Abstract
Corporate finance is the branch of finance that focuses on how corporations approach their sources of funding, capital structure, investment decision, and accounting. There are unethical concerns in corporate finance and this paper is focusing on them. First, paper defines what corporate finance is and what it deals with. Secondly, the paper explains what unethical concerns in corporate finance are and the impact these concerns have. Finally, it details some of the actions that need to be taken to handle these ethical concerns. Overall, the paper demonstrates that unethical actions have a massive negative impact which can be handled by taking the right actions and consequently reversing their negative impact.
Ethical Concerns
Corporate finance is a branch of finance that focuses on how corporations approach their sources of funding, capital structure, investment decision, and accounting. Using corporate finance, one can assess the growth of a corporation, and the impact it has on a country’s economy and its shareholders. Within the different entails of corporate finance, a corporation can act ethically or unethically. When unethical actions prevail, there are negative impacts on both a country’s economy and the shareholders. As such, there is a need to address all the unethical issues that are found in corporate finance. Unethical concerns have numerous economic demerits on the shareholders, the corporation, and the economy of the government, but if the right action is taken, these demerits can be significantly reduced.
Corporations can engage in legal or illegal activities as they try not to pay taxes to the relevant bodies. When the methods used are legal, that is known as tax avoidance, but when illegal methods are used, this is known as tax evasion. Some of the methods used by some corporations include accelerated depreciation, offshoring profits, awarding stock options, and maximizing tax credits (Alm & Kapser, 2019). By doing this, the corporations significantly reduce their taxable income and consequently reduce the taxes they have to pay. Others falsify the available information so that their taxable income looks nonexistent or blatantly fail to pay tax. This is unethical for corporations as it has multiple negative impacts.
One negative impact of tax evasion is reduced income for the government. Tax is a way of the government collecting money that they use to provide much-needed services to individuals and corporations. Another negative impact is the corporation running a risk of closure. The closure has an impact on people losing jobs and their source of livelihood (Nola, Kochavkov, Scholl, & Tkhir, 2021). As such, when a company is evading tax, it is directly risking the livelihood of its employees. The third impact of tax evasion is an increase in the tax rate. Since tax evasion causes a decline in government revenue, the government can result in collecting higher taxes to make up for deficits. This then causes an increased tax rate for other people, despite them being faithful in paying their tax.
The second unethical concern in corporate finance is insider trading. Insider trading is when insiders in a corporation use monopolistic information they have access to, to sell or buy the stock of a company resulting in abnormal results. It is an unfair advantage the insiders in a corporation enjoy mainly because they have access to information that is ordinarily out of reach to the general public (Nanda & Barai, 2020). For instance, if a person is aware of a merger that is about to take place, and they know the merger will improve the stocks of a company significantly, when they use this information to buy the stock even before the information is publicly available, then this is known as insider trading.
The first negative impact of insider trading is that there is a significant reduction in liquidity. Reduced liquidity simply means that transactions by investors will cost higher than they would ordinarily do (Chao & Shaub, 2020). A higher cost of transaction translates to the returns of investors being slashed. This means that insider traders benefit at the expense of other investors. The second negative impact of insider trading is that it undermines public confidence in financial markets. When the public believes that the odds are stacked against them in trading, they tend to shun investing even more. This then reduces the availability of funding for corporations.
Another unethical concern in corporate finance is accounting fraud. Accounting fraud in corporate finance takes many shapes and forms. One common form is the loss of assets and the unauthorized use of the same. This happens when money or property belonging to the corporation is used for personal gain by an individual. Another form is when money is redirected by an individual so that they can buy personal goods for themselves (LaMarco, 2018). In some cases, individuals falsify financial statements to show that the company is doing well and has a strong financial position for their gain. This fraud is used to lure investors which is unethical. These are some examples of accounting fraud that some companies engage in.
Accounting fraud has multiple negative impacts on both corporations and the economy. When financial documents are falsified to lure investors, the expected return on investment for investors is usually disappointing in real life (Chao & Shaub, 2020). This is because the true the expectations built on false data cannot be met. Also, it causes corporations to never have stability. Any time accounting fraud takes place, there are follow-up actions that are taken to cover up the accounting fraud. These actions have to be done perpetually lest the accounting fraud is discovered. Over time of covering up, the accounting fraud continues to eat up the organization like cancer and often leads to a total collapse of the organization.
Corporations also often engage in corrupt activities which is unethical in corporate finance. Corruption is when favors of any nature are exchanged to give a person an unfair advantage over everyone else. For instance, when deciding who will win a tender to supply specific products to the corporation, a supplier can bribe the procurement manager so that they are given the tender to supply the products to the corporation (Du, 2021). Corruption can also be in how people ascend the corporate ladder. Some people are denied their rightfully earned promotions simply because another person has bribed their way up. These varying forms of corruption harm the corporations.
One negative impact is the reduced quality of supplied goods and services. When corruption is the order of the day, most of those who win the tenders look to recover the money they have spent dealing corruptly by providing substandard products and high prices. Since the tenders are won in a corrupt way, it becomes hard to check the quality of products delivered and also to take action against suppliers who are delivering these products (LaMarco, 2018). This translates to the corporation producing substandard goods and services. Corruption also robs a corporation’s great talent when those who have earned positions cannot take them up unless they are corrupt.
Negative Impact of Unethical practices
Corporations are vastly affected by unethical practices in corporate finance. First, the longevity of a firm is put in jeopardy every time those running the corporation engage in unethical activities. When the law catches up with illegal and unethical activities, corporations are often heavily impacted as they might be required to pay millions of dollars in damages. For some corporations, this can often be the end of their operations.
Secondly, unethical practices cause the general public to have a negative image of the corporation. Corporations are built to meet the needs of individuals in the general public. This means corporations need the goodwill of the public to be successful. It is for this reason that most companies engage in customer relations activities to build a good image with the general public. An unethical activity often undoes all the goodwill a corporation has with the public. This can lead to investors pulling out as well as customers opting for goods and services offered by competitors. This puts a corporation at risk of closure.
Actions to be taken
To deal with ethical concerns in corporate finance, one thing that needs to be done is the continuous drafting of policies that are geared to address unethical issues. Policies dictate what is acceptable in corporate finance and what is not acceptable. They also dictate how these parameters that are put in place will be measured (Du, 2021). By doing so, policies also mandate different institutions the responsibility of enforcing them. This way, the policies are practiced and continuously they help reduce the unethical actions and gradually eliminate them in totality. Such policies would be of great benefit to both corporations, shareholders, and the economy of the concerned country.
Policies targeting ethical issues in corporate finance should be developed with the assistance of people running corporations or with sufficient experience in the same. Participation of different parties ensures that as many issues as possible have been gathered. It also ensures that the policies that are developed are realistic and therefore easy to adopt for corporations. Policies should not be hard to adopt and they should not create a hostile business environment. Any policy that is hostile to the business does not benefit the corporation or its shareholders. Nonetheless, the policies are necessary to protect the interest of shareholders and corporations from unethical individuals.
Research conducted by Jiari Anderson on how to decrease unