CGVE/U5 Topic 6 Ethics in Finance and Accounting

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.

Finance Depends on Trust

Markets break down without trust. If financial markets are full of rogue traders, individuals will start to disengage from it, thereby reducing the capacity to find investments and hence reducing the economic growth. A market with strong ethics is more inclusive which helps it to be more liquid and offer cheaper financial options.

Financial market participants often have economic freedom, and often with good reason, but the successful financial exchanges in the world are more famous for trust than the degree of their freedom.

If trust is important and if it cannot be achieved by laws alone, how important is it to have agreements and moral codes that are beyond the law, especially when the law is often the way to codify the ethical behaviors?

An Ethical Framework

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.
  • The third objective is to keep things simple.

We often see financial market participants hesitate a moment before deciding whether to go ahead with a transaction. It is when they assess whether the transaction makes sense, feels odd or is avoidable. In that moment, people tend to ask whether they know the individuals involved in the transaction and whether a similar transaction was made earlier.

None of the two is very exacting ethical standard. We can offer these market participants some more questions, and after that it is up to them and their companies how they behave. However, that behavior should not be so ruinous that it affects the marketplace or the economy.

The key questions to ask while preparing a transaction is − have you ever faced a situation when you have put someone at an advantage over others?

Getting a loan from a client leading to its bankruptcy when one buys up the company’s assets cheaper is not illegal, but it is unethical. Similarly, driving products out of market and making it hard to find is not always illegal, but it is unethical.

The Final Consideration

The consequences of a financial transaction lead us to ask whether a transaction and its full implications are clear, and whether they will be subject to scrutiny −

  • If Yes, the moral responsibility of the market participants is lowered and they can concentrate on providing ethical service. In these circumstances, people are in a better situation to take correct decisions.
  • If No, the moral burden on the financier is greater. In these circumstances, a written justification for the record would be a better option.

Individuals may often need to make their own moral choices. These cannot be easily codified into a list of dos and don’ts. However, people can and should be helped to arrive at these important answers, by allowing them to ask the right set of questions.

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