH. Both claim that conflicts of interest have
contributed to dishonest stock reports to investors. If LVMH wins its
case against Morgan Stanley, it will be because it shows convincing
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evidence that the securities firm put its interest in Gucci ahead of its
duty to present investors with an accurate picture of stocks’ value.
Zurich Financial Services, Converium Holding AG
Settle Reinsurance Fraud Charges
The Securities and Exchange Commission today announced settled
civil securities fraud charges against Zurich Financial Services and
Converium Holding AG, now known as SCOR Holding (Switzerland)
AG, relating to finite reinsurance transactions. The SEC's orders find
that Zurich's former reinsurance group, which operated under the
name Zurich Re and was later spun off in 2001 as Converium,
designed three reinsurance transactions to make it appear that risk
had been transferred to third-party entities when, in fact, the risk
remained with Zurich-controlled entities.
According to the SEC's orders, Zurich Re — and later Converium —
improperly used reinsurance accounting for the transactions enabling
them to artificially inflate their performance figures. This misconduct
allowed Zurich to receive a significant windfall when it spun off
Converium in a December 2001 initial public offering. Converium
continued the fraudulent scheme following the IPO. Zurich and
Converium agreed to settle the SEC's charges without admitting or
denying the SEC's findings, and Zurich will pay a $25 million penalty.
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WIPRO’S CODE OF ETHICS FOR PRINCIPAL AND
FINANCE OFFICERS:
Wipro’s Promise
“With utmost respect to Human Values, we promise to serve our
customer with Integrity, through Innovative, Value for Money
Solutions, by Applying Thought, day after day.”
Our promise is at the core of Corporate Governance Practice in Wipro.
In the Information Age, Information is the Key asset. As custodians of
Information and assets, the Code of Ethics for Principal Officer and
Finance Professionals is codified as under.
Applicability
The Code of Ethics applies to the Principal Officer and all the
employees in Finance Function in Wipro. The Principal Officer and all
the employees in the Finance Function are expected to abide by this
code as well as other applicable Wipro policies or guidelines. Any
violation of Wipro Code of Ethics may result in disciplinary action, up
to and including immediate termination.
Wipro’s Code of Ethics for Principal Officer and Finance
Professionals
I. Principle of Professional & Personal Integrity:
• Act with honesty and integrity, avoiding actual or apparent
conflicts of interest in personal and professional relationships.
• Confidential information acquired in the course of one's work
will not be used for personal advantage.
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• Achieve responsible use of and control over all assets and
resources employed or entrusted.
II. Principle of Propriety& Relevance of Information:
• Provide all stakeholders with information that is accurate,
complete, objective, relevant, timely and understandable.
• Respect the confidentiality of information acquired in the
course of one's work except when authorized or otherwise
legally obligated to disclose.
III. Principle of Compliance:
• ·Comply with rules and regulations of all Public Authorities in all
the geographies in which Wipro operates.
IV. Principle of Role models of Highest Standards of Corporate
Governance:
• Act in good faith, responsibly, with due care, competence and
diligence, without misrepresenting material facts or allowing
one's independent judgment to be subordinated.
• Share knowledge and maintain skills important and relevant to
stakeholders’ needs.
• Proactively promote and be an example of ethical behavior as a
responsible partner among peers, in the work environment and
the community.
ECOLAB’S Code of Ethics for Senior Officers and
Finance Associates
In my role as a Senior Officer or Finance Associate at Ecolab, I have
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adhered to and advocated to the best of my knowledge and ability
the following principles and responsibilities governing professional
conduct and ethics:
A) Act with honesty and integrity, avoiding actual or apparent
conflicts of interest in personal and professional relationships. A
"conflict of interest" exists when an individual's private
interests interfere or conflict in any way (or even appear to
interfere or conflict) with the interests of the Company.
B) Provide information that is full, fair, accurate, complete,
objective, relevant, timely and understandable, including in and
for reports and documents that the Company files with, or
submits to, the SEC and other public communications made by
the Company.
C) Comply with all applicable laws, rules and regulations of
federal, state and local governments, and other appropriate
private and public regulatory agencies.
D) Act in good faith, responsibly, with due care, competence and
diligence, without misrepresenting material facts or allowing
my independent judgement to be subordinated.
