Ethical and Unethical behaviour taking place in Finance

The Importance of Ethics in Finance

Whether your company hires an outside financial manager or manages its finances in house, ethical considerations are both necessary and expedient. Finance is the process of managing money and maintaining a set of books that provides insights on how your company earns and spends its cash. Attending to this process with honesty and integrity allows you to present your financial situation accurately, both internally and externally.

Your financial reports represent your profit and loss, net worth and cash flow situation. When you use them to understand and improve operations, it is an ethical imperative to present this information in ways that are clear and honest. Whether you are assessing efficiency and profitability or evaluating whether it makes sense to invest in future growth, approaching these documents with a sound moral compass helps you to provide the people who review them with the information they need to make the best possible decisions.

Business partners and stakeholders have a right to know whether your business is earning or losing money and whether they are making investments in an organization with a firm or shaky foundation. Showing a crooked set of books may help you to secure financing that will be convenient and expedient but may be in neither your best interest nor the lender's if your business model is not sound enough for you to repay what you borrow.

Ethical practices in Finance

1. Profit, but Not at Any Cost

A modern, capitalist economy has at its very foundation the principle of profit. Without a surplus, or profit, the economy doesn’t work. As such, financial services professionals are obliged to pursue a profit as the result of their activities. However, a modern economy only works if that profit is earned within a framework of rules and regulations that apply and are adhered to by everyone. Financial services are obliged to pursue profit maximization within the applicable framework and not by seeking an advantage by conducting activities that could be considered outside of that framework. Like sprinters competing in the 100 meters, the conditions should be the same for all competitors and the race conducted in an ‘honourable’ fashion.

2. The Client’s Interests First

Financial Services is a wide sector and the ‘client’ may take many shapes and forms. At the highest level, in the case of a country’s central bank, the ‘client’ would be at one step removed the ‘Government’, and ultimately the population of the country.  At another level further down the ladder, the ‘client’ would be the investors in a fund or the private investor whose money a CFA® charterholder manages. Whoever the ‘client’ might be, an ethical approach to Financial Services will always put the client’s interests first. A doctor is paid but receives that payment on the understanding that their primary responsibility is to look after the health of their patients, not their own financial wellbeing. A doctor whose work routinely meant that the health of their patients suffered, would not receive their salary for long. In the same way, Financial Services should see their own income as reward for improving the financial health of their clients. There is nothing wrong with a fund or its manager making money, but their profit should not come at the expense of their clients. A truly ethical Financial Services industry would not see a small profit eaten up by fees, leaving the client with far less gain, or even a loss, while the financial services professionals and company supposedly working for that client make a tidy profit.

3. A Commitment to Excellence

An ethical approach to financial services would see professionals and the organizations that they represent constantly striving to do the best job they possibly can under the circumstances. This means avoiding a mentality of doing ‘enough’, and stopping there. Commitment to both excellent results and technical accuracy in each step of the processes leading to that result is required.

4. Ethics Prioritized Over Client Instruction

Of course, unethical behavior in Financial Services can also be provoked by clients themselves. Whether it be through strong encouragement to help them minimize tax within the gray areas of international tax law, or any other activity that could be interpreted as giving them an unfair advantage, it is far from uncommon for financial services professionals to be put under pressure by their clients to conduct activities they may not consider ethical. Financial Services run ethically will prioritize ethical conduct even when by doing so they may decline to undertake activities expressly requested by the client, even at the risk of losing that client’s business.

5. Legal is Not Always Ethical

While legal and regulatory frameworks are, in theory, in place to govern ethical practice in Financial Services, there may be many instances where a particular course of action may be considered unethical despite not directly contravening laws or regulations. The legal framework governing Financial Services is not perfect and finding loopholes or other means to circumvent it is common. In fact, many areas of Financial Services specialize in doing just that. However, ethical Financial Services means choosing not to act in a certain way, or perform certain activities, despite the fact that doing so may not technically mean breaking any laws. Choosing not to exploit technicalities that may mean an activity is legal because it is considered unethical is the mark of a truly ethical approach.

Unethical practices in Finance

i. Deliberate abnormal delays in payments to (a) Vendors, (b) Dealers commissions and promotion costs.

ii. Delays in paying wages, interest to financiers, incentive, bonus to employees.

iii. Holding up bills of vendors on silly reasons and ultimately buying from others to avoid payment to earlier vendors.

iv. Not prompt in statutory payments of ESI, PF, Sales Tax and Excise Duties.

v. Cheating employees of their dues towards medical expenses, leave travel assistance, children education fees etc.,

vi. Opening of current accounts in different banks to avoid adjustments against loans by earlier banker.

vii. Creating bogus bills of purchase to show higher costs and hence losses to avoid bonus payment to employees.

viii. Collecting loans from private financiers at higher rate of interest to help kith and kin and to get kick-backs.

ix. Quick release of payments to known or adjustment parties and delaying payment to others.

x. Taking private finance only from those who are ready to do personal favours to the finance department head.

Unethical Practices in Investment Decisions:

(1) Long Term Financing:

i. Issue of equity shares,

ii. issue of irredeemable debentures

iii. Retained earnings

iv. Financial assistance from special financing institutions.

(2) Medium Term Financing:

i. Issue of redeemable debentures,

ii. Issue of preference shares,

iii. Public deposits,

iv. Medium Term loans,

v. Financial assistance from special financing institutions

(3) Short Term Financing:

i. Trade credit,

ii. Bank credit and

iii. Advances from dealers and customers.