Page 64 - The Pakistan Accountant July-September 2017

Signature Qualification CA that Empowers to Lead PAKISTAN We should aim not merely at the prevention of scandals but also achieving the highest possible level of exemplary ethical conduct. The goal should be not only to prevent the worst but also to achieve the best. finance, but finance ethics is far more than trust. The ethics Ethical misconduct is not always a matter of of an occupation or a profession is best understood not bad people doing bad things, but often of by examining the worst conduct of its members but by attending to the conduct that is commonly expected and good people who stumble unwittingly into generally found. In finance, as in other areas of life, three wrongdoing. questions of ethics are critical: ▪ What are our ethical obligations or duties? ▪ What rights are at stake? ▪ And what is fair or just? government securities division had attempted to execute a ‘squeeze’ by rigging several auctions of Beyond these more specific questions lies the ultimate US Treasury notes. The total cost of this scandal ethical question: How should we live? In the case of finance, including legal expenses and lost business, on top this question goes to the heart of the purpose of financial of a US $290 million fine, has been estimated at US activity: What role should finance play in our individual lives $1 billion. At that time, the reputational value of the and in the development of a good society? Salomon Brothers franchise was apparently deemed to be worth little. Therefore, a comprehensive treatment of ethics in finances is necessary because of the diversity of financial activities After losing US $1.6 billion on derivative transactions and the rage of ethical issues they raise. in 1994, Orange County in California sued its financial adviser Merrill Lynch for concealing the Although the need for ethics in finance should be obvious, amount of risk that was involved in its investments. it is useful to understand both the misconduct that occurs In 1998, Merrill Lynch settled the suit for more all too frequently and its causes. Most people in finance are than US $400 million. In 1996, P&G settled with decent, dedicated individuals, but unlike the professions, Bankers Trust after the bank agreed to forgive US which involve a strong commitment to service, finance relies $200 million that P&G owed on failed derivative mainly on the search for gain, which can easily become transactions. P&G charged that Bankers Trust had greed. Moreover, individuals operate within and through misrepresented, the investments were bolstered organisations, institutions, and system, including markets, by damaging audio tapes, including some in which may be faulty. Consequently, scandals may occur which bank employees were recorded using the that were part of no one person’s intentions and for which acronym ROF for ‘rip-off factor’ to describe one no one bears responsibility. Many scandals result not from method for fleecing customers. Although derivative deliberate misconduct doing what one knows to be wrong securities continued to be a source of considerable but from rational factors following incentives in situations abuse, efforts to regulate them have been largely with complex interactions. Ethical misconduct is not always unsuccessful. Both Merrill Lynch and Bankers Trust a matter of bad people doing bad things, but often of good were eventually saved from collapse by absorption people who stumble unwittingly into wrongdoing. into larger banks (Bank of America and Deutsche Bank respectively). Here are some of the scandals of recent years, which have created an image of finance as an activity devoid of ethics, Unauthorised trading by individuals has caused and it also explores some of the causes of these scandals: great losses at several banks and trading firms. Nick Wall Street was shaken in the late 1980’s by the insider Lesson, a 28 year old trader in the Singapore office trading and market manipulation of Dennis Levine, Martin of Barings Bank, destroyed this venerable British Siegel, Ivan Boesky, Michael Milken, and others. In 1990, firm in 1995 by losing more than US $1 billion on Milken pleaded guilty to six felonies and was sentenced futures contracts that bet the wrong way on the to 10 years in prison. Previously, his firm, Drexel Burnham direction of the Japanese stock market. In 1996, the Lambert, collapsed after admitting to six felonies and acknowledged king of copper trading was fired by agreeing to pay US $650 million. James B. Stewart, the Sumitomo Corporation for losing an estimated US author of Den of Thieves, calls their activities “the greatest, $2.6 billion, and Sumitomo also sued a number of criminal conspiracy the financial world has ever known.” banks for issuing derivative securities that enabled Insider trading continuous to be not only a frequent the trader to hide the losses. Between 2006 and occurrence but also a source of controversy. However, the 2008, Jerome Kerviel, a trader at the French Bank investigation of Raj Rajaratnam, head of the Galleon Group Societe Generale, managed to lose €4.9 billion who was convicted of insider trading in 2011 and sentenced Returns in unauthorised activity. UBS, a financial services to 11 years in prison also ensnared many members of the that are company, incurred losses of US $2.3 billion in 2011 circle of informants that he had build over many years, ‘too good that had been hidden by a young trader named including a director of Goldman Sachs and Procter & to be true’ Kweku Adoboli. In most of these cases, the rogue Gamble (P&G). This conviction exposed to the extent to often are, traders exploited flaws in reporting systems and which insider trading had become organised in the hedge but who benefited from lax management supervision, which fund world through so called expert networks. wants to may have also been weakened by a reluctance to point this interfere in these traders apparent money making The investment bank Salomon Brothers was nearly out? ability. Returns that are ‘too good to be true’ often destroyed in 1991 by charges that traders in the are, but who wants to point this out? 62 The Pakistan Accountant July - September 2017