In the contemporary world of business, corporate finance tends to be considered as an essential part of a firm. This area tends to handle issues such as sourcing of funds. Besides, it also controls the actions of managers when they try to propel the firm’s value to shareholders, without having self-interest thoughts behind them. Still, corporate finance offers tools that can be used in allocating financial resources. Since such studies entail a lot of decision and risks, a lot of incentives exist that can be chosen to conduct unethical procedures.
Furthermore, the benefits and costs allocated to different parties can lead to conflicts of interest. This shows why ethics needs to be incorporated to prevent the emergence of errors. A perfect example would the unethical trait that was observed during the 2008 financial crisis, which hit almost all markets globally. Prior to the crisis occurring, awareness and knowledge on the ethical industry weren’t sufficiently known, but the results of the crisis transformed the financial sector (John, 2010). Therefore, this paper will aim at discussing some of the ethical concerns that relate to corporate finance and the strategies that can be used to handle them with ease.
Defining ethics
According to John (2010), ethics tends to be the moral principles pertained to a particular individual. Its existence is aimed at distinguishing what is wrong or right. Numerous scholars describe it as the rule of conduct which individuals don’t want to violate. Still, they help us in providing guidance pertained to behaviours that impact others. Therefore, our norms, values and morals play an essential role in one’s ethics. Hence, the failure by people to follow morals leads to unethical behaviour which could lead to reputational damage, fines or jail terms. An excellent example of an unscrupulous character would be insider fraud. Thus, to prevent such an instance from occurring firms need to ensure that their employees are honest and respectful. However, John (2010) notes that despite regulators and governments trying to combat such misconducts through regulation reforms, it’s still not sufficient to ensure corporates are entirely ethical, this explains why enterprises need to establish an ethical model and culture of integrity. Moreover, enterprises should develop principles that could be used in analyzing decisions and potential behaviour in ethical practice. More so, managers play a significant role in promoting noble traits, as they should demonstrate how it’s applied, which could inspire employees to behave ethically.
Why ethics matters in corporate finance
In corporate finance, accountants are required to have a high level of ethics considering the nature of work they perform. Besides, shareholders and individuals relying on financial statements depend on annual financial statements to acquire sufficient information that would enable effective decision making pertained to investments. Since accountants prepare financial statements, while auditors verify it to present the accurate view related to a company. Ethics knowledge tends to be vital as it helps both accountants and auditors to overcome issues arising from ethics and allows them to make the right chosen despite it benefiting the company (John, 2010).
Additionally, John (2010) notes that investors can’t just invest in anything they want, the reason being new rules have emerged on different types of stock. Prior to the 2008 financial crisis, investors were allowed to invest in stocks without money that could cover their investment. But, after the crisis occurred, they were unable to pay their debts which led to losses in banks. Hence, the reason why investments need security, and despite there being stock types that are less restricted, such as hedging they are only limited to few investors (John, 2010). Besides, there has been an establishment of institutions such as CFA that help in promoting ethical codes and professional standard conducts in the financial sector.
Unethical practices found in corporate finance
Studies by numerous scholars indicate that the conjunction associated with corporate finance and ethics tends to be oxymoronic. Such a reaction tends to be justified by several financial scandals that have been witnessed over the years whereby commercial activities were being reported highly. Also, for decades these activities were not reported according to the set standards of trust and responsibility, explaining why companies were considered unethically. Below, we will discuss some of the unethical concerns found in corporate finance, particularly in accounting and finance.
Unethical practices in Accounting
One of the primary issues ethical issue that exists in corporate finance accounting emerges from underreported incomes. According to John (2010), companies underreport income to avoid taxes which tends to be an illegal practice. Underreporting of incomes tends to be unethical since it leads to government losses in tax that could have been used in federal projects, social security or Medicare. Underreported income most occurs in public firms who are pressured to succeed at high levels placing the firm under stress when developing financial statements. Here, accountants face an ethical dilemma of trying to maintain accurate reports on a company’s profits, liabilities and assets without giving in to the pressure placed by their superiors (John, 2010). Therefore, due to the demand, some accountant may consider acting unethical and could opt to indicate false financial record providing a false image of the enterprise success.
False documentation tends to be another unethical practice found in corporate finance. According to John (2010), false documentation is changing of details that exist in the original document and trying to pass the document as real. Further, John (2010) argues that false documentation is a white-collar crime that entails changing, modification or altering of a document to deceive other people. It could also involve passing along materials that are known to be false. The typical types of documents that are falsified include; bank account records, identity cards, income statements, personal check and tax returns. Ideally, the falsification of documents in corporate finance is aimed at evading tax. Besides, John (2010) notes that such an unethical practice tends an offence that could make lead to charges or penalties.
Creative accounting is also an unethical practice that is common in corporate accounting. Statements by John (2010) indicate that accounting practices are mandated to follow the required laws and regulations. Hence, creative accounting aims at capitalizing the loopholes that are found in accounting standards and portray and better image pertained to a company. Ideally, accounting statements are aimed at allowing investors to compare the financial health of rival firms. But, when firms indulge in such unethical practices, it distorts the value of data provided in the financial statement. Besides, accountant indulges in such unethical behaviours to manage earnings and rub off debts in the balance sheet.