E) Respect the confidentiality of information acquired in the
course of business except when authorized or otherwise legally
obligated to disclose the information. I acknowledge that
confidential information acquired in the course of business is
not to be used for personal advantage.
F) Proactively promote ethical behavior among my associates at
the Company and as a responsible partner with industry peers
and associates.
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SEMINAR REPORT - 66 -ETHICS IN FINANCE
G) Maintain control over and responsibly manage all assets and
resources employed or entrusted to me by Ecolab.
H) Adhere to and promote this Code of Ethics.
This Code of Ethics is intended to supplement the Ecolab Code of
Conduct and company policies regarding ethical practices in the
finance area. All procedures for upholding, enforcing, and complying
with the Code of Conduct are also applicable to this Code of Ethics.
The Ecolab Law Department should be asked to help interpret or
apply this Code as required.
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SEMINAR REPORT - 67 -ETHICS IN FINANCE
In the end it can be said that approaches to dealing with ethical
problems in finance range from establishing ethical codes for financial
professionals to efforts to replace the rational-maximizer (egoistic)
paradigm that underlies the modern capitalist system by one in which
individuals are assumed to be altruistic, honest, and basically
virtuous.
It is not uncommon to find established ethical codes and ethical
offices in corporations and in financial markets. Ethical codes for
financial markets are established by the official regulatory agencies
and self-regulating organizations to ensure ethically responsible
behavior on the part of the operatives in the financial markets.
One of the most important and powerful official regulatory agencies
for the securities industry in the United States is the Securities and
Exchange Commission (SEC). It is in charge of implementing federal
securities laws, and, as such, it sets up rules and regulations for the
proper conduct of professionals operating within its regulatory
jurisdiction. Many professionals play a role within the securities
industry, among the most important of which are accountants,
broker-dealers, investment advisers, and investment companies. Any
improper or unethical conduct on the part of these professionals is of
great concern to the SEC, whose primary responsibility is to protect
investor interests and maintain the integrity of the securities market.
The SEC can censure, suspend, or bar professionals who practice
within its regulatory domain for lack of requisite qualifications or
unethical and improper conduct. The SEC also oversees self-
regulatory organizations (SROs), which include stock exchanges, the
National Association of Security Dealers (NASD), the Municipal
Securities Rulemaking Board (MSRB), clearing agencies, transfer
agents, and securities information processors. An SRO is a
membership organization that makes and enforces rules for its
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SEMINAR REPORT - 68 -ETHICS IN FINANCE
members based on the federal securities laws. The SEC has the
responsibility of reviewing and approving the rules made by SROs.
Other rule-making agencies include the Federal Reserve System, the
Federal Deposit Insurance Corporation (FDIC), and state finance
authorities. Congress has entrusted to the Federal Reserve Board the
responsibility of implementing laws pertaining to a wide range of
banking and financial activities, a task that it carries out through its
regulations. One such regulation has to do with unfair or deceptive
acts or practices. The FDIC has its own rules and regulations for the
banking industry, and it also draws its power to regulate from various
banking laws passed by Congress.
In addition to federal and state regulatory agencies, various
professional associations set their own rules of good conduct for their
members. The American Institute of Certified Public Accountants
(AICPA), the American Institute of Certified Planners (AICP), the
Investment Company Institute (ICI), the American Society of
Chartered Life Underwriters (ASCLU), the Institute of Chartered
Financial Analysts (ICFA), the National Association of Bank Loan and
Credit Officers (also known as Robert Morris Associates), and the
Association for Investment Management and Research (AIMR) are
some of the professional associations that have well-publicized codes
of ethics.
There has been an effort to address the ethical problems in business
and finance by reexamining the conceptual foundation of the modern
capitalist system and changing it to one that is consistent with the
traditional model of agency relationship. The proponents of a
paradigm shift question the rational-maximizer assumption that
underlies the modern financial-economic theory and reject the idea
that all human actions are motivated by self-interest. They embrace
an alternative assumption—that human beings are to some degree
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SEMINAR REPORT - 69 -ETHICS IN FINANCE
ethical and altruistic—and emphasize the role of the traditional
principal-agent relationship based on honesty, loyalty, and trust.
Duska (1992) argues: "Clearly, there is an extent to which [Adam]
Smith and the economists are right. Human beings are self-interested
and will not always look out for the interest of others. But there are
times they will set aside their interests to act on behalf of others.
