third module mba ,business ethics and corporate governance

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UNIT III: Ethics in Indian Business Context across Functional Areas - Ethics in finance -ethics in
HRM – ethics in marketing - ethics in production. (Case Method) (6 Hrs)
( The ethical issues in finance include:- window dressing, misleading financial analysis, insider
trading, securities fraud leading to manipulation of the financial markets, bribery, kickbacks, over
billing of expenses, facilitation payments, fake reimbursements, churning, deception etc.
The ethical issues in HRM include:- Discrimination issues i.e. discrimination on the bases of age,
gender, race, religion, disabilities etc, sexual harassment, affirmative action, issues surrounding the
representation of employees and the democratization of the work place, trade unionization, issues
affecting the privacy of the employee like workplace surveillance, drug testing etc., discrimination
with whistle-blower, issues relating to the fairness of the employment contract, matters related to
occupational safety and health.
The ethical issues in marketing include:- Pricing issues like price fixing, price discrimination, price
skimming, anti-competitive practices like manipulation of supply, exclusive dealing arrangements,
tying arrangements, misleading advertisements, contents of advertisements, children and marketing,
surrogate advertising, black markets, grey markets.
The ethical issues in production include:- Flawed, addictive and intrinsically hazardous products,
greenhouse gasses, smog, environmental ethics, carbon emissions, genetically modified food, product
testing etc)
ETHICAL ISSUES IN FUNCTIONAL AREAS
Introduction
Ethical in the functional areas of any business is necessary to ensure a good rapport between the
management and the employees. In fact, all functional areas, namely marketing, finance, human
resources as well as information technology should follow a code of ethics so as to function well and
give maximum output. Only one person alone cannot achieve this. Each employee should feel
responsible and try to stand by what is right in any given situation. In other words, it should be a team
effort across all levels of the organization.
Ethical issues can arise in various functional areas of a business such as marketing,
research and development, HRM, production and finance. Ethical issues in all these functional areas
must be controlled or coordinated by the chief executive officer (CEO) of the enterprise.
A) ETHICAL ISSUES IN MARKETING & ADVERTISING
 Concept of market & marketing
Marketing is a technique that is used to attract and persuade customers. Marketing provides a way in
which a product is sold to the target audience. Marketing is a management process that identifies,
anticipates and supplies consumer requirements efficiently and effectively. The main aim of marketing
is to make customers aware of the products and services. It also focuses on attracting new customers
and keeping existing customers interested in the product.

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Marketing is very much integral to market. The word „Market‟ is derived from the Latin word
„„MARCATUS‟ meaning Merchandise, Traffic, Trade or a Place where business is conducted.
Market is a place where the buyers and sellers assemble to exchange their products for Money and
Vice Versa.
Production precedes marketing. The chances in marketing concepts over the period and broadly
classified into five phases:
1. Production Concept
2. Product Concept
3. Selling Concept
4. Marketing Concept
5. Societal Concept
1. Production Concept:
Oldest concept, where business or producers believe that customers want products at lower prices.
They do not concern for product attributes, ie: product qualities. Hence, the attention of the producer
gets focused on production. This concept may be adopted in specific situations. One, when the demand
for the product is higher than its availability. Two, when the mass production through the economies
of scale is to bring down the higher cost of production. In a nutshell, producer dictates the market
under the production concept.
2. Product Concept: Different from the production concept. If production concept seeks to win
markets via large- scale production and low unit costs: The product concept seeks to achieve the result
via product attribute. The product concept holds that consumers appreciate quality products even by
paying higher price. The marketers or producers believe that all products cannot be sold in the market.
Instead, only those products can be sold in the market which are qualitative and meet and satisfy the
consumer‟s requirements.
3. Selling Concept
As more and more markets become buyer‟s concept, the sales concept assumes increasing relevance. It
is realized that production is not as a big problem as sales is. It is sales only that converts goods and
services into money and revenue and loss/profit. Hence, selling assumes greater importance. In this
concept, the seller dictates the market or the seller is the king in the market.
4. Marketing Concept
Marketing concept is broader than selling concept in the sense that is considers the needs and wants of
consumers. In other words, selling concept considers the present growth whereas the marketing
concepts focus on future growth. It is, thus, said that marketing concept is consumer oriented with the
objective of earning profits in long run. In this concept, the consumer is the boss or king who dictates
the market.
5. Societal Concept
As extension of the marketing concept that covers the society at large in addition to the consumers.
Under this concept, marketing is not considered a business activity alone but an activity to take care of
the social needs. The societal concept of marketing thus holds that the business organization should
take into account the needs and wants of the consumers, that satisfy the consumers‟ wants and needs
and enhance the satisfaction of the consumers as well as the society as a whole.

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Paradigm Shifts in Marketing Management
In the realm of paradigm shift in marketing management, the following three changes are noteworthy:
l. The emphasis has shifted from the philosophy of “let the buyer beware (caveat Emptor) to that of
“let the seller beware (caveat venditor)”. The implication is obvious. The responsibility of sellers has
enormously increased.
2. In the case of marketing, there has been a paradigm shift from products to process
3. The focus has largely shifted from materials or goods to men and the building relationship between
the buyer and the seller.
Marketing ethics is an area of applied ethics which deals with the moral principles behind the
operation and regulation of marketing. Some areas of marketing ethics (ethics
of advertising and promotion) overlap with media ethics.
Marketing Ethics includes:
a) Honesty in all marketing transactions.
b) Responsibility for the goods sold.
c) Openness in all dealing
d) Fairness in all the deals (absence of cheating or deception at any stage) .
e) Respect for human dignity
f) Disclosure of information regarding the product
g) Selling products that are not harmful or injurious
h) Absence of unethical means to sell the product (no unethical advertisements)
i) Charging fair prices
j) Truthfulness in disclosing the quality and effect of the product being sold (no hiding of
information)
 Emerging Ethical Problems in Market Research
Market research has experienced resurgence with the widespread use of the Internet and the popularity
of social networking. It is easier than ever before for companies to connect directly with customers and
collect individual information that goes into a computer database to be matched with other pieces of
data collected during unrelated transactions.
The way a company conducts its market research these days can have serious ethical repercussions,
affecting the lives of consumers in ways that have yet to be fully understood. Further, companies can
be faced with a public backlash if their market research practices are perceived as unethical.
Ethical issues in marketing arise from the conflicts and lack of agreement on particular issues. Parties
involved in marketing transactions have a set of expectations about how the business relationships will

