Ethical aspect in Financial Management :

A sound financial policy and effective management control, is very important for good corporate governance. Many unethical practices noticed in the area of financial management are putting pressures on the regulators and governments which affect both internal and external stakeholders.

Some of the noteworthy unethical issues in the financial activities and markets are:

1. Concealment of facts:

In case of Satyam’s scam, for years the (real) financial position was concealed but unrealistic financial position was reflected in a systematic manner to appear as realistic numbers.

2. Money Laundering activities:

This is not only unethical but also criminal and  illegal. These activities include conversion of illegal money into legal money, using the banks as channels to effect such activities.

3. Misappropriation and diversion of funds:

Many business enterprises including corporates avail of loans and do not use the funds for the purpose the loan was availed of, but divert the funds for other activities. For example: A manufacturing company avails of working capital finance for production purpose. The funds are raised against hypothecation of goods; however the funds are not used for production of the goods, but invested in real estate sector and/or capital markets to earn higher returns. Though the repayment of the loan is on schedule, these activities of the company are unethical on account of misappropriation of funds

4. Lack of internal control:

Due to weak internal controls at appropriate levels, sometimes loans become nonperforming assets. Unethical practices like corruption, diversion and misappropriation of funds, loans granted against collateral which are of inferior quality, lesser value, etc., not only affect the performance of the banks but also increases the levels of nonperforming assets.

5. Non compliance of regulatory and legal frame work:

Banks face many compliance issues, by not following the rules and regulations.. These non compliances have created avenues for conversion of black money to legal money through banking channels, and made banks not only to face embarrassment but also reputational risks.