LESSON 19: What is Ethics in Finance?

TARGET

At the end of the lesson, you should be able to:

 Understand what business ethics is;

 Know the importance of ethics in finance; and
 Identify the governing bodies handling the codes of ethics.

EXPLORE

Create a graphic organizer by writing down what you know about Finance using the
following guide questions. Compare and discuss your answers with a group.

Guide questions:

1. Define ethics or business ethics.

2. Explain the importance of ethics in finance.
3. Describe the fraud triangle and its components.
4. Enumerate the different governing bodies handling the codes of ethics.
5. Name famous accounting frauds and financial scandals.

EXAMINE

Finance is concerned with money, the stock market, and other financial resources.
Because it relates to the management of company resources, it is important to involve
people who have the same goal in mind -- maximizing shareholder wealth. This is the
reason why there is an increasing emphasis on ethics in business and in financial
management.

Ethics in Finance

Today, after numerous business blunders, ethics has become an important prerequisite
in a company’s finance system. The dilemma of the blunderers is that there are
inconsistencies in the conceptual framework of modern financial-economic theory, as
well as the lingering agency problems in many organizations. The financial-economic

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theory states that people act rationally when striving to maximize their own interests,
underpins the current capitalism system's financial-economic theory.

Importance of Ethics in Finance

Code of Conduct in Financial Transactions

There is a pressing need for a proper code to be followed. All transactions in the
corporate or financial sector, from investment to trading to stock to economic activity,
are guided by policies put in place by authorities to ensure that there is a code of
conduct in place. These policies enable investors and depositors to see that there are
proper controls for their transactions. Some ethical criteria for firms are codified in law;
for example, environmental rules, the minimum wage, and prohibitions on insider
trading and collusion are all examples of the government establishing minimum
business ethics standards.

Trust and Confidence in the Finance Industry

Given the goal to maximize shareholder wealth, organizations are tasked to maintain the
trust and confidence of the shareholders. Investors have a natural trust in financial
institutions and different organizations, and expect them to invest their money
responsibly. It is the duty of the company to maintain a fiduciary relationship with the
shareholders with proper code of ethics in place and compliance to government
regulations being followed by the organization.

Synergy Within the Organization

What constitutes business ethics has evolved throughout time, and the various aspects
of ethics are critical to every firm. Code of ethics in business and finance overreaches the
whole value chain of an organization, especially in its human resources. It encourages
employees to follow the management’s ethical culture. Employee loyalty and morale, as
well as the depth of a management team's bond, are all factors to consider when it
comes to ethics. The ethical operation of a firm is intimately tied to profitability in both
the short and long term, as it is with other business endeavors.

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The Fraud Triangle

The fraud triangle, developed by criminologist Donald Cressey, is a popular auditing

model that seeks to explain why an employee decides to conduct workplace fraud. When
reviewing the risks of fraud in businesses, auditors frequently refer to the fraud triangle.
This explains the tendency of persons faced with what they believe are non-shareable
financial problems to violate both financial and corporate trust. They think that these
problems can be secretly solved given their conceptions of themselves as users of
entrusted funds or properties.

Image from: https://anderscpa.com/the-fraud-triangle-three-conditions-that-increase-

the-risk-of-fraud/

Cressey's fraud triangle is essential because it aids an organization in determining the

motivations for a person's decision to commit fraud as well as the opportunities that
allowed him to do so. The fraud triangle can assist a corporation in detecting and
preventing fraud, in part through the implementation of more effective internal
controls.

Code of Ethics from Governing Bodies

The Chartered Financial Analyst (CFA) Institute established an international code of

conduct, most commonly referred to as code of ethics, to help finance professionals in

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achieving the missions of organizations to lead the investment profession globally by
promoting the highest standards of ethics and quality of service to the society.

The Department of Trade and Industry also establishes standards such as retail prices
and practices that help safeguard the public against unethical practices in business.
With the help of the different bureaus under the Department of Finance, local
government units, and accreditation boards in the Philippines, the organizations in the
country are generally practicing ethical standards in order to avoid the penalties
imposed on non-compliant organizations.

INTEGRATE

1. Cite accounting frauds and financial scandals that happened in the Philippines.
2. What is the difference between ethical and moral?
3. Create sample codes of ethics for oneself.

EQUIP

“INTRODUCTION TO BUSINESS ETHICS” by Genius Educations

https://www.youtube.com/watch?v=AkjsrJNdIR4

“Ethical Finance: The Truth” by Islam Channel

https://www.youtube.com/watch?v=9o1SKOpaQ_8

“Ethics in Finance is Good! Episode 3: Issue Spotting and Problem Solving” by Seven
Pillars Institute for Global Finance and Ethics

https://www.youtube.com/watch?v=UC7VJ2Z1BUw

“Ethics in Finance is Good! Episode 4: Ethical Theories” by Seven Pillars Institute for
Global Finance and Ethics

https://www.youtube.com/watch?v=89kAE0jX-mI

“Creating ethical cultures in business: Brooke Deterline at TEDxPresidio” by TEDx

Talks

https://www.youtube.com/watch?v=wzicXbnmllc

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BUILD

Research on the Enron Scandal. Write a 3-page reflection paper on its fraud case.

CHECK

ESSAY (50 Points)

1. Discuss the Importance of Ethics in Finance (10 Points)

2. Illustrate and Explain the Fraud Triangle (20 Points)
3. How does fraud happen in accounting and finance? (10 Points)
4. What do businesses need to do to prevent fraud? (10 Points)

INFOGRAPHICS

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