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take shape and how various transactions need to be conducted. Each marketing concept has its own
ethical issues.
 Unethical Practices in Marketing
 Specific issues in marketing
Market research
Market research is the collection and analysis of information about consumers, competitors and the
effectiveness of marketing programs. With market research, businesses can make decisions based on
how the responses of the market, leading to a better understanding of how the business has to adapt to
the changing market. It is used to establish which portion of the population will or does purchase a
product, based on age, gender, location, income level, and many other variables. This research allows
companies to learn more about past, current, and potential customers, including their specific likes and
dislikes.
Ethical danger points in market research include:
 Invasion of privacy
 Stereotyping.
People affected by unethical market research:
 Public
 Respondents
 Client
 Researcher
Grouping Market audience
Unethical practices in marketing can result in grouping the audience into various segments. Selective
marketing may be used to discourage the demand arising from these so-called undesirable market
segments or to disenfranchise them totally.
Examples of unethical market exclusion may include the industry attitudes towards the gay, ethnic
minority, and plus-size groups.
Ethical danger points include
 Excluding potential customers from the market: selective marketing is used to discourage demand
from undesirable market sectors or disenfranchise them altogether.
 Targeting the vulnerable (e.g. children, the elderly).
Another example is the selective marketing of health care, so that unprofitable sectors (i.e. the elderly)
will not attempt to take benefits to which they are entitled. A further example of market exclusion is
the pharmaceutical industry's exclusion of developing countries from AIDS drugs.

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1. Product:
Instances are available to believe that product development itself at times involves unethical marketing
practices, ie: Product is developed following some unethical methods or ingredients. They may be
adultered, qualitatively poor or may contain substances whose effect on health may be dangerous.
The buyers may be ignorant about the long run impact of the ingredients.
For instance, research has revealed that coke contains some carcinogenic substances. Sugar substitutes
taken by diabetic patients are more harmful than sugar itself. It is the moral duty of the marketer to
supply those products which are completely harmless, but this is not always done. The effects of the
product are not always disclosed. In many medical products, the warning signals are not given and the
impact on the children is not mentioned. As news items often disclose, chemists are in the habit of
selling expired medicines to uneducated rural people.
Example: Nestle once produced baby-food stating that it contains less sugar than apple and
more nutrients than of apple. Actually, the baby-food contained more sugar and fewer nutrients than
an apple.
Similarly KELLOG Company of Michigan produced its breakfast cereals containing quite inadequate
nutritional value in children‟s cereals.
2. Pricing
Pricing ethics
List of unethical pricing practices.
 Bid rigging
(Bid rigging is a type of fraud in which a commercial contract is promised to one party, however, for
the sake of appearance several other parties also present a bid.)
 Dumping (pricing policy)
 Predatory pricing
 Price discrimination
 Price gouging
 Price fixing
 Price skimming
 Price war
 Supra competitive pricing
 Variable pricing

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Pricing is the second most important component of marketing mix. Pricing of the product or service
should be fair to serve the purposes of both the marketer and consumer. As regards the unethical issues
involved in pricing, these relate to the following types of pricing strategies.
2.1 Deceptive Pricing is generally in the form of bait and switch pricing intending to first lure or
entice the customer into the store announcing low price of the products(s).Yet another form of baiting
is to lure the customer into the store announcing discount or rebate on some product which is actually
not available in the store and thus, leave the customer with no choice but to buy product(s) without
discount or rebate.
Eg: AUDI in USA market was accused of bait and switch tactics in 1998 for offering rebates on a
product which was phased out and was unavailable, leaving customers helpless and consider other
products.
2.2 Manipulative pricing is distinguished from deceptive pricing in that it does not involve in a
typical way any false or misleading claims. It just manipulates price to take advantage of this
consumers psychology to make sale of its goods or services.
The common examples of manipulative pricing in India are “Buy one and get one free”, “Buy two and
get one free! In fact the price has already been jacked up on the first two shirts covering the price of
the third shirt also.
BATA Pricing in India like 299.00 instead of 300.00 is an example of manipulative pricing.
Unfair Pricing
This is the technique of pricing products even lower than costs with an objective to drive the
competitors out of the market and then again raise price to the previous level.
For example, this happened even for public sector Company like the Hindustan Machine Tools (HMT)
in 1990s in the Diary Machinery Area from their Competitors to Suffer Losses
A) Price Fixing:
It is an agreement among companies in an industry to set prices of their products at certain levels.
Dealers and manufacturers often charge either too high (skimming or gouging) or too low
{predatory or penetrating) pricing. There are many methods of price fixation but manufacturers
often indulge in charging unethical prices and not just prices.
 Price skimming is a pricing strategy in which a marketer sets a relatively high initial price for
a product or service at first, and then lowers the price over time. It is a temporal version
of price discrimination.
 Price gouging is the practice of raising prices on goods and services at an unfair level during a
state of emergency. Price gouging is a pejorative term referring to when a seller spikes the
prices of goods, services or commodities to a level much higher than is considered reasonable
or fair, and is considered exploitative, potentially to an unethical extent. Usually this event
occurs after a demand or supply shock: common examples include price increases of basic
necessities after hurricanes or other natural disasters.

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 Predatory pricing is a pricing strategy in which a product or service is set at a very low price
with the intention of drive competitors out of the market or creating barriers to entry for
potential new competitors. Thus Predatory prices are charged to eliminate competition, often
unethically.
 Penetration pricing is a pricing strategy where the price of a product is initially set low to
rapidly reach a wide fraction of the market and initiate word of mouth. The strategy works on
the expectation that customers will switch to the new brand because of the lower price.
Price Fixing can be of two types: (i) Horizontal price fixing by setting prices at artificially high levels
by the competitors and (ii) Vertical price fixing by setting prices by manufacturers and retailers for
their products.
Eg: Some time back, Panasonic was accused of vertical price fixing by forcing its retailers to raise
prices by 10%. The retailers who did not agree with this were threatened by Panasonic.
Price Fixing is Akin (similar) to Carteling.
Carteling is collective price fixation by which enterprises restrain the growth of a competitive market
place.
Business associations such as those of the Gas Dealers, Airline Operators, etc. fix the bottom line
prices; no one affiliated to the association dares to violate the rule. Such a pricing is unethical because
it deprives the consumers of the benefits of a free market.
B) Price Discrimination:
Price Discrimination refers to changing different prices for the same products to different customers
depending on their ability to pay.
For example one price for locals and another price for Visitors/ Tourists.
As per the Robinson – Patman Act 1936, price discrimination is illegal. However, price discrimination
is legal also if such difference have some cost justification. For example, Cooking Gas, Petrol and
Diesel prices in India are different from place to place based on cost justification.
eg: Gas Price for Domestic and Commercial is different.
3. Packaging:
Does not often mention the safety instruction or level and no expiry date. Packaging may be done
with harmful materials like plastics.
4. Placing (Distribution):
May be often uneven but, certain products are not distributed in all the areas and an artificial scarcity
is created by the dealers to charge higher prices. Many products that are distributed in the market are

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pirated or violate the copyright act. Shoddy and adulterated goods (like medicines) are also sold by
bribing the hospital directors or purchase officers.
ANTI- COMPETITIVE PRACTICES
Anti-competitive practices are business, government or religious practices that prevent or
reduce competition in a market
There are various methods that are anti-competitive.
For example, bait and switch is a type of fraud where customers are "baited" through the
advertisements for some products or services that have a low price; however, the customers find in
reality that the advertised good is unavailable and they are "switched" towards a product that is costlier
and was not intended in the advertisements.
Another type of anti-competitive policy is planned obsolescence. It is a method of designing a
particular product having a limited useful life. It will become non-functional or out of fashion after a
certain period and thereby lets the consumer to purchase another product again.
Others are:
i) manipulation of supply
ii) exclusive dealing arrangements
iii) tying arrangements etc
 MANIPULATION OF SUPPLY:
When firms in an oligopoly industry agree to limit their production so that prices raise to levels higher
than those that would result from free competition.
– Examples:
• Market allocation conspiracies: illegal
• OPEC
– Effects:
• Higher prices
• Higher profits for the conspirators
 EXCLUSIVE DEALING ARRANGEMENTS:
When a firm sells to a retailer on condition that the retailer will not purchase any products from other
companies and/or will not sell outside of a certain geographical area.( retailer or wholesaler is obliged
by contract to only purchase from the contracted supplier.)
– Examples:
• A gasoline refinery that sells to independent gas stations on the condition they
agree to buy exclusively from the refinery
– Effect: reduced competition

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– Illegal if it substantially reduces competition
 TYING ARRANGEMENTS:
When a firm sells a buyer a certain good only on condition that the buyer agrees to purchase certain
other goods from the firm (where products that aren't naturally related must be purchased together)
A tying arrangement is an agreement between a seller and a buyer under which the seller agrees to sell
a product or service (the tying product) to the buyer only on the condition that the buyer also
purchases a different (or tied) product from the seller or the buyer agrees not to purchase the tied
product from any other seller.
– Example: Windows & Internet Explorer (IE)?
– Effect: reduced competition
– Illegal if:
1. 2 distinct products, and
2. Seller has market power for one of the products
5. Advertising (i.e.: Promotion)
 Most unethical part of marketing.
Promotion is one of the PS of marketing mix product and price has no relevance
unless the prospective buyers are made known about the product. This is done through promotion. In
marketing context, promotional activities include advertising, publicity, sales promotion, and personal
selling.
The term advertising originates from the Latin word „Adverto‟, which means to turn
round. Thus, advertising denotes employing means to draw attention of people to an object or
message. Of late, advertising has been widely criticized, because of its unethical messages,
exaggerated claims and outright false hoods. Now, even the morality and ethicality of some specific
types of advertisements bombarded in all media.
Examples of such advertisements include (not limited to) advertisements for alcohol, and tobacco
products, advertisements aimed at children, excessive use of violence in advertisement etc.
“Thumps up‟s‟ advertisement showing “bungee jumping”, influencing children to
recreate, may result in deaths of a few children is one such advertisement widely criticized and finally
banned. This is why govt. of India has adopted code of ethics in advertising to address the subtle and
unethical issues in advertising. In India, we have the advertising standards council of India (ASCI) as a
watch dog to go into issues of fair / unfair or obscene advertising in the country.
Unethical Advertising
Any advertising activity that causes harm to the society in one form or other directly or indirectly is
considered as unethical advertising.

