ethical aspects of sfm

8/14/2019 Ethical Aspects of Sfm

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ETHICAL ASPECTS OF SFM

Background:- Some of the obvious reasons for widespread

unethical financial practices may be listed as follows.Ambition for achieving disproportionately high results with

inadequate resources & time.

Corrupt practices in govt.bureaucracy, politicians &

regulatory authorities. Complex tax laws.

Structural & procedural deficiencies in the organisation.

Monopolistic power creating an imbalance in a market

economy.

Organisational culture does not promote healthy

competition, loyalty, creativity, consistency, transparency &

entrepreneurship.


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Centralised control, lack of empowerment.

Unhealthy rivalry promoted by the owners, their families,

partners & so- called advisors. False notion of racial superiority, intellectuality, religious

& regional supremacy.

Saturated growth of a developed country, leading to a

forced exposure outside which the enterprise may not beready to face.

Individuals family, socio-economic background.

Fear of uncertainty about future.

Definition of Ethical ManagementA transparent approach to business success, which is

enjoyed by all stake-holders, based on the national

priorities & moral guidelines of the society.


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ETHICAL DILEMMA:-

A practice in which an ethical individual or an organisation

being forced to accept an unethical or semi-ethical solution to

a problem in the larger interest of the organisation,

employees & society.

While facing a dilemma an executive is expected to follow a

following preference-order of respect.

The universe

Nation

Society

Organisation

Division

Group

Family

Individual


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Remedy For Ethical Dilemma:-

Ethical dilemma should be sorted out with the best possible,& most acceptable adequate ethical solution. Quality ofsuch solutions may be decided from the following matrix.

The Flexible Solution

(Ethical)

The Best Solution

The Worst Solution

(Legal)

The masterminded solution


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An ethical audit or audit of ethical practices must be carried

out every year, by using two sets of parameters --

Quality of combinations of solutions as shown in the matrix.

Preference observed in addressing ethical dilemma.

Ethical-Economical Combinations :

Financial strategists are more concerned about ethical

economic solutions than ethical legal combination. The

E E combinations could be broadly classified as follows.

Fully ethical & most economical --- Best

Fully ethical & not so economical Acceptable

Most economical & not ethical Dangerous

Non-ethical & non-economical Disastrous

The most effective, ethical & economic approach of business

requires the following major attributes, skills & approaches


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to be mastered by everybody in the organisation.

Creative & alternate thinking about solutions. Entrepreneurial approach to business, at all levels in the

organisation.

Most efficient systems of accounting, information,

communication & control. Maturity for understanding the macro & micro variables of

business.

Patience for long-term results.

Ethical results normally start late on the performance curve ofthe organisation. But results are big & sustainable, compared

to those with unethical, short-cut tactics.


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CORPORATE GOVERNANCE

Corporate Governance encompasses the system of

operating & controlling a body corporate in order to satisfythe expectations & objectives of various stakeholders,creditors, employees, customers, suppliers etc.

What is CG?

It is a network of legal provisions, regulations, & practices

to bring accountability & transparency in the functioning ofbody corporate.

It is concerned with both the internal aspects of thecompany such as internal controls & the external aspectssuch as an organisations relationship with itsshareholders & other stakeholders.

CG structure specifies the distribution of rights &responsibilities among different participants in thecorporation, such as the board, managers, shareholders &


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other stakeholders & spells out the rules & procedures for

makingdecisions on corporate affairs.

CG ensures that resources available to a company are

used in a manner that meets the aspirations of the

society & different stakeholders.

Two basic principles of CG are:

The management (BOD) has executive freedom to run,

direct & drive the enterprise

The management should exercise this freedom within a

framework of effective accountability.

Thus CG provides for empowerment of BOD &

simultaneously creates a system of checks & balances

to ensure that the decision-making power is not misused

but is undertaken, with a sense of care & responsibility.


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FEATURES OF CG

Trusteeship :- Ensures that BOD has responsibility to

protect the interests of different stakeholders. Transparency : Disclosures without jeopardising the

strategic interests.

Empowerment :- Refers to creativity & innovation

throughout the organisation by vesting decision makingpowers as close to the scene of action as possible.

Control :- Timely management of change.

Ethical Behavior :- Both within organisation & in external

ralationships.Focal point of CG is on top management however, in big

organisations it may be addressed to three interlinked

levels namely; Strategic Supervision(BOD), Strategic

Management(Corporate Management Committes ) &

Executive Management( Divisional Chiefs)


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DEVELOPMENTS IN PRACTICES OF CG

At formal level, CG started in India in 1998 when CII evolved

a code of corporate governance for transparent

disclosure norms as follows.

1. Annual Reports of all listed companies should be

accompanied by compliance certificate signed by CEO or

CFO.

2. Listed companies should give a statement on value

addition.

3. Data on high & low averages of share prices should be a

part of the annual report.

4. Disclosure norms for a GDR issue should also be the

norm for any domestic issue of securities.


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RECOMMENDATIONS OF VARIOUS COMMITTEES ON CG

In May 1999, SEBI appointed a committee on CG, under the

chairmanship of K.M.Birla to suggest

Suitable amendment to the listing agreement

Measures to improve the standards of CG in listed

companies.

A code of corporate best practices.

Birla committee made several mandatory & non-mandatory

recommendations about

Independent directors, Nominee directors & Chairman of

the BOD.

Audit Committee & its composition.

Frequency of audit committee meetings, Functions of

Audit Committee.


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Remuneration committee of the board & its composition

Accounting Standards & Financial Reporting

Functions of the Board

Separate Report on CG in the Annual ReportThe committees recommendations have looked at corporate governance

from the point of view of the shareholders & investors. The control &

reporting functions of the BOD & role of the various committees, role of

management assume a special significance from this perspective.

The recommendations of K.M. Birla committee resulted in the introduction ofClause 49 in the Listing agreement. Provisions & requirements of clause 49

of the Listing Agreement are dealing with the following.

BOD :- Composition of the Board, Non-executive directors compensation &

disclosures, Independent directors, Borad procedure, Code of conduct, Term

of office of the non-executive directors etc.


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Audit Committee :- Qualified & independent audit

committee, meeting of audit committee, powers of audit

committee, role of audit committee, review of information by

audit committee.

Audit Reports & Audit Qualifications :- Disclosure of

accounting treatment.

Whistle Blower Policy :- Internal policy on access to Audit

Committee.

Subsidiary Companies :-

Disclosure of Contingent Liabilities :-

Disclosure :- Basis of related party transactions,disclosures about risk-management, Proceeds from IPO,

remuneration of directors, management analysis report,

Redressal of shareholders & investors complaints :-

Regarding transfer of shares, non-receipt of dividends etc.


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CEO/CFO Certification :-

Report on Corporate Governance :-

RECOMMENDATIONS OF NARAYAN MURTHYCOMMITTEE :-

In the year 2002, SEBI constituted a committee under the

chairmanship of N.R.Narayan Murthy to review the

performance of CG in India & to make appropriate

recommendations to enhance transparency & integrity to

stock market. These are as follows.

Audit committees of listed companies will review the

following information mandatorily.

a) Financial statements & draft audit report,

b) Management discussion & analysis of financial

condition

c) Report related to compliance withlaws


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d) Records regarding related party transactions

Companies should be encouraged to move towards

unqualified financial statements. A statement of all related party transactions ( as per AS-

18) should be placed before the independent auditcommittee for approval .

Procedures should be in place to inform the members ofthe BOD about the risk assessment.

BOD should lay down the code of conduct for all members& senior management people.

The nominee directors ( by Govt. or FI ) shall be elected

by the shareholders & be subject to same responsibilitiesas other directors.

All compensations & stock-options payable to non-executive directors should be approved by theshareholders in general meeting.


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Companies should ensure that personnel who observe an

unethical practice should be able to approach the Audit

Committee. The performance evaluation of non-executive directors should

be by a peer group comprising members of BOD.

All Audit Committee members shall be non-executive

directors.

Role of Audit Committee :- The role of audit committee shall

include the following.

1. Oversight of the companys financial reporting process & the

disclosure of its financial information to ensure that the

financial statement is correct, sufficient & credible.2. Recommending the appointment & removal of external

auditor, fixation of audit fee & also approval for payment for

any other services.


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3) Reviewing with management the annual financial

statements before submission to the board, focusing primarily

-- Any changes in accounting policies & practices

-- Major accounting entries based on exercise of judgment

by management.

-- Qualifications in draft audit report.

-- Significant adjustments arising out of audit.-- The going concern assumption.

-- Compliance with Accounting Standards

-- Compliance with stock exchange & legal requirements

concerning financial statements.

-- Related party transactions.

4) Reviewing with the management, external & internal auditors,

the adequacy of internal control system.


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5) Reviewing the adequacy of internal audit function,

including the structure of the internal audit department.

6) Discussion with internal auditors any significant findings &

follow-up thereon.

7) Reviewing the findings of internal investigation by the

internal auditors into matters where there is suspected

fraud or irregularity or a failure of internal control system.

8) Discussion with external auditors before the auditcommences about nature & scope of audit as well as

post-audit discussion to ascertain area of concern.

9) Reviewing the companys financial & risk management

policies.10) To look into the reasons for substantial defaults in the

payment to the depositors, debenture-holders,

shareholders ( in respect of dividends) & creditors.


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Mandatory Review of Information by Audit Committee:-

1. Financial statements & draft audit report, including

quarterly/ half-yearly financial information.

2. Management discussion & analysis of financial

condition & results of operations.

3. Management letters/ letters of internal control

weaknesses issued by statutory/internal auditors.

4. Reports relating to compliance with laws & to risk

management.

5. Records of related party transactions

6. The appointment, removal & terms of remuneration of

the Chief Internal auditor shall be subject to review by

the Audit committee.


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SARBANES OXLEY ACT 2002

The challenge to the investors confidence in listedcompanies caused by some untoward incidents in the

recent past in the international capital markets hasbrought corporate governance issues under the spotlight.Serious financial manipulations in the corporate arenahave intensified the focus on how business houses aremanaged. In view of the scam involving U.S. corporate

giants like Xerox, World Com, Enron etc. the Sarbanes-Oxley Act was enacted in the U.S. with some stringentmeasures relating to CG.

The act deals with the corporate social responsibility &emphasized the audit function & financial disclosure,conflict of interest & corporate governance at publiccompanies. It aims at the strengthening of powers &functions of Audit Committee. It requires the constitutionof Public Company Accounting Oversight Board (PCAOB)

to oversee the audit of public companies that are subject


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securities laws, to establish audit report standards. It prohibits

an auditor from performing specified non-audit services,

alongwith an audit. Audit firms to be appointed by & report

directly to the Audit Committee and subject to rotation of thepartner & the firm.

ethical aspects of sfm

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