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Ethical Concerns in Corporate Finance

Ethics: The moral principles that govern a person’s behavior or conduct based on what is good and bad.

In business, management and other employees need to act under the highest ethical standards i.e., act with honesty and integrity, no conflicts of interest, accuracy etc.; in all financial activities.

Non-ethical practices which may cause business failure or huge losses include:

  • Insider Trading – Where an individual fails to maintain confidentiality of information about a business and instead uses such knowledge for personal financial gain.
  • Creative AccountingThe manipulation of financial data or financial statements by showing non-existing losses in order to take benefits on tax liabilities, or increase company’s revenue, reducing expenses, to increase profit in order to attract investors.
  • Asset Misappropriation – The use of company assets (both cash and non-cash) for self-gain through over-billing, inflated business expenses, altered cheques, fraud in payroll, etc.
  • Standards for Disclosure of Information – As much as disclosing a lot is an issue, disclosing little is also a matter in question. Proper disclosure of information narrows chances of staff with insider information using it for personal gain/profit thus increasing transparency in the market.

So what does acting ethically entail in the field of Corporate Finance?

  • Acting with honesty and integrity – Honesty is the best policy. Honesty plays an important role as it allows clients and investors to have trust in the firm, and the information they receive when making decisions on investing in the company.
  • Disclosure of accurate information – Employees must not disclose to a third party any confidential information which they have acquired during the course of their employment. In addition, there should be incorporation of Non-Disclosure Agreements (NDAs) in employee contracts governing the disclosure of any information.
  • Avoid conflicts of interest – This requires the honest disclosure of any possible conflict of interest. Organizations can manage this by drafting policies that create awareness on potential sources of conflict of interest.
  • Report any violation of ethical behavior – This includes illegal activities and fraud or any dealings and conditions that may threaten the organization or other staff.
  • Ethics and internal controls – Maintain an internal control system to safeguard against unethical behavior, help in building a good work atmosphere for all staff, and minimize risks associated with unethical behaviors.

Conclusion:

Ethics has become an essential part in the field of finance and needs truthfulness, integrity, honesty, and fairness in all sorts of financial activities. It is essential for managers to understand the relationship between corporate ethics and financial performance and invest resources that enhance ethics in business.