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Misleading Advertisements/false advertising
Misleading advertisements are those advertisements that deceive or are likely to deceive anyone who
sees it. Misleading advertising may affect consumer‟s choices regarding what they buy. It‟s worth
bearing in mind that it may be an offence for a trader to advertise goods or services if it is likely to
delude and therefore cause loss, damage or injury to the consumer.
An advertisement is misleading if it creates increases or exploits a false belief about expected product
performance. The following are some examples of how advertisements can be misleading:
 The conditions of delivery of the goods or services diverge to that advertised. (Example: „free
delivery‟ actually involves a fee or charge)
 Claims made about the characteristics of goods and services consisting a fake declaration of fact.
(Example: A product weighs 800g instead of 1 Kg)
 The attributes of the advertiser, the advertiser‟s identity etc. are exhibited falsely. (Example: A
made in India labeled product actually a product which is Made in China)
 The price or manner, in which the price is calculated, is altered. (Example: Goods are not offered at
sale prices, but advertised as such)
 Advertisements can be illusory in other ways as well. For example, if the advertisement conceals
some important facts. (Example: „60% Discount on everything‟ – really only applies to certain
things)
Advertisements are also considered misleading if they create a false impression even if everything
stated in the advertisement may be literally true. Misleading advertising occurs when a claim about a
product or service is materially false or misleading, in an attempt to persuade the consumer to buy it.
Misleading advertisements usually make claims which can be generally categorized as puffery claims,
data based claims and testimonial claims. While puffery claims are made without implying scientific
bases for it, data based claims are simply that a test / study/ count or some kind of scientific effort has
been made to produce the basis for the claim. Using name, signature, photograph etc makes false
testimonial claims
A. Statutory Framework:
The objective of regulating misleading advertising(through laws) is to ensure that advertisements do
not distort the facts about the product and mislead the buyer through subtle implications, omissions,
and false statements about the quality, quantity, features or other characteristics of the product or any
service accompanying the product, e.g., repair and maintenance
Some of statutes which are responsible for regulating the misleading advertisements are:-
1. Constitution of India:-
2. Monopolies and Restrictive Trade Practices Act, 1969
3. The Consumer Protection Act, 1986
4. The Trademarks act, 1999
5. The Drugs and Magic Remedies (Objectionable Advertisements)Act, 1954
6. Securities and Exchange Board of India Regulations, 2003

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Forms of advertisement
 Press advertisements in newspapers or magazines
 Television or radio commercials
 Posters telling the public about an event or concert
 Digital advertisements on websites or mobile phones
 Websites
 Shop signs (giving information unique to a particular shop)
 Sales/direct mail letters
 Faxes of promotional material
 Catalogues
Contents or form of advertisements.
(1) Any advertisement of a hearing, meeting or examination shall state the time, place and purpose of
the same.
(2) Any advertisement of an election shall state the time and purpose of the election, and if the
election is upon a public question the advertisement shall state the substance of the question.
(3) Any advertisement for bids or of a sale shall describe what is to be bid for or sold, the time and
place of the sale or for the receipt of bids, and any special terms of the sale.
(4) Where any statute provides that, within a specified period of time after action by any governmental
agency, unit or body, members of the public or anyone interested in or affected by such action shall or
may act, and it is provided by statute that notice of such governmental action be published, the
advertisement shall state the time and place when and where action may be taken.
Surrogate Advertising
In India, even though it is legal to manufacture products like tobacco, liquor, pan masala, these
products have been banned from being advertised because these products are addictive in nature and
ultimately cause harm to the consumers. Government imposed a ban on advertisements of these
products in the media in the year 2002.
AS a reaction to the ban imposed by the Government, the liquor & tobacco majors sought other ways
of endorsing their products. Very often, in the advertisement for tobacco or alcohol a surrogate
advertisement is used that shows these products not directly but along with another product or
occasion like a big royal party or get together. As a substitute to keep their customers, they have
introduced various products as brand extension with the same brand name.
eg: McDowell‟s/ Bagpiper/ Johnny Walker Club Soda/ Playing Cards Royal Challengers – IPL Team.

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The advertisements for such new products are placed under the category of “Surrogate
Advertisement”.
Considering the evil effects of surrogate advertisements, the Governments of India has passes
legislations from time to time to prohibit the advertisement of products like tobacco, liquor etc.
1. Cigarettes and Other Tobacco Products Act,2003 ( COTPA)
2. Framework Convention on Tobacco Control (FCTC)
3. The Advertising Standards Council of India (ASCI)
4. The Cable Television Networks (regulation) Act, 1995 ( CTNA)
5. The prohibition of publication or telecast of vulgar, obscene and surrogate advertisements and remix
songs by print and electronic media bills, 2004.
Puffery advertising:
This is an advertising that makes impressive claims about one‟s product that cannot be justified. eg:
Kamilari, Musli Power
Few more unfair/unethical practices in Indian Scenario:
1. Adulteration: Adding something inferior to the product being sold is common in the case of
cereals, spices, tea leaves, edible oil, petrol etc.
2. Spurious Products: Sale of spurious product that is, selling something of no „value instead of the
real product is often found in the case of medicines and drugs or health care products.
3. False Measures
4. Sale of Duplicates: Sale of duplicates means selling goods with a mark, which is shown of superior
quality than what is actually is.
For example, goods which are locally made are sold at a higher price as imported goods.
5. Hoarding and Black Marketing:
When any essential commodity is not available in the open market and stocks are intentionally held
back by dealers, it is known as hoarding.
Black marketing is the practice of selling hoarded goods secretly at a higher price.
Black market deals with the banned, counterfeit or stolen items which are sold in the market illegally.
Black market brings a lot of disadvantages. The fake products can bring a lot of dangers with them.
For example, a fake drug can be extremely harmful for a patient. Illegal products like weapons, etc.
can be used in serious crimes.
6. Tie- in –Sales
Buyers of durable consumer goods are sometimes required to buy some other goods as a pre-condition
to sale or may be required to pay after-sales service charges for one year in advance.

