ETHICS IN FINANCE

Presented by Group 1
Allen Joy | Roshini Jose | Sayith G | Shari Menon
Shinu Nazim | Sujith Kumar
Introduction
Finance would be impossible without ethics.

Finance covers broad range of activities but
the two most visible aspects are financial
markets and financial services.

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Why is it important to worry about
ethics in finance?
When you think about it, you realize that you put
your hard earned savings in the care of financial
firms-asset mangers, bank, insurance and all kind of
funds and you trust them to look after the money.

You want the best return, but there is a balance
between risk and reward.

You need to feel confident that you can find trust the
finance Professional to act with integrity, in your
interest.

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Financial sector in India
REGULATORS
RBI, SEBI, FMC, IRDA, HLCC
MARKETS
Commodities, equities, debts, foreign exchange
PLAYERS
Brokers, firms, Banks, Financial institutions, FII,
mutual fund, managers, investors, registrars.

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Ethics in Financial Services
Financial services professionals job and mission is to
enable clients to grow and protect their wealth .This
means trillons of dollars od assets are involved.

The Financial services industry is also highly regulated.
Regulation minimizes fraud, theft and misuse. Ethics
purifies the industry. Ethics sets the standard od
excellence for professionals in financial services.

Ethics in financial services industry affect everyone even
consumers.If you are not a financial services
professional,you are a consumers of financial services.
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Examples of unethical in finance
Make exaggerated claims to counter exaggerated
claims of a competitor.

Offer a customer an unauthorized gift in return for
their business.

Conceal information from a customer in order to get
their business and to meet you sales effect.

Put non-business relatd expenses on your expense
account.
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Common Reason for unethical
Behavior

Everybody else is doing it

Its not that big of a deal

Its necessary

Nobody will know

Its for the benefit of the company or somebody else.
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Objectionable practices in selling
financial products to clients

Deception

Churning

Suitability

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Deception
It is often a matter of interpretation.

In general, a person is deceived when that
person is unable to make a rational choice as a
result of holding a false belief that is created by
some claim made by another.

That claim may be either false or misleading
statement or a statement that is incomplete in
some crucial way.
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Churning
It is defined as excessive or inappropriate
trading for a clients account by a broker who
has who has control over the account with the
intent to generate commissions rather than to
benefit the client.

It can be defined as Excessive Trading.

It is indicated by a pattern of trading that
consistent favors trades that yield higher
commissions.
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Suitability
The legal requirement than an investment
adviser, broker, or other party act in a way most
likely to fit a client's investment goals .

Causes for unsuitability
1. Unsuitable types of securities
2. Unsuitable grades of securities
3. Unsuitable diversification
4. Unsuitable trading techniques
5. Unsuitable liquidity
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Different forms of unethical
practices in finance


Fraud or Deception
Misappropriation of Funds
Income Smoothing
Stock Manipulation
Tax Shelter
Slush Funds
Book Adjustments
Conflict of Interest
Insider Trading
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Income Smoothing
The use of accounting techniques to level out net income
fluctuations from one period to the next.

Companies indulge in this practice because investors are
generally willing to pay a premium for stocks with steady
and predictable earnings streams, compared with stocks
whose earnings are subject to wild fluctuations.

The term income smoothing is more likely associated
with the manipulation of earnings, creative accounting
and the aggressive interpretation and application of
generally accepted accounting principles.
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Tax Shelters
Tax shelters are any method of reducing
taxable income resulting in a reduction of
the payments to tax collecting entities,
including state and federal governments.

The methodology can vary depending on
local and international tax laws.
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Slush Fund
An account in which a business,
government, or individual in either of those
hides money for later use.

Businesses sometimes hide profits for a
given quarter in a slush fund to make later
profits look more robust, or even to hide
later losses.
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SATYAM SCAM
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Financial Fraud
Any attempt to deceive another for financial gain.

Fraud consists of a misrepresentation of a material
fact that is relied upon by another party.

Financial fraud also takes place when bribes or
kickbacks are accepted in order to manipulate a
business decision.

Falsifying financial statements and records would
also be considered an example of financial fraud.





