Ethical aspects of financial Management

Last updated on 16/07/2020 2 By indiafreenotes

Financial managers must have the skills to handle large sums of other peoples’ money, but skill alone isn’t enough. The potential for financial managers to line their own pockets or ruin a client or company through bad judgment is immense. It’s essential to have a code of ethics in finance and to live up to those principles every day.

Financial managers shouldn’t see the code as setting a limit on ethical behavior: Tick off all the boxes, and you’re good. Having ethics in finance means doing the right thing, even in situations that aren’t covered on the list. If in doubt, find someone with the standing to give you ethical guidance.

Conflicts of Interest

Underlying the role of ethics in financial management is a fiduciary duty. Managers must act in the interests of their clients and employers, not their own. If there’s a conflict of interest where you can enrich yourself while harming a client, you must side with the client.

Bernie Madoff, for example, served as both a broker for his clients and a custodian for their money. With both roles combined, there was no independent auditing of his operations, which made it easier to defraud his clients of millions.

That’s why establishing internal controls is essential. When the risk of exposure is high, it’s less tempting to steal.

Security and Information

In the networked 21st century, ethical conduct includes how you handle and secure information. The security breach at the Equifax credit bureau, for example, may have affected confidential credit and personal data belonging to 143 million Americans. Strategic CFO magazine suggests that a proper code of ethics could have led to better protection for people’s data and more transparency after the breach occurred.

Reputation and Ethics in Finance

Another role of ethics in financial management is to guard your and your employer’s reputation. If you act ethically, you’re in the clear. However, cross the lines, and you can destroy your company’s good name as well as your own.

Some regulators and lawmakers assumed the risk of scandal and loss of reputation were sufficient to discourage financial managers from acting unethically. Repeated financial mismanagement cases in the 21st century have shown that the largest finance companies can sail through a scandal with no loss of business.

Some industry analysts say tighter regulation is necessary because ethics in finance can’t withstand temptation.

Ethics in Finance vs. Rewards

One problem with living up to a code of ethics in finance is that the system sometimes rewards unethical behavior. If an organization rewards financial manager for making decisions that benefit the company, not the clients, some financial managers will stumble.

Wells Fargo, for example, wound up in trouble when it turned out employees had opened accounts without customers’ permission to meet sales targets. In the banking industry, misselling to customers is a serious breach of ethics. If the rewards system prioritizes targets over ethics, it’s too tempting for some to pass up.

Transparency

Financial documents reflect a company’s performance relative to its peers, and its internal strengths and weaknesses. Regulatory agencies require publicly traded companies to submit periodic financial statements and make full disclosures of material information. A change in the senior executive ranks, buyout offers, loss or win of a major contract and new product launches are examples of material information. Transparency also means explaining financial information clearly, especially for those who aren’t familiar with the company’s operations. Financial managers should not hide, obscure or otherwise render relevant financial information impossible for ordinary shareholders to understand.

Ethical violations

The most frequently occurring ethical violations in finance relate to insider trading, stakeholder interest versus stockholder interest, investment management, and campaign financing. Businesses 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, mis-pricing 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 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 non-public information. The law applies to both the insiders, who have access to nonpublic information, and the people with whom they share such information.