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eg: TV sets are sometimes sold on the condition that buyers will make advance payment of a year‟s
service charge.
7. In genuine Sales Promotion Techniques:
Practices like offering gifts having no additional value or coupons to collect a gift on the next purchase
of some products also allures customers to buy a product. Often gifts are collected after the price of the
product on sale is increased. Dealers also announce contests or lottery among buyers of a product
without the intention of awarding any prize.
8. Misleading Advertisements:
Another practice by which consumers are deceived.
Eg: Paracetomol tablet does not have any side-effect like aspirin. But they suppressed the expert‟s
report that long time use will result in liver damage.
9. Sale of Substandard Goods
Sale of goods which do not conform to prescribed quality standards particularly for safety.
eg: Pressure cookers, stoves
10. Environmental Ethics:
Marketing ethics is related with environmental ethics. Production and packaging of some products
results in waste disposal leading to pollution.
Grey markets
The gray market (sometimes spelled as "grey market") is the collective system of unauthorized
sales channels for products.
The grey market, also referred to as the parallel market, is a market where a product
is bought and sold outside of the manufacturer's authorized trading channels. The grey market is where
the unofficial trading of a company's shares, usually before they are issued in an initial public offering
(IPO), happens.
The distribution channels involved in the grey market are legal but are not provided by the original
owner.
Gray market products may be less expensive than those bought through official distribution
channels but are sometimes inferior. The products may be counterfeit or have counterfeit parts, for
example; they may be second-hand products or contain second-hand components that are represented
as new. In some cases, gray market products are authentic but distributed illegally, perhaps to exploit
variations in costs and prices in different parts of the world.
Warranties, updates or other support are usually not available for gray market products.

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For example – an unauthorized dealer, who owns a store of a brand of watch,
would be considered as a part of grey market. On the other hand, if the same person sells fake watches
under the same brand name, then that would be included in a black market.
Comparison of grey and black markets
Black Market Grey Market
Definition
Deals with selling and buying of counterfeit,
banned or stolen goods
Grey market usually deals with the
genuine goods that are sold and bought
through the unauthorized channel of
distribution.
Characteristics
 They are clearly illegal
 Generally involves transaction outside the
boundaries of the official economy
 Often rise where demand is greater than the
supply
 Tries to avoid price control feature and taxes
 warranty
 Often takes the advantage of
difference in costing of products in
countries
 Tend to compete with the authorized
dealers
 Can often lead to black markets
 The products are usually deprived of
normal
Key words
Counterfeit, stolen or fake product and
unauthorized channel
Unauthorized source or unauthorized channel
or both
Second hand sales
Not legal Generally legal

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Children and marketing
Children are bombarded by brand messages almost from birth, including counting books for
preschoolers that use M&Ms or Cheerios, exposure to brightly coloured and appealing branded
packaging in the supermarket, movie and toy tie-ins in fast-food restaurants, product placement in
movies, advertisements on television and the Internet, and pitches from entertainment and sports stars
in a range of media. In fact, it is almost impossible to escape marketing messages. No wonder, then,
that children as young as two are starting to recognize logos and request specific brands as soon as
they begin to speak. Children are a prime target for marketers. Not only do children today have more
disposable income at younger ages, but they have significant influence over family purchases.
Advertisers have a responsibility to avoid manipulating younger children, who tend to be more gullible
than the rest of the population. One study found that a child requested a product because it was seen on
TV; the parent was more likely to buy it. Yet younger children cannot adequately process information
to evaluate advertising claims. The potential for taking advantage of children has led to propose a ban
on advertising sugar coated foods on children‟s programs. Others have suggested prohibiting all
advertising on programs watched by a significant proportion of children under the age of eight, which
is rather difficult to implement.
ETHICS IN FINANCE AND ACCOUNTING
Finance is an important element of an organization and it helps in its growth and development.
Finance plays an important role in making resources available in an organization, such as man,
machine, material, market and money. The finance manager of the firm is responsible for arranging
the finances for the firm. The finance manager can raise funds from the following two sources:
i ) internal sources ii) external sources
Finance is the lifeblood of business and with the management of finance, accounting is invariably
associated. Financial management is concerned with many related activities like investment, financial
decision-making and also decisions on dividend payments. There are, fundamentally, two objectives of
FM are:
 First, in the short-run to maximize profits and to plough back some part of this profit.
 Second, to maximize wealth or company assets
Organizations that provide financial services cannot afford to have its employees leave their morals on
the front door when they step inside. Finance usually depends on a very high level of ethics.
The simplest ethical guide for finance professionals should have three objectives:
 The first is to have higher ethical standards and a more inclusive financial system.
 The second, we should be more conscious of moral choices, but morals should not be imposed upon
people in suffocating ways.

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 The third objective is to keep thingssimple.
Ethical questions arising in finance are in relation to accounting. Accounts should present true and fair
picture of business operations. Accountant can present either an enlightening or a misleading picture
depending on how he chooses to depict it.
Ethical issues in finance relate to the following
1. Insider Trading:
- Very notorious form of financial practice.
Insider trading refers to the use of significant facts that have not yet been made public and are likely to
affect the prices of company‟s securities in the stock market. It can be done by using one‟s official
position in a company for personal gains. It is a concept where a person has privilege to obtain
company‟s internal information which he uses for his personal advantage. It may include information
relating to policies, plans and future of the company having financial implications or stock price
sensitive information. Its main motive is to gain more and more personally.
Ie, People having inside information buy most of the shares of a company when the
conditions are very favorable, and the outsiders get less no: of such shares. It is one of the undesirable
situations when company executives pass the information on to some selected people.
2. Financial Services:
Financial Services largely operate through personal selling by tax advisers, consultants, stock brokers,
financial planners etc. It gives them numerous opportunities for abuse though financial professionals
take pride in the level of integrity in the industry. This gives dissatisfaction to the people and they have
objections like (a) Deception,
(b) Churning,
(c) Suitability.
(a) Deception: Deception means false claims that are capable of being disproved although individual
clients may not have easy access to the evidence but deception is often a matter of interpretation. In
relation to mutual funds promotional material, if it gives emphasis on only strengths of a fund and not
weaknesses, it is misleading. Deception can occur when essential information is concealed or the past
trends are displayed in a misleading manner.
In general, a person is deceived when he is unable to make a rational choice as a result of holding false
belief created by some claim made by someone else. The claim may be incomplete, false or a
misleading statement.
(b) Churning: Churning is defined as exercise or inappropriate trading for a client‟s account by a
broker who has control over the account with the intent to generate commissions rather than benefit
for the client. When the control of an account is granted to a broker by the client, and there is breach of

