Business Management:
Ethical Issues in Finance

There are many situations where you act without considering if it is ethical or not. For example, you would not think much of someone claiming personal traveling expenses as official traveling expenses to save tax. This was a clear example, where ethical and unethical conduct could be clearly demarcated. However, in practice, the line between ethical and unethical is quite thin. So, how do companies ensure ethical behavior?

Most large companies have a code of ethics—a set of general guidelines to encourage employees to behave ethically and responsibly. However, a code of ethics might do more harm than good especially if it lays stringent do's and don'ts. This might give the employees a false notion that anything if it is not specifically forbidden would be acceptable.

In addition to the company specific codes of ethics, companies and professionals are also bound by ethical codes of conducts of numerous professional organizations and institutions. For example, most independent accountants are members of the American Institute of Certified Public Accountants (AICPA) and must abide by the AICPA Code of Professional Conduct. Accountants who are members of the Institute of Management Accountants are bound by the Standards of Ethical Conduct of Management Accountants. Health care industry and the IT industry are bound by industry specific codes of ethics. These codes set minimum standards of conduct for members. Unacceptable actions can result in an individual's expulsion from the organization. In the organizational context, the company found indulging in unethical behavior may be ostracized from the industry and might face loss of reputation.  

Recent scams, particularly in the accounting industry, might suggest that business and professions are resorting to more unethical conduct in today's age compared to previous decades. However, experts attribute this to new business situations and the resulting problems that are more complex. For example, companies are under tremendous pressure to show good results on a quarterly basis and this might lead to a situation where slight manipulations of financial numbers might seem justifiable.

Experts also agree that ethical behavior is governed more by the individual rather than the environment. There have been cases where whistleblowers have exposed unethical behavior or violations of the company's code of ethics and brought huge organizations down to their knees. But, these are rare instances. Research shows that whistleblowers are often sacked from their jobs and end in worse conditions than if they had kept quite. Such cases of violations of code of ethics breeds cynicism. It would appear that having no code is better than a written code of ethics. A company code of ethics is useful only when the company's actions are consistent with it. Only then can it be followed consistently within the company.

Once a code of ethics consistent with the actions of the company is established, it needs to be communicated across the company. Open communication of values and state of company affairs gives employees the perspective they need to take a decision when faced with an ethical question. The code of ethics should be reviewed on a periodic basis to ensure that it deals with current issues facing the employees. Involving the employees in the renewal effort would make the code of ethics more pertinent and powerful.

Information is for educational and informational purposes only and is not be interpreted as financial or legal advice. This does not represent a recommendation to buy, sell, or hold any security. Please consult your financial advisor.