Insight on the Ethics of Finance’s Evolving Role in Business
We’ve come to think of ethics as a black and white, straight-forward concept. However, in business, as in life, the ethical decision is not so straightforward. By definition, ethics are the standards of behavior that involve issues of right and wrong and/or the processes for determining standards of right and wrong. Ethics evolve out of a desire to improve the overall quality of life (or an organization’s culture for example). In order to achieve this, goals, values and ethical reasoning are developed.
When it comes to ethical behavior, two ways of thinking proceed: considering one’s self before others or placing others first. Consider the rational maximizer versus the principal-agent model. In the business world, standards are generated from both types of ethical theory. The rational maximizer would suggest that individuals most consider what is best for themselves, therefore, beckoning for more regulations to control for greed and abuse. Using the principal-agent model means the organization or firm individuals have a mentality that looks towards the greater-good for others. The value to shareholders is key for decision-making. In this sense, less finance regulation is necessary.
Unfortunately, these concepts have become strained and challenged as the finance role evolves with a changing society. Between an influx of technology, global business expansion and complex financial instruments, the question has become one of stronger ethics or more regulations. Federal guidelines have been created, enforced and enhanced over the years as government tries to solve this dilemma. Over the years, key principals have been established through Congress that seem to build ethics into regulation. For instance, organizations must demonstrate diligence in preventing and detecting misconduct.
One of the biggest federal acts towards improving ethical behavior in finance was the passing of the Sarbanes Oxley Act (SOX) in 2002, which established better standards for American public boards, management and accounting firms. The act was brought about in response to poor ethical behavior being displayed in some prominent American companies. Through this, the ethical bar was raised. Company leaders and accounting auditors are now held to a higher standard and the penalties for not obliging have increased. The provisions of this act clearly outline what the government considers as good standards of ethical behavior.
The following are all titles within SOX that are laws that seem to be based on accepted ethical practice. This is the most obvious realization of how ethics have been driven into the financial realm to support the evolving market place
- Auditors Independence (Title II) – This helps eliminate conflicts of interest between auditors and their clients.
- Corporate Responsibility (Title III) – Title III states that corporate executives and alike should hold responsibility for guaranteeing records are accurately reported. This goes further by outlining what a proper relationship is between an outside auditor and organization representatives.
- Analysts Conflicts of Interest (Title V) – By having supervision over analysts, shareholders can feel more trustworthy and confident with reportings.
|
| The Center for Budget and Financial Management promotes excellence, transparency and accountability by providing the strategies and tools necessary to solve financial and budgetary issues. Turn your finance department into a proactive part of your organization through effective budgeting, planning and forecasting techniques. |
|
 |
 |
|
|
|
|
|
|