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fiduciary duty (trust) not in the interest of the client, the broker is said to be engaged in the act of
Churning.
(c) Suitability: All the intermediaries (brokers, insurance agents and other sales people) should
recommend only the suitable securities and financial products to the investors and not the products
which suit them rather than the client.
3. Financial Markets
In financial markets, there are moral rules, behavior and expectations which prevent investors against
fraud and manipulations. Financial Transactions mainly take place in organized markets like
commodity markets, futures or option markets and currency markets. Ethical issues must be observed
because of unequal information, bargaining power and resources available with different market
players. Many participants in the market enter into long term relations with investors which involve
obligations to act as agents. However, they become subject to unethical and unhealthy conduct when
these agents fail in their duty to safeguard the interests of investors. Though contracts with investors
mention the scope of their duties and remedies available in case of noncompliance, the problem is that
contracts themselves are often vague and incomplete, resulting in disagreement and uncertainty about
ethical and legal contract. Irregularities in financial markets can take the following forms:
(a) Efficiency: The main objective of financial market regulation is to ensure efficiency which can be
achieved only when people have confidence in their fairness of operations.
When people tend to believe that the financial market operations are not fair and equitable, it affects
efficiency of the market operations. This happens when companies or financial intermediaries do not
observe laws relating to financial disclosures and maintenance of accounts.
(b) Unfairness in market: The aim of financial markets is to ensure fairness that protects the general
public against financial frauds. Individual investor can be treated unfairly by the operations of
financial markets by (i) fraud, manipulation, (ii) unequal information, (iii) unequal bargaining power
and (iv) efficient pricing.
(i) Fraud and Manipulation:
(a) The company that fails to report proper information may be committing fraud.
(b) Manipulation involves buying and selling of securities in order to create false or misleading
impression about the direction of their price so as to induce other investors to buy or sell the securities.
(ii) Unequal Information:
With unequal information, competition between parties is regarded as unfair because market players
with superior and extensive information are benefited at the cost of those who do not have adequate
information.
Stoke investors and analysts spend considerable time, effort and money to acquire information and
they can use this information for personal use.
Unequal informations are objectionable as they reduce efficiency.
Efficiency along with fairness helps to reduce information asymmetric in financial markets.

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(iii) Unequal Bargaining Power:
Unequal bargaining power can result because of factors like access to resources and processing ability
of the privileged few.
(iv) Efficient Pricing:
Fairness in financial markets includes efficient prices that reasonably reflect all available
information.
Volatility and fluctuations also affect the market by reducing investor‟s confidence and drives them
away.
4. Creative accounting
For gathering money for investment it is necessary to show that the financial health of the company is
very safe and sound. Hence, the company cooks the financial data and manipulates them to suit the
requirements. The cooking of data is also known as creative accounting.
5.Merger of companies may be a financial stunt.
A good company merges with an old company in order to evade taxes or to reduce competition. After
merger, the joint company becomes strong and it is possible to increase prices and market share.
Sometimes merger is resorted to take advantage of the brand image of one of the companies.
6. Window dressing
Window dressing is a technique used by companies and financial managers to manipulate financial
statements and reports to show more favorable results for a period. Although window dressing is
illegal or fraudulent, it is slightly dishonest and is usually done to mislead investors
Companies typically window dress their financial statements by selling off assets and either
purchasing new assets or using this money to funds other operations. This way the cash balance on the
balance sheet appears to be at a normal amount.
Window dressing is probably most commonly found in investment brokers and mutual fund houses.
Eg: Let's assume Company XYZ wants to look attractive to
potential acquirers. It might do some window dressing by announcing much higher sales projections,
obtaining and holding a lot of cash, or making other announcements that are likely to raise
the stock price, even if only for a short time. The objective is to make a favorable impression on
potential acquirers.
7. Misleading financial analysis
Financial analysis of an organization is misleading when it is used to misrepresent the organization, its
situation or its prospects. This type of deceit is sometimes used to obtain money by misdirecting
people to invest in a stock market bubble, profiting (or assisting others to profit) from the increase in
value, then removing funds before the bubble collapses

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Other issues are:
 Another unethical financial issue is creating unusual delay in making payments to suppliers, taxes,
excise duties and other legal payments.
 Many companies open accounts in different banks to avoid taxes and avoid adjustments against loans.
 Companies may create many independent subsidiaries and make „benami‟ property transactions to
avoid payments to government and taxes.
 Financial irregularities also include cheating employees in the matter of payment of regular wages,
medical bills. bonus, LTC, children„s tuition fees, and so on.
 Companies falsify bills of purchase to inflate cost in order to reduce taxes.
 Loans are often taken from those institutions which are ready to do some personal favor.
 Many a time a company does not share the correct information in the stock market. It commits fraud
and there is information asymmetry. The practice is unethical.
Top Investment Scams in India
1. The Securities Scam
The utter anarchy and lack of administration in the prevailing fiscal
market led to the foremost securities scandal in India in 1992. The
money market at that permitted funds to be relocated with impunity
from financial institution and corporate into equity and
consequently witnessed crores of bank‟s capital to transfer into
broker‟s account.
2. The IPO Scam The ban of control over capital issues on account of heavy bull trend
in the secondary market unlocked the prospects of massive scandal
in Initial Public Offerings (IPO). The scam was executed in two
parts: The first part was carried out by the firms that increased their
market costs to incur profits in order to sponsor lucrative projects.
The second part saw the unison of small time merchants, CAs,
Investment Bankers and Traders to hoist new firms and heave
public capitals. The IPO Scam prevailed for three long
years from 1993-1996

