This document discusses ethics in finance, including characteristics that can lead to fraud, ethical issues surrounding financial statements, hostile takeovers, financial markets, and insider trading. It outlines unethical practices like fictitious revenues, concealed liabilities, improper disclosures, deception in markets, and trading on non-public information. The document also examines the duties of auditors and objectives of ethical audits. It analyzes defenses against hostile takeovers such as poison pills and greenmail, as well as golden parachutes and management buyouts, noting potential ethical issues with some practices.

1. Ethics in Finance

2. Characteristics of Management
Prone to Fraud
 Unduly aggressive financial Targets
 Domination by person or group without controls
 Aggressive accounting practice to keep stock prices high
 Pressure to reduce tax liabilities
 Major performance related compensation
 Non-Financial personnel involved in accounting matters

3. Ethical issues in Finance
 Financial statements
 Hostile Takeovers
 Financial Markets
 Insider Trading

4. Fraud in Financial Statements
 Fictitious Revenues
 Concealed Liabilities and Expenses
 Fraudulent Asset Valuations
 Improper or Fraudulent Disclosures or Omissions
 Creative accounting – form of fraudulent financial
reporting so as to provide misleading
information.

5. Duties of an Auditor
 To give an accurate statement to the members about the
state of affairs of a company
 To meet the objectives of the Companies Act 1985 and
also the Articles of Association
 To be reasonably skillful and careful in identifying the
true nature of the accounts

6. Ethical Audit
 An audit that assess a business’s structures,
procedures, systems and policies.
 It measures the extent to which the activities of a
business comply with the standards it has publicly
declared to its external customers
 It measures business conduct against varied moral
standards of the community.

7. Objectives of Ethical Audit
 to provide a critical assessment of functioning of
business
 To investigate into acquisition or restructuring operations
 To determine the type of training necessary for
employees
 To establish ethical conduct of business
 To enhance, measure and promote the quality that
increases business performance by assessing them
against the ethical business objective
 To improve the quality of governance by evaluating the
performance and ensuring that financial information is
both available and reliable

8. Ethical Issues in Financial Markets
 Deception: act of misrepresenting relevant information
 Churning: Excessive or inappropriate trading for clients
account by a broker who has control over the account
with intent to generate commissions rather than to
benefit client
 Unsuitability
 Unfairness in Markets

9. Insider Trading
 Refers to trading on price sensitive information
by company employees or individuals closely
connected with the firm
 This information has not been disclosed to other
market participants

10. Ethics & 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.

11. Hostile Takeovers
 Are those that elicit opposition from the boards or
employees of Target company
 Reasons for opposition are as follows:
 Disagreements over price
 Protecting their own interests

12. Anti-takeover defense measures
 Poison Pills
 Green mail
 Golden Parachute
 People Pill

13. Poison Pills
 An anti-takeover device used by company’s
management to make takeover prohibitively
expensive for the bidders
 Company under target changes AOA so that
group of Shareholders have special rights to buy
and sell preferred stock at highly favorable
prices (At times below market price)

14. Ethics & Poison Pills
 Poison pills are prohibited in Britain by takeover
code because they prevent open competition
between bidders for shares
 Use of poison pills are ethical if they are
designed to protect the management from
unwanted takeover bids.

15. Greenmail
 It occurs where a potential takeover agent purchases
stock in a company
 After the purchases have totaled five percent the agent
must announce his intention to takeover the company, if
that is the intent
 Stock prices go up in anticipation of takeover battle
 Management of target company sends greenmails to
prevent a shareholder from taking over the company
 Takeover agent ends up selling the shares back to
company at an increased or higher negotiated price

16. Ethics & Greenmail
 Target company may be forced to incur
debts to raise funds to finance the buy
back of shares at premium price

17. Golden Parachute
 A company gives lucrative benefits to its top
executives such as stock options, bonuses, etc
 Presence of parachute allows management to
evaluate takeover bid more objectively

18. People Pill
 Management threatens that in event of a
takeover the entire management team will
resign
 If managers act in their own interest rather
than company’s long term value then they are
acting unethically

19. Management Buyout
 It occurs when management decide to bid for the
company
 They convert the company into a private
company and at a later date, bring it back to
market to make substantial profits.

20. Ethics & Management Buyout
 Shareholder believe that management may
resort to unethical practices to bring down share
prices and buy out at cheaper rate
 Unethical activities can involve leaking
confidential information by managers for their
benefit during buy out

21. Thank You