Ethical issues in Finance

Importance of Financial Statement Steps to be taken by the management for true, fair and reliable management accounts: y y y Determining the key elements of the business like the objectives and see how they are defined and measured Making sure that the funds are allocated to different activities on the basis of their importance Frame rules that have a positive effect on business activities

Ethical issues in Accounting

Ethics are crucial in accounting. Providers of accounting information often face ethical choices as they prepare nancial reports. Their choices can affect both the use and receipt of money, including taxes owed and money shared with owners. Accounting information can affect the price that a buyer pays and the wages paid to workers. It can even affect the success of products, services, and divisions. Misleading information can lead to a wrongful closing of a division, causing workers, customers, and suppliers to be seriously harmed. Because of the importance of accounting ethics, codes of ethics for accountants are set up and enforced. These codes include those of the Provincial Certied General Accountants Associations, the Provincial Societies of Management Accountants, and the Provincial Institutes of Chartered Accountants. These codes can be of help when one confronts ethical dilemmas. Ethics codes are also useful when one is dealing with condential information. For example, auditors have access to condential salaries and an organizations strategies. Organizations can be harmed if auditors pass this information to others. To prevent this, auditors ethics codes require them to keep information condential. Internal accountants are also not to use condential information for personal gain. y y y Provides fair and accurate reporting of the financial position of a business Ethical issues: Reporting income, falsifying documents, allowing or taking questionable deductions, illegally evading income taxes, engaging in frauds etc.

Fraud in financial statement can be committed in five ways:

y y y y y Fictitious revenue-revenues not actually earned Fraudulent Timing differences Concealed liabilities and expenses Fraudulent disclosures or Omissions Fraudulent asset valuation-false statement of the inventory available

Accountants in professional practice: Provides 2 types of accounting service

1. The auditor
y y Appointed by shareholders to to audit a particular company Duties include: to give an accurate statement about the state of affairs to meet the objectives of the Companies Act to be reasonably skillful and careful in identifying the true nature of accounts

Accountants in related services Offer services in different fields like:

y y y y Tax services Management consultancies Insolvency services Environmental audits

Understating Liability Frauds

y y y y y y Not recording accounts payable Not recording accrued liabilities Recording unearned revenues as earned Not recording warranty or service liabilities Not recording loans or keep liabilities off the books Not recording contingent liabilities

Asset Overstatement Frauds

y y y y y y Overstatement of current assets (e.g. marketable securities) Overstating pension assets Capitalizing as assets amounts that should be expensed Failing to record depreciation/amortization expense Overstating assets through mergers and acquisitions Overstating inventory and receivables (covered earlier)

The Ethical Audit Main purpose- check the actions of a firm Objectives
y y y y y y Assess the business structure and procedures, systems and policies Whether business activities comply with the standards To identify the way in which it does business Evaluate whether mgmt has relevant information in running the business. To help business. undergo major alterations like restructuring To identify the training necessary for the employees

y y y

Establishing ethical conduct of business to attract valuable investments Establish code of conduct Helps the shareholders to evaluate the performance of the directors and vice versa

ETHICAL ISSUES IN MERGERS AND ACQUISITIONS:

Mergers and acquisitions involve a wide array of ethical questions, some of which relate to the degree of "fit" between the value systems of the merging firms. A mismatch can sometimes lead to serious problems, such as when one firm invests heavily in employees and the other focuses mainly on shareholders or customers. A secondary category of ethical issues involves questions arising from the actual M&A; transaction. Some really vexing issues surface in the course of these deals. Management must decide, e.g., when to disclose plans for the merger, what restrictions to place on insider use of information, what counts as fair and proper accounting and taxation, and how to treat employees who may lose their jobs. In cross border M&As, these issues can be particularly difficult because of cultural and legal differences. For example, the legal definition of 'redundant employees' varies widely as do requirements for severance arrangements. In the face of such differences, managers of the merging companies have to wrestle with what is fair to the different sets of employees and what will help build a cohesive organization with a single set of ethical standards going forward. Host governments may present additional challenges and opportunities in the international context. Managers of firms that enter foreign countries through their M&A strategies need to be aware of these issues. Governments tend to protect their national interests when dealing with foreign-owned firms. E.g. in the United States an airline cannot have more than 25% foreign ownership. Governments may have currency laws that prevent a foreign-owned firm from taking money out of the country. Labor laws may be different from those in a firms domestic market. Such differences may be rooted in culture and tradition that may prove to be difficult to recognize and/or understand.