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3. Satyam Scam After manipulating the firm‟s documents for several financial years,
the former Chairman and Chief Executive of SATYAM Computers,
Mr. Ramalinga Raju, was booked for committing scam Following
unethical practice and forger, he showed greater profits and
committed fraud of 700 crores.
SECURITIES FRAUD LEADING TO MANIPULATION OF FINANCIAL MARKETS
Securities fraud is a type of serious white-collar crime that can be
committed in a variety of forms, but primarily involves misrepresenting information investors use to
make decisions. The perpetrator of the fraud can be an individual, such as a stockbroker, or an
organization such as a brokerage firm, corporation or investment bank.
Securities fraud, also known as stock fraud and investment fraud, is a deceptive practice in the stock
or commodities markets that induces investors to make purchase or sale decisions on the basis of false
information, frequently resulting in losses, in violation of securities laws
Manipulation is the act of artificially inflating or deflating the price of
a security or otherwise influencing the behavior of the market for personal gain. Manipulation is
illegal in most cases, but it can be difficult for regulators and other authorities to detect. Manipulation
is also difficult for the manipulator as the size and number of participants in a market increases. It is
much easier to manipulate the share price of smaller companies, such as penny stocks, because they
are not as closely watched by analysts and other market participants as the medium and large cap
firms. Manipulation is variously called price manipulation, stock manipulation and market
manipulation.
Types of security fraud
1. Corporate fraud
a. Corporate misconduct
Fraud by high level corporate officials. i.e.: company itself
b. Dummy corporations
Dummy corporations may be created by fraudsters to create the illusion of being an existing
corporation with a similar name.

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2. Internet fraud
3. Insider trading
4. Microcap fraud
5. Mutual Fund fraud
A number of major brokerages and mutual fund firms were accused of various deceptive acts that
disadvantaged customers.
6. Ponzi schemes
A Ponzi scheme is an investment fraud that pays existing investors with funds collected from new
investors. Ponzi scheme organizers often promise to invest your money and generate high returns with
little or no risk. But in many Ponzi schemes, the fraudsters do not invest the money. Instead, they use
it to pay those who invested earlier and may keep some for themselves.
7. Third Party Misrepresentation
The last type of securities fraud occurs when a third party gives out false information about the stock
market or a particular company or industry. “Pump and dump” schemes are a prevalent type of third
party misrepresentations. In a pump and dump scheme, a person will find a small, unknown company
with cheap stock and buy large amounts of its shares. The perpetrator will then send out false
information about the company to encourage others to buy the stock, driving up the price. Once the
price of the stock is high enough, the perpetrator sells his or her shares for a profit.
PUMP AND DUMP SCHEMES
"Pump and dump" schemes have two parts. In the first, promoters try to boost the price of a stock with
false or misleading statements about the company. Once the stock price has been pumped
up, fraudsters move on to the second part, where they seek to profit by selling their own holdings of
the stock, dumping shares into the market.
BRIBERY
Bribery involves an attempt to influence the decision of someone in a position of authority by offering
them money or some other benefit. It is illegal everywhere on earth, though unfortunately common in
some places.
It is unethical because it amounts to an inducement to disloyalty. Decision-makers (e.g., government
officials) are obligated to make the decision that is best for the people they serve, and a bribe is
typically aimed at getting them to make the decision that is best for you instead. It is typically
considered illegal & can be punishable.

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 Factors That Push Business to Pay Bribe
• Competitors are giving bribes to obtain business (which can cause the misuse of the country‟s
resources)
• The pressure for higher levels of performance by top management and shareholders
• This is an accepted practice in the host country.
• Tax laws of the country encourage bribery. It can be written off as a business expense.
• Government control over business activities.
• In economics, the bribe has been described as rent
• Government officials are poorly paid and use bribery to supplement salaries.
• Bureaucratic delays can be costly for business.
• Pressure from politicians to make contributions to political parties or causes.
Common Financial Frauds in Indian Organizations
Financial Frauds or unethical financial practices are deliberate misrepresentation which causes another
person to suffer damages, usually monetary losses. These financial frauds involve complicated
financial transactions conducted by „white collar criminals‟, business professionals with specialized
knowledge and criminal intent.
1. Credit Cards: The credit card frauds begin with either the theft of the physical card or the
compromise of data associated with the account, including the card account number or other
information that would routinely and necessarily be available to a merchant during a legitimate
transaction.
2. Bank Cheques: A significant amount of cheque fraud is due to counterfeiting through desktop
publishing and copying to create or duplicate an actual financial document, as well as chemical
alteration, which consists of removing some or all of the information and manipulating it to the benefit
of the criminal.
3. Mortgage:
Mortgage Fraud is the criminal action where the intent is to materially misrepresent the information on
a mortgage loan application to obtain a loan or to obtain a larger loan than would have been obtained
had the lender or borrower known the truth.
4. Tax:
Committing a tax fraud intentionally violate the legal duty to voluntarily file income tax returns and
pay the accurate amount of income, employment and excise taxes. The violation of the tax law by

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misrepresenting the income or fudging numbers to avoid paying taxes is likely to be committed by
what is called tax fraud.
5. Bankruptcy:
Bankruptcy is a legal process which allows a business or individual to be discharged of all their debts
due to an inability to pay. There are three methods of committing bankruptcy frauds, concealment of
assets, multiple filings, and petition mills.
The concealment of assets fraud means when the debtor hides his assets during the declaration phase
of the bankruptcy processes, in an attempt to keep them from being liquidated.
The multiple filling frauds are submitting incomplete lists of the assets on both filings, in an attempt
to avoid liquidation of those assets.
The petitions mills fraud is unlike concealment of assets or multiple filings frauds but it is not
perpetrated by the debtor, but by a third party.
6. Money Laundering
Laundering or washing (legitimizing) of illegally obtained money to hide its true nature or source such
as the drug trade or terrorist activities.
Money laundering is effected by passing it secretly through legitimate business channels by means of
bank deposits, investments, or transfers from one place (or person) to another.
Money laundering can be defined as the process by which large amounts of illegally obtained money
(from drug trafficking, terrorist activity or other serious crimes) is given the appearance of having
originated from a legitimate source.
How to prevent unethical practices in finance?
1. Monitoring the cheques: All cheques should be kept under safe custody using lock & key, and the
keys should not be with many people but with specific one. Cheques should be always cleared in
sequence and avoid signing a blank cheque. All disbursements made should be reviewed on a regular
basis.
2. Maintain Employees Manual: The best ways of avoiding unethical practices in business are by
maintaining a employee manual in terms of do and don’ts and setting the clear standards of behavior
for employees. This includes setting the appropriate ethical code and delegation of authority matrix.
3. Periodical review of financial statements:
Periodical Review in the name of audit can serve as a watch dog to maintain accounting records in a
righteous manner and helps present the clear and true picture of the financial position of the business
during the period. Though audit will not always discover all frauds, but it will certainly give a picture
of the financial position.
4. Review of sensitive documents:
Business needs to maintain confidentiality about its certain matters so as to avoid misuse of the same
by unscrupulous users for their own vested interests. Hence, there is a need to specify and notify who
will receive especially the sensitive documents to prevent their misuse by others.

