Ethics in financial management refers to the compliance with certain sets of ethical principles and values in the sphere of financial activities within an organisation.
When it comes to finance, the financial managers are expected to make the right decisions with specific reference to the code of ethics like openness, equity and accountability. Thus, ethics in financial management involves not only compliance with rules but also the right course of action for the shareholders, employees as well as the customers.
Known effects of financial decisions as well as the increasing complexity of the contemporary financial market underlines the need for the development of strong ethical standards among financial managers.
Some of the ethical problems faced by managers include conflicts of interest, financial misconduct, and manipulation of financial data. Financial ethics can be relied upon to regulate behaviour where the legal obligations may not offer adequate direction and enables a business entity to exercise sound financial responsibility.
Ethics in financial management consists of principles like truthfulness, responsibility, integrity and accountability. Financial managers have a responsibility to run their affairs legally and within the principles of corporate governance with regards to the interest of the stakeholders. Going by the code of ethics in financial management, such people should desist from any action that compromises the credibility of the financial reports or misleads stakeholders.
The importance of ethics in financial management of any organisation cannot be overemphasized. Ethical practices are the best way of building trust with stakeholders and enables the achievement of long-term objectives of the business. Implementing ethically managed finance creates better companies that can attract investors, create good relations with suppliers and gain customer loyalty.
Further, the relevance of ethics in finance assures that financial decisions are not just made based on profit but also with consequent evaluation of the broader effect on society. Exercises like fraud contain information that is misleading and may bring forth short-term benefits but in the long run will lead to legal consequences like fines and legal cases, loss of reputation and sometimes business failure.
For example, such a business organisation, which should be managed ethically, will aim at achieving the goal of replenishing the created benefits to all the stakeholders, ensuring the best combination of profit and socially oriented factors. Therefore, financial ethics arise not only with the purpose of dealing with the legal consequences but as a means of fostering ethical organisations.
The most common ethical dilemmas facing those who engage in financial management is conflict of interest. In some instances, the personal and business attributes of a financial manager will have conflicting self-interest. That means that ethical problems faced by managers could appear if they are forced to gain short-term high revenues, disregarding future consequences.
Inaccurate presentation of financial information is also a common issue. Falsification of the records to depict better status than what it actually holds, which is commonly referred to as ‘‘cooking the books’’ is always malicious and will cost the organisation heavily by way of legal penalties.
However, there are ethical issues in finance related to investments. It is important for a financial manager to weigh the decision whether to invest in companies that carry with them reputations for unethical behaviours such as tobacco and gambling firms even though they are likely to bring in good returns. This is where manager ethics comes in, requiring that decisions be evaluated not just by outcomes of the finances, but also by their ethical consequences.
To illustrate how ethics in finance plays out in real-world scenarios, consider these ethics in finance examples:
A company’s financial manager who does not falsify the organisation’s financial performance figures to make the company seem more profitable than it is.
A company that does not get into investing in industries that negatively impact the environment, despite the high returns to be made.
A finance professional who reveals all the financial risks that exist instead of concealing them to attract more investors.
Each of these examples show how ethical financial management is not about meeting the legal requirements but doing the right thing.
The five ethics in finance typically include:
Financial managers should always be honest in their actions. They should desist from any act of fraud or misrepresentation and other acts of falsification of records or reports. Integrity also implies that one should not impersonate or manipulate other people into giving out wrong figures about a firm or organisation's financial status.
Every financial decision whether minor or major should not be influenced by emotion, passion, or prejudice to any individual or group. It is thus important for financial managers to offer impartial decisions on all the elements in question to minimise appeals for self-interest and influence.
It is important that financial managers guard information with caution. Any information that can affect the sales figures, profit margins, tactics and plans, the investments made by the stakeholders must not be disclosed to anyone. This information, if protected, fosters trust with clients and stakeholders.
Financial managers must align themselves with the skill and knowledge level required in performing their duties. Continuous learning is crucial as it allows the person to know the next developments and principles in regulation, tools and practices of ethical financial management.
There should be decision strategies that are fair and in equal measures to all stakeholders that are in the business. Another objective of financial managers is neutrality, that no interest group is favored or disfavored in the implementation of specific decisions.
These are the five ethical principles through which any financial manager could aid in the promotion of a positive corporate culture.
The code of ethics in financial management provides rules that every financial worker must obey to gain moral and legal success. Usually, it comprises principles relating to truthfulness in reporting financial information, their accountability and the role of refraining from options that may involve a conflict of interest.
The financial ethical principles presented in a code of ethics help financial managers to make legal and ethical decisions.
Ethical issues are among the most important in organisational decision-making processes in the field of financial management. Management in ethics can be defined as incorporation of ethical issues into management. Ethical principles should be used by financial managers to assess the impact of the roles they play in a firm on the interests of stakeholders, society, and the environment.
Managing financial ethics is between the overall profit and social accountability. It is vital for companies to adopt a strong financial management of ethics to increase chances of organisational sustainable growth, while encouraging stakeholder’s trust and loyalty.
Financial managers must find ways of working towards organisational objectives while at the same time abiding by or meeting ethical standards. For instance, in a recession, the company requires trimming expenses. Instead of acting in the best interest of the company’s finances, like firing employees, it could select one that is more ethical, that is cutting some of their own bonuses.
Ethics form an effective tool in financial management to ensure that the finance managers make correct decisions that are not only financially beneficial but also correct. By following financial ethical principles, corporations can have the capacity and confidence from stakeholders to foster the long-term success of the company and also generate a positive impact, socially. The financial manager needs to understand and apply reason, control and ethics in managing the financial functions for the organisation.
To learn more about financial management, we at British Academy of Training and Development offer Financial Management Courses designed to help individuals seeking to be in a position to manage matters of finance and successfully handle ethical dilemmas in the current business environment.
The term ethics in financial management can be defined as the set of principles which regulate the activity and actions of financial managers. Such principles serve to make the financial activities to be more transparent, fair and to be taken with responsibilities.
The five codes of ethics in finance include integrity, objectivity, confidentiality, competence and being fair. These ethics help in making financial managers observe the best practices and best interests of the organisations they are working for.
Some of the common ethical considerations in financial management include issues to do with the conflict of interest, accuracy in reporting financial results, analyzing all the finances in the long run, and its impact on the companies and its stakeholders.
Financial ethical standards are guidelines to address the right behaviour of financial workers such as integrity, clarity, accountability, and no engagement in situations of conflicts. These principles will assist one when making an ethical decision concerning finance.