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Fraud in financial statement can be committed in
5 ways:

Fictitious revenue-revenues not actually earned
Concealed liabilities and expenses
Fraudulent disclosures or Omissions
Fraudulent asset valuation
Changes in accounting principles








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Fraudsters can contact their potential victims through
many methods

"Get-Rich-Quick" schemes
-Plans which offers high or unrealistic rates of
return for a small amount of investment while at the same
time promising that such investment is easy and risk-free.

Depending on the nature of the financial fraud, a
corporation may choose to pursue legal action to recover
the lost assets, or handle the situation internally.

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Financial Manipulation
The attempt or act to artificially change the price of
a security or a market movement with the intent to make
a profit.

Manipulation can be used to both increase and decrease
prices, depending on the investor's perceived needs.

One example is wash selling.

Manipulation is illegal under the Securities Exchange Act.

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Ernst & Youngs survey of over 3,000 employees in 36
countries across EMEIA highlights that one in five
respondents are aware of financial manipulation in their
own company in the last 12 months

42% of board directors and senior managers are aware of
irregular financial reporting in their company

57% believe bribery and corruption are widespread in their
country


When money speaks, the truth remains silent
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Who is Insider???
Insider is defined under the SEBI prohibition of
Insider Trading regulation 2 (e) Insider is the
person who is connected with the company ,
who could have the Unpublished price sensitive
information or receive the information from
somebody in the company .

For the purpose this definition, words
connected person shall any person who is a
connected person six months prior to an act of
insider trading
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Insider Trading
Insider trading essentially denotes dealing in
a companys securities on the basis of
confidential information relating to the
company which is not published or not
known to the public used to make profit or
loss. It is fairly a breach of fiduciary duties of
officers of a company or connected
persons as defined under the SEBI
regulations,1992, towards the shareholders.
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Insider Trading
This information has not been disclosed to other market
participants

Two aspect of the problem:

1. One is that of some one within the firm using
information for his or her private gain, at the
expense of the firm. This is called conflict of interest

2. The other is the use of insider information by
someone within a firm advantage over those not in
the firm.



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Insider Trading
It violates equality of opportunity

Does not give a level playing field between
insiders and outsiders

Might harm exchange as a whole because
investors might not be willing to trade on
exchange that does not give shareholders
their rights.

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Insider terms actually includes both legal and
illegal conduct.

The legal version is when corporate insider
officer, directors , and employees buy and sell
stock in their own companies. when corporate
insiders trade in their own securities , they must
report their trades to SEBI.

Illegal insider trading refers generally to buying
or selling a security , in breach of fiduciary duty
or other relationship of trust and confidence,
while in possession of material , non public
information about the security.

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RAJAT GUPTA SCAM
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Fair reporting of financial
statements
Financial statements are meant to present the financial
information of the entity.

It includes income statements, balance sheet,
statements of retained earnings and cash flows, as well
as other possible statements.

Records the outline the financial activities of a business,
an individual or any other entity.

Understanding financial statements is essential to the
success of a small business.
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Understanding financial statements is essential
to the success of a small business.

Structured representation of the financial
position and financial performance of an entity.

It is a standard practice for businesses to
present financial statements that adhere to
generally accepted accounting principles
(GAAP).

It is to maintain continuity of information and
presentation.
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Financial statements are often audited by
government agencies, accountants, firms,
etc.

It is to ensure accuracy and for tax, financing
or investing purposes.

Financial statements are integral to
ensuring accurate and honest accounting for
businesses



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True and fair view in auditing means that the
financial statements are free from material
misstatements and faithfully represent the
financial performance and position of the
entity.

True suggests that the financial statements are
factually correct and have been prepared
according to applicable reporting framework.

Misstatements may result from material errors
or omissions of transactions & balances in the
financial statements.
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Fair implies that the financial statements
present the information faithfully without any
element of bias .

Preparation of true and fair financial
statements has been expressly recognized as
one of the responsibilities of the directors of
companies in the corporate law of several
countries.

Auditors must therefore consider whether
directors have fulfilled their responsibility for
the preparation of true and fair financial
statements when providing an audit option.

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A complete set of financial statements should include:

a statement of financial position (balance sheet) at the
end of the period.

a statement of comprehensive income for the period (or
an income statement).

a statement of changes in equity for the period.

a statement of cash flows for the period.

notes, comprising a summary of accounting policies and
other explanatory notes.

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THANK U