ethics in finance

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ETHICS IN FINANCEPresented by Group 1

Allen Joy |Roshini Jose |Sayith G |Shari Menon

Shinu Nazim |Sujith Kumar


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Introduction

Finance would be impossible without ethics.

Finance covers broad range of activities butthe two most visible aspects are financialmarkets and financial services.

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Why is it important to worry aboutethics in finance? When you think about it, you realize that you put

your hard earned savings in the care of financialfirms-asset mangers, bank, insurance and all kind offunds and you trust them to look after the money.

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

You need to feel confident that you can find trust thefinance Professional to act with integrity, in yourinterest.

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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 toenable clients to grow and protect their wealth .Thismeans trillons of dollars od assets are involved.

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

Ethics in financial services industry affect everyone evenconsumers.If you are not a financial servicesprofessional,you are a consumers of financial services.

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Examples of unethical in finance

Make exaggerated claims to counter exaggeratedclaims of a competitor.

Offer a customer an unauthorized gift in return for

their business.

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

Put non-business relatd expenses on your expenseaccount.

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Common Reason for unethicalBehavior

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 sellingfinancial 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 aresult of holding a false belief that is created bysome claim made by another.

That claim may be either false or misleadingstatement or a statement that is incomplete insome crucial way.

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Churning

It is defined as excessive or inappropriatetrading for a clients account by a broker whohas who has control over the account with theintent to generate commissions rather than to

benefit the client.

It can be defined as Excessive Trading.

It is indicated by a pattern of trading thatconsistent favors trades that yield highercommissions.

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Suitability

The legal requirement than an investmentadviser, broker, or other party act in a way mostlikely to fit a client's investment goals .

Causes for unsuitability1. Unsuitable types of securities2. Unsuitable grades of securities

3. Unsuitable diversification4. Unsuitable trading techniques5. Unsuitable liquidity

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Different forms of unethicalpractices 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 incomefluctuations from one period to the next.

Companies indulge in this practice because investors are

generally willing to pay a premium for stocks with steadyand predictable earnings streams, compared with stockswhose earnings are subject to wild fluctuations.

The term income smoothing is more likely associated

with the manipulation of earnings, creative accountingand the aggressive interpretation and application ofgenerally accepted accounting principles.

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Tax Shelters

Tax shelters are any method of reducingtaxable income resulting in a reduction ofthe payments to tax collecting entities,

including state and federal governments.

The methodology can vary depending onlocal and international tax laws.

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Slush Fund

An account in which a business,government, or individual in either of thosehides money for later use.

Businesses sometimes hide profits for agiven quarter in a slush fund to make laterprofits look more robust, or even to hidelater 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 materialfact that is relied upon by another party.

Financial fraud also takes place when bribes orkickbacks are accepted in order to manipulate abusiness decision.

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

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Fraud in financial statement can be committed in5 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 throughmany methods

"Get-Rich-Quick" schemes

-Plans which offers high or unrealistic rates ofreturn for a small amount of investment while at the sametime promising that such investment is easy and risk-free.

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

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Financial Manipulation

The attempt or act to artificially change the price ofa security or a market movement with the intent to makea profit.

Manipulation can be used to both increase and decreaseprices, 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 36countries across EMEIA highlights that one in fiverespondents are aware of financial manipulation in their

own company in the last 12 months

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

57% believe bribery and corruption are widespread in theircountry

When money speaks the truth remains silent

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Who is Insider???

Insider is defined under the SEBI prohibition ofInsider Trading regulation 2 (e) Insider is theperson who is connected with the company ,who could have the Unpublished price sensitive

information or receive the information fromsomebody in the company .

For the purpose this definition, wordsconnected person shall any person who is aconnected person six months prior to an act ofinsider trading

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Insider Trading

Insider trading essentially denotes dealing ina companys securities on the basis ofconfidential information relating to the

company which is not published or notknown to the public used to make profit orloss. It is fairly a breach of fiduciary duties of

officers of a company or connectedpersons as defined under the SEBIregulations,1992, towards the shareholders.

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Insider Trading

This information has not been disclosed to other marketparticipants

Two aspect of the problem:

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

2. The other is the use of insider information bysomeone within a firm advantage over those not inthe 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 onexchange that does not give shareholderstheir rights.

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Insider terms actually includes both legal andillegal conduct.

The legal version is when corporate insiderofficer, directors , and employees buy and sellstock in their own companies. when corporateinsiders trade in their own securities , they must

report their trades to SEBI.

Illegal insider trading refers generally to buyingor selling a security , in breach of fiduciary duty

or other relationship of trust and confidence,while in possession of material , non publicinformation about the security.

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RAJAT GUPTA SCAM

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Fair reporting of financialstatements 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 wellas other possible statements.

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

Understanding financial statements is essential to thesuccess of a small business.

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Understanding financial statements is essentialto the success of a small business.

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

It is a standard practice for businesses topresent financial statements that adhere togenerally accepted accounting principles(GAAP).

It is to maintain continuity of information andpresentation.

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Financial statements are often audited bygovernment 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 forbusinesses

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True and fair view in auditing means that thefinancial statements are free from materialmisstatements and faithfully represent the

financial performance and position of theentity.

True suggests that the financial statements arefactually correct and have been preparedaccording to applicable reporting framework.

Misstatements may result from material errorsor omissions of transactions & balances in thefinancial statements.

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Fair implies that the financial statementspresent the information faithfully without anyelement of bias .

Preparation of true and fair financialstatements has been expressly recognized asone of the responsibilities of the directors of

companies in the corporate law of severalcountries.

Auditors must therefore consider whether

directors have fulfilled their responsibility forthe preparation of true and fair financialstatements 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 (oran 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 andother explanatory notes.

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THANK U

ethics in finance

Documents

introduction finance

financial services industry

financial sector

financial institutions

financial servicesprofessional

clients account

toenable clients

gettheir business