Accounting management assignment help on: Ethical risks in business
Q?? What are the ethical risks associated with derivatives?
It is very clear that Derivatives considered as financial instruments with value which change significantly to underlying components like events, prices and assets. In general, ethical risk which derivatives pose is that they may be very dangerous for non experienced investors. The fundamental feature of the derivative is to provide the greater incentive but this could be the main risk if investors are not aware of investment when they are creating at time. Other type of the ethical risk is associated with the derivative is when traders and managers are not taking into fact investors and stakeholders risk who has commended their investments (Lewin, 2001).
The ethical risks associated with derivatives when traders and managers use highly risky and complex financial instruments. In general, derivatives are implemented in transaction of sales where there is the chance of high financial rewards (Michaely, Roni & Womack, 1999). It is viewed that if the risks related with the derivative are not conveyed to investor then it can result in fraud or even deception. In general, derivatives pose great amounts of risk inexperienced or small investors. The fundamental premise of the derivatives is to pass on the risk between parties based upon their willingness to presume extra risk or hedge against it. According to the Warren Buffett, he has explained that derivatives considered as financial weapons of the mass destruction. Derivatives show investors to counter party risk. For e.g. if the businesses want the fixed interest loan but banks provide only variable rates, the businesses swap payments with other business which wants the variable rate, making the fixed rate for the first type of business. At last, it can be said that derivatives can suffer great returns or losses from little movements in the underlying price of the assets. It is realized that due to great dependence on derivatives at the time of sub-prime crisis, UBS faced the problem like tax evasion. It is viewed that if the 2nd business goes bankrupt, then the 1st business loses its permanent interest rate and has to give back the variable interest rate. Defective goods given to the traders to sold with no any due diligence from the organization as to risk level. On the other side, Swaps may be implemented to mitigate risks like alterations in rates of interest, or to consider the altering prices of currencies and commodities. Derivative has been implemented for leveraging of the debt in the economy to the massive degree. It is very clear that, when something happens unexpected, the economy will search it complex to reimburse the debts, thus producing the depression or recession. The ethical matters in implementing derivatives rest with traders and managers who implement this greatly risky and complex financial component. At last, ethical risk with the derivatives is they are deceptive in nature and don’t let the investors to know any kind of big risks.
What is the difference between making a bad business decision associated with derivatives and engaging in unethical conduct using derivatives?
It is viewed that when the investor make the bad decision of the business related with derivatives are not thinking sensibly and doing excellent business. In general, the individual has the mindset, but not thinking and creating the bad action by indulging in derivatives and it shall be terrible for the organization. The main distinction is that when the investor creates the bad decision it is the choice that the investor helps the business by implementing this derivative as to get out of the predicament in which the investor has invested. No doubt, manipulation and greed performed the function in the widespread usage of the new financial components (Michaely, Roni & Womack, 1999).Complicated derivative has certainly created the finance world a more opaque and convoluted place. Before year 2008, some people described the cons and pros of CDS, still while they proved influential adequate to assist bring down Lehman Brothers, Bear Stearns, Washington Mutual, AIG and others. CDS was considered as the innovative component to hedge the risk for the integration of the international financial world. The dealings of the finance become more difficult with models of computer trading, exotic products of derivative and intense risk taking which does not refer the ethical decision making dimensions and the implication of high risky financial components on stakeholders. At last, all these factors make the running of the business more complex and make the ethics significance more important.
What kinds of Investment decisions drove Barings bank, UBS, Bear Stearns and Lehman Brothers to financial disasters?
It is realized that in April 2008, UBS issued the exclusive report to the shareholder that identified the grounds of loss. Generally, UBS showed that they had basic failures like accounting decisions, people making decision, incentives and control systems. In incentives area, the Company searched the some major flaws.
Workers have robust incentives to indulge in carry trades in that workers implemented UBS capital to spend in great-yielding mortgage securities. The Company had charged very least cost of the capital and charged capital cost based upon the assets riskiness being bought. The treatment of the accounting at the UBS permitted traders to record the profits the instant the trade was performed with no any clawback based upon the following outcomes. UBS offered non sufficient incentives to safeguard the franchise of the UBS for the long period. The management of the Company gave loads of cash components to people indulged in events that revealed the organization to big risks (Lin & Nichols, 1998).
Bear Stearns
It is viewed that the investment in the subprime loan was the huge factor for the financial disaster but derivatives could be the main factor. Since, the failure of the information came out when Bear Stearns broadly misrepresented the information of the client on the applications of the loan to make them visible more attractive mortgage recipients.
Barings Bank
To conceal the bad debts, the management of the Bank created the error account for hiding of the losses. Due to this account, no one was able to view the losses hidden by the account. In fact, Leeson assured Barings that he was not using the funds of the Company for trading and all positions were hedged perfectly. This was the main reason for the financial disaster for the Barings Bank.
Lehman Brothers
It is viewed that the dependence of the Lehman Brothers on subprime mortgages was considered as the main factor for the financial disaster. In addition, few are accusing the Company for non-ethical behavior in its dealings with Alliance Mortgage, the Company who was in charge of predatory lending (Easterbrook, Frank & Daniel, 1984). It is realized that Lehman Brothers assisted bundle of dollars in the mortgages in the derivative components for the First Alliance. The Company had also bought various CDS a kind of derivative agreement. The Company has also bought great amounts of subprime debt & other lower ranked assets when securitized the underlying mortgage (Hannan, Kagel, & Moser, 2002).
How can an ethical corporate culture with adequate internal controls, including ethics and compliance policies, prevent future disasters in financial companies?It is very clear that ethics of the business from the organizational prospect is not just about altering people philosophies about the ethics one individual at the time and then presuming there shall be no any misconduct. Firms are required to form principles, establish shared values and form standards of the compliance to monitor the misconduct. While various people belief they have excellent ethics and wish to do accurate thing, people have to faith others comprising lawyers, accountants and managers when selling difficult financial instruments. This shows that there is accuracy with vital ethical assessments by those offering oversight, the investor may be the part of ethical misconduct. To some point, this is what occurred in year 2008 global crisis. This model showed significant danger on the economy of the world and produced in widespread nonprofit, government, business and personal financial loss. Hopefully, the system of the regulatory shall become more practical and offer benefits for more transparency and cooperation to investigate risks. The industry of finance is required to create ethics an enterprise-broad concern and portion of the performance assessments. Overreliance and Complacency on difficult models of the computer to find out actions relied only on formula to increase profits have impacted the industry of Finance (Bernstein, 2001).
The protection that CDS, subprime loans and model of the computer were not non ethical procedures ignored the truth that the decision makers mishandled the financial instruments to destroy others. Concern for other people and prevention of the harm considered as the basic principle of the business ethics. It is very clear that business ethic in the organization needs value-related leadership from the top management, determined actions which comprise managing and usage of the standards of the sufficient conduct and continuous and openness effort to enhance the ethical performance of the organization (Borge, 2001). While, personal values considered as significant in ethical action making they are considered as significant instruments which guide the actions, policies and decisions of the organization. The importance of the ethical behavior associates to values and traditions of the organization, not only to individuals who create the actions and take out. The ability of the firm to implement and plan ethical standards of the business relies in portion on structuring activities and resources to accomplish ethical aims in the efficient and effective manner.
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