Agency situations were presumably set up to guarantee those times."
The idea that human beings can be honest and altruistic is an
empirically valid assumption; it is not hard to find examples of
honesty and altruism in both private and public dealings. There is no
reason this idea should not be embraced and nurtured.
As Bowie (1991) points out: "Looking out for oneself is a natural,
powerful motive that needs little, if any, social reinforcement. . . .
Altruistic motives, even if they too are natural, are not as powerful:
they need to be socially reinforced and nurtured".
If the financial-economic theory accepts the fact that behavioral
motivations other than that of wealth maximization are both realistic
and desirable, then the agency problem that economists try to deal
with will be a nonproblem. For Dobson (1993), the true role of ethics
in finance is to be found in the acceptance of "internal good" ("good"
in the sense of "right" rather than in the sense of "physical product"),
which, he adds, is what classical philosophers describe as "virtue"—
that is, the internal good toward which all human endeavor should
strive. He contends: "If the attainment of internal goods were to
become generally accepted as the ultimate objective of all human
endeavor, both personal and professional, then financial markets
would become truly ethical"
PUNJABI UNIVERSITY REGIONAL CAMPUS FOR INFORMATION TECHNOLOGY &MANAGEMENT,MOHALICREATED BY:- GIRISH KAPOOR (MBA II SEM. IV)
SEMINAR REPORT - 70 -ETHICS IN FINANCE
Anand Shetty "Ethics in Finance". Encyclopedia of Business, 2nd
ed..FindArticles.com. 23 Jan. 2009. available at:-
http://findarticles.com/p/articles/mi_gx5209/is_1999/ai_n19125703
Anand Prakash Jangid(ACA, CISA,DISA, CISM, ACP), “LESSONS TO BE
LEARNT FROM THE WORLD’S BIGGEST BANKING FRAUD – SOCIETE
GENERALE”
Bowie, Norman E. (1991). "Challenging the Egoistic Paradigm."
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Bowie, Norman E., and Freeman, Edward R., eds. (1992). Ethics and
Agency Theory: An Introduction. New York: Oxford University Press.
Boatright R. John;(2003) “Ethics and the conduct of business” 4th
Edition, Pearson education. Pg. 339 to 368
DeGeorge, Richard T. (1992) "Agency Theory and the Ethics of
Agency." In Norman E. Bowie and Edward R. Freeman, eds. Ethics and
Agency Theory: An Introduction. New York: Oxford University Press.
Dempsey, Mike. (1999). "An Agenda for Window-Dressing or for
Radical Change?"
http://panopticon.csustan.edu/cpa99/html/dempsy.html.
Dobson, John. (1993). "The Role of Ethics in Finance." Financial
Analysis Journal. November-December: 57-61.
Dobson John; H.Alford; Rowman & Littlefield,” Finance Ethics: the
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8476-8401-6 (cloth) 0-8402-4 (paper) available at
PUNJABI UNIVERSITY REGIONAL CAMPUS FOR INFORMATION TECHNOLOGY &MANAGEMENT,MOHALICREATED BY:- GIRISH KAPOOR (MBA II SEM. IV)
SEMINAR REPORT - 71 -ETHICS IN FINANCE
http://www.pust.edu/oikonomia/pages/genn/recensione.html
Duska, Ronald R. (1992). "Why Be a Loyal Agent? A Systematic
Ethical Analysis." In Ethics and Agency Theory: An Introduction.
Norman E. Bowie and Edward R. Freeman, eds., New York: Oxford
University Press.
Frowen, S.F. and McHugh, F.P., eds. (1995). ed. Financial Decision-
Making and Moral Responsibility. New York: Macmillan.
Goodpaster, Kenneth E. (1991). "Business Ethics and Stake-holder
Analysis." Business Ethics Quarterly. 1. 53-71.
Hartman P. Laura;(2004) ” Perspectives in business ethics”; Second
Edition; the Tata Mcgrawhill Companies; pg no. 582 to 645.
Nadler, Paul S. (1989). "Ethics and the Financial Community." Secured
Lender. January-February.
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ncial-services.html
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SEMINAR REPORT - 72 -ETHICS IN FINANCE
http://www.pressreleasepoint.com/zurich-financial-services-
converium-holding-ag-settle-reinsurance-fraud-charges
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