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5. Checking the payroll: The hole for unethical financial area is payment made to especially
temporary and contractual staff. Hence, due care should be taken in checking every payroll so that
employees are paid appropriately.
6. Employee References: One way to hire employees with integrity based on referrals. Therefore,
when hiring new employees, checking references and perform background checks that include
employment, credit, licensing and criminal history seem very pertinent to hire right type of employee.
7. Independent Review: In order to ensure the correctness of records and entries, all account
reconciliations and general ledger balances should be reviewed by a person outside the day-today
transactions.
8. Stringent Law: Another means to control unethical practices in finance is to pass stringent laws to
penalize those who follow unethical practices in finance.
KICKBACKS
A kickback is a form of negotiated bribery in which a commission is paid to the bribe-taker in
exchange for services rendered. Generally speaking, the remuneration (money, goods, or services
handed over) is negotiated ahead of time. The kickback varies from other kinds of bribes in that there
is implied collusion between agents of the two parties, rather than one party extorting the bribe from
the other. The purpose of the kickback is usually to encourage the other party to cooperate in the
illegal scheme.
A kickback is the payment to a recipient as compensation or reward for providing favorable treatment
or services to another party. A kickback in the form of money, gifts, credit or anything of value may
be viewed as a corrupt practice that interferes with an employee's or official‟s ability to make unbiased
decisions.
OVER BILLING OF EXPENSES, FACILITATION PAYMENTS, FAKE
REIMBURSEMENTS
A. FAKE REIMBURSEMENTS
Reimbursement is the act of compensating someone for an out-of-pocket expense by giving them an
amount of money equal to what was spent. i.e: amount refunded for costs incurred or expenses paid.
 Fraud Schemes
The two primary schemes perpetrated are employees claiming reimbursement for fictitious expenses
or inflating actual business expenses. Examples of fictitious expenses that have been known to appear
on expense reports include:
 Charging for items used for personal reasons (gas, groceries, hotels, etc.)
 Billing for travel and expenses that never materialized (canceled airline tickets, seminar or convention
registration fees, tuition reimbursement and professional dues payments)

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 Seeking reimbursement for items that were never purchased (office supplies, gifts for clients)
 Collusion among employees who both bill separately for travel or mileage reimbursement when they
traveled together
 Outright falsifying or manipulating receipts
Inflating business expenses can be found when employees:
 Claim meals and entertainment reimbursement that may be in excess of allowed per diems or items not
reimbursable under your policy (alcohol, leisure activities, sports tickets).
 Add tips to reimbursement when tips were already included.
 Add tips to their reimbursement copies that were greater than what was actually left.
 Fly first class or use limousines when modest means may be available and more applicable.
 Use inflated mileage totals when seeking reimbursement for auto travel.
 Safeguards to Prevent Fraud
 Maintain a travel reimbursement policy or guidelines that govern this activity. Prohibited activity
and per diem amounts should be detailed in this policy and regularly communicated to your
employees.
 Require original documentation to be either submitted with the reports or maintained for a period of
time for audit purposes.
 Initiate a formal review process in which a department manager or equivalent reviews employees‟
reports. Payroll or human resources should perform a cursory review as well.
 Routinely question expenditures that look extraordinary or abnormal. Waiting for a larger problem
to build will only be more difficult and costly to resolve later.
 Have all disbursements made in a formal manner through either accounts payable or payroll. Cash
shouldn‟t be advanced to employees, if at all possible.
 Implement the use of corporate charge cards for greater control. With corporate cards, companies
can query each card individually and ensure that payments are being made against them.
 Receive credit activity reports on a monthly basis from the issuing company, if using corporate
charge cards. These reports can help you determine how many charges are being cancelled or credited
back to the accounts. This activity can be compared to actual expense reports to determine if it is being
accurately reported.
 Annually audit a sample of employees’ expense reports to ensure they meet the company‟s
established guidelines. Be sure that proper documentation exists to support the expenditures that were
requested. If a company card is used, verify that the balance is being paid promptly.
 Treat reimbursement activities consistently by having employees pay expenditures and seek
reimbursement, or by having the company pay these expenses directly. Flip-flopping between the two
could allow for duplicate reimbursement to occur.
 Prosecute offenders found to be violating or falsifying their expense reports. If they are allowed to
escape unpunished, others will follow their actions.

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FACILITATION PAYMENTS
A payment made to a government official to facilitate approval of some type of business transaction or
activity. In some countries, small facilitation payments are considered unofficial fees rather than
bribes, but most countries do not make this distinction.
These are customary, unofficial minor payments to secure or speed a routine government action. They
are colloquially as “speed money”, “grease payments” or “oiling the wheels”
Examples
 Passport clearance at frontiers
 Access to the „fast lane.‟
 Help speed up issue of documents
 Port entry for vehicles Release of goods from customs
 Loading and unloading cargo
 Obtaining services such as telephone, power, water, mail collection
 Processing work permits
 Planning permissions
OVER BILLING OF EXPENSES
Overbilling (sometimes spelled as over-billing) is the practice of charging more than is legally or
ethically acceptable on an invoice or bill.