An ethical analysis of the Enron case:

The Enron scandal is one that left a deep and ugly scar on the face of modern business. As a result of the scandal, thousands of people lost their jobs, some people lost their entire pensions, and all of the shareholders lost the money that they had invested in the corporation after it went bankrupt. I believe that Kenneth Lay, former Enron CEO, and Jeffrey Skilling behaved in an unethical manner without any form of justification, but the whistleblower, former Enron vice president Sherron Watkins, acted in a way that upheld moral principles. I can understand Jeffrey Skilling motivation, since money and greed are very powerful forces, occasionally driving even the most honest individuals to commit horrible acts. I might understand a destitute individual committing a dishonest act in order to feed themselves or their children, but Jeffrey Skilling was by no means destitute and had no just cause to even consider deceptive accounting. Personally, I am constantly faced with situations where it is possible for me to be dishonest and steal expensive items from the company I work for, but I choose not to since these things are needed by the company and are owned by the

shareholders. I believe that I have no right to steal anything since I am living very comfortably, with respect to most humans, and I am satisfied with my economic position. If Jeffrey Skilling had looked at the Enron situation from a perspective similar to mine, he probably would not have seen any reason to do what he did. Sherron Watkins actions, in my opinion, were perfectly orchestrated in a very ethical manner. She noticed something suspicious about the accounting, so she took a closer look and didnt just ignore the problem. When she realized the depth of the situation, she reported it to the people that could do something about it in the organization, even reaching the top man, Kenneth Lay. When the company refused to correct the situation, she went to the media, which forced the problem to be fixed by causing shareholders to dump their investments in Enron. In her memo written to Kenneth Lay, she expressed concerns that her 8 years with Enron would not be worth anything after the scandal, but she went ahead anyways despite these fears about her future employment.

Sure, people lost their jobs and pensions when the news came out, but that was not the fault of the whistleblower. It was the fault of those who forced her to take the story outside of the company. It was Jeffrey Skilling fault in the first place that the unethical accounting was being done, but the company could easily have fixed the problem internally without going bankrupt. If Kenneth Lay had actually done something about the problem, share values might have gone down after the corrected financials came out, but the company would probably have survived. I have seen companies in far worse situations reverse their fortunes by replacing management and making their processes more efficient. I think that whistle blowing is a very courageous and selfless act, since it exposes the person to economic, personal, and sometimes physical attacks. I am reminded of the story of Jeffrey Wygand, a tobacco company scientist, who blew the whistle by declaring that tobacco company executives knew about the dangers of smoking and considered cigarettes delivery devices, but did not care about the health problems caused by smoking. After blowing the whistle, he was threatened by his company, fired, and followed by unknown people for quite some time afterwards. I have never blown the whistle personally, but I can easily see how dangerous it would be, given the vulnerable situation that it places the person in. Although I think that Jeffrey Skilling should be given the most blame for the corruption at Enron, that does not mean that Kenneth Lay is not deserving of some blame for what happened. He was the lead figure at the corporation and he should have been watching the accounting to make sure that no illegal actions were being taken by the employees. Sure, he might not have had an accounting background, but he could have hired independent consultants to look at the financials and make sure that nothing unethical was being done. I might have been able to give him the benefit of the doubt if the corruption was very far down the chain, but accounting is very closely related to upper management (in most businesses) and Skilling seemed to be someone that Kenneth met with frequently.

As the leader of a publicly-held corporation, a CEOs foremost duties are to produce a profit for shareholders, a responsibility which Kenneth Lay might have followed in the short term, but not in the long term. Sure, some shareholders might have made a return on their investment if they sold their stock before the collapse, but all of the long term investors who were loyal to the company ended up being punished for that loyalty. Kenneth Lay betrayed the shareholders through deception and lack of foresight into the consequences of Enrons accounting practices. A CEO is also supposed to care for the people who work for him by giving them job security and benefits, but Kenneth Lay ultimately failed in this area as well since his inaction ended up costing most of them their jobs and pension funds invested in company stock. The actions of Kenneth Lay seem to be those of a manager who doesnt care about what his sub-managers are doing as long as the machine is running smoothly and profits are rolling in. When the whistleblower informed him of the suspicious activities of his underlings, he decided not to do anything about the situation. Instead, he forced the whistleblower to go outside the company and caused the resultant financial collapse of Enron. I think that a manager needs to at least question the actions of people under them in order to ensure that a company or organization is behaving in an ethical manner. A manager who does not manage often becomes a mere puppet, providing a clean fade for a possibly corrupt and evil organization. I think that if Kenneth Lay and Jeffrey Skilling had applied the Kantian concept of reversibility, and asked them how they would feel if their employer betrayed them and caused them to lose their life savings, they would have acted differently. I believe reversibility is one of the best ways to evaluate the ethicality of decisions since it forces a person to think about what the other person feels like. Part of their punishment should be to spend time with the victims of their actions to see the effects that the Enron collapse has had on them. It is also interesting that Kenneth Lay grew up in poverty, but he was willing to throw away all of his progress just to make some extra money. Since he came from a humble background, I would think that he would have been able to better empathize for the common man and the lesser-paid employees of Enron. However, it appears that his success excessively inflated his ego, causing him to turn down President Bushs offer to make him secretary of commerce. In conclusion, I find that the actions of Kenneth Lay and Jeffrey Skilling were clearly unethical and not justified by need. The whistleblowers actions, on the other hand, were very ethical and represented the selfless things that human beings are capable of doing. It is very unfortunate that the Enron situation occurred at all, but it is fortunate that it was exposed in a somewhat timely manner and the people responsible are being brought to justice.