Unethical practices in finance
The most typical form of unethical conduct existing in finance is insider trading. This term is mostly heard by investors and is commonly associated with illegal conduct; however, the terms include both legal and illicit practices argues John (2010). Therefore, illicit insider trade entails the buying and selling of a security, which occurs in violation of fiduciary duty or other relationships entailing confidence and trust. At the same time, one possesses security material. Further, this trade violation also involves “tipping” of information associated with the security. Such a practice is considered unethical in corporate finance.
Corruption is also an unethical practice that is common in finance. John (2010) notes that in the corporate world, companies tend to induce their influence by offering money to attain a favourable deal. A perfect example would be Diageo, a beverage company located in the UK that was forced to settle charges amounting $16 million for bribing government officials in South Korea, India and Thailand to help them approve their product. Since firms are pressured to surpass the competition and to woo customers regularly with the same product, it takes a toll on an enterprise; thus, most will opt to engage in unethical practices.
Still, the issue of conflict of interest emerges which leads to unethical practices. According to John (2010), faulty systems could induce unethical behaviour; thus, only a single interest tends to have priority and issues arise whenever the other interest fails to control an employee. For instance, banks and brokers participate in the keeping of assets without destruction. Since both parties engage in payment system while providing accounting services that track balances and transactions, conflicts arise when each wants to satisfy their interest. Thus, such incidences propel level of conflict of interest which yields unethical practices.
How can the unethical practices be handled
According to John (2010), unethical behaviour by employees is common around an organization as it entails behaviours such as violation of standards, ignoring rules, company guidelines and regulation which tends to have a detrimental impact for others. Still, John (2010) cites that unethical behaviour in corporate finance fosters an environment that disrupts the organizational culture, propels conflicts and reduces employee’s performance, aspiration and commitment. Thus, the reduction of employee motivation, commitment or performance may impact the organization negatively, which explains why firms need to prevent unethical practices and enhance ethical behaviours. Therefore, to reduce the incidences of unethical practice, companies can do the following:
Use of the Sarbanes Oxley Act to ensure that the corporate firm delivers its internal controls based on the compliance objective. John (2010) notes that the existence of the Sarbanes Oxley Act ensures employers comply with the set organizational code of ethics as they meet disclosure obligations. While some CEO complain about the increased cost of regulation, there exist those that value the reminder involved in corporate governance to prevent instances whereby a financial institution fails to comply with the set regulatory acts. Therefore, sufficient implementation of the Sarbanes Oxley Act is vital in preventing unethical practices and crisis that emerge due to employee misconduct. Besides, implementation of the act allows a company to operate under a set of values that don’t place much significance profit maximization, which ensures the safety of an organization.
Employers have the right to control the behaviour of workers which should is based on the guidelines that have been set in the organization. Thus, as stated by John (2010), employers need to implement policies that are against illegal, deceptive or coercion behaviours to convey trust to their customers. Hence, managers in any organization as recommended by John (2010), should use transparency, accountability and communication on ethical practices as leadership methods aimed at reducing unethical practices in corporate finance. Besides, leaders are also considered to nudge workers into unethical practices such as lack of transparency, conflict of interest and greed, which ultimately leads to unethical conducts. Therefore, leaders are required to encourage employees toward ethical practices.
An effective method that could be used in combating unethical practices in accounting entails the implementation of GAAP. According to John (2010), the GAAP guidelines help in the preparation and standardization of financial statements such as the income statement, cash-flow statements and balance sheets. It also measures income so that a company can use data provided on financial statements in making decisions. For instance, investors, stakeholders and creditors can use the information on whether to invest or provide credit. Furthermore, GAAP is accompanied with disclosure principles that are used in determining what information should be presented on the financial states. It concerns itself with issues surrounding the measurement of disclosure activities, preparation of economic data found in financial statement and helps in preventing instances that could lead to unethical accounting practices.
According to John (2010), whenever professional obligation collides with personal interest, conflict of interest tends to emerge, which leads to unethical practice in corporate finance. Therefore, when an employee experiences conflict of interest, they are faced by ethical issues that revolve around two choices. Still, workers are pressured to choose one to prevent wrong decision making. Besides, employees also struggle to choose between diverging allegiances or points of view since organization’s failure to disclose any information on conflict of interest. Hence, the question, “how can they avoid signals that yield conflict of interest?” Well, organizations can address this issue using the code of conduct accompanied by several ethical situations that an employee might face. Furthermore, proper training of managers through provision of scenarios can help the organization to guide the employee in the right direction whenever a conflict of interest emerges. Still, despite an employee being faced by a conflict of interest, managers are mandated with the duty of encouraging employees to disclose the information. Therefore, the existence of a formal reporting policy is necessary to allow employees to have a channel that they could communicate and ask questions on the conflict of interest.
In conclusion, this paper sufficiently addresses the issue of unethical concerns that exist in corporate finance. Since unethical practices in corporate finance are considered to be a catalyst to the series of enterprise scandals that have emerged lowering credibility in the accounting profession. The above discussion effectively describes what ethics entails and why it matters. Besides, we have discussed several unethical practices that exist in accounting; namely, false documentation, creative accounting and underreported incomes, and in finance; namely, conflict of interest, insider trading and corruption. Still, we have provides strategies that could be used in combating the unethical practices which include; the implementation of Sarbanes Oxley act, setting code of conduct to help with conflict of interest, GAAP and implementation of policies that combat unethical behaviour. To sum up, we can state that the issue of ethics should be widely considered in corporate governance because of the benefits it raises.