FOCUS ON ETHICS“WHAT ABOUT MORAL RISK?”`

Presentation by: AMOS VILANE

ID: MA0N0241

BRIEF HISTORY

FOCUS ON ETHICS“WHAT ABOUT MORAL RISK?”

Moral risk…exposure to loss resulting from wilful, improper, or illegal act by an agent or. counterparty…unethical behaviour

Reasons for engaging in unethical practices

1. Pressure from CEO to CFO…to use aggressive accounting to “make the numbers work”

2. Reason for Accounting Fraud is “Pressure to hit the numbers” …portraying a wrong image to attract investors

WAYS TO MINIMIZE MORAL RISK

1. Build awareness through code of ethics- which spells out general principles of right and wrong conduct

2. Companies must write detailed standards of conduct….because some ethical codes are faulted because the are Vague and abstract

3. some organizations administer honesty tests prior to hiring new workers

4. other organizations require ethics training of mid –level managers.

WAYS TO MINIMIZE MORAL RISK

Provide whistle blower protection for employees with ethics related concerns……to strengthen corporate ethics

Establish an Ethics director

Evaluate managers’ ethics in performance reviews

BENEFITS

CFOs who stand up to CFOs pressure improve their ethical standards in their performance.

Unethical practices

Cheating on expense accounts

Forging signatures

CHALLENGES RELATED TO ETHICSATTITUDES vs ACTUAL ACTIONS

People who otherwise might do the right thing can be pressured to do something wrong e.g. CFO by CEO

Is “hitting the numbers or making the numbers work” ! An appropriate goal ? If not, why do executives emphasize it?

Refer to the contrast between profit maximization and shareholder wealth maximization.

1. CEOs act unethically because they want to be seen to have attained the expected targets of the corporations they are managing or else they may lose their jobs.

2. Also, the CEOs want to attract more people to buy shares from the corporation, so they portray a wrong image that their company is doing quite well

3. At times, out of greed, CEOs would act unethically to get more bonuses using information from the “cooked books”, thus they put pressure on CFOs to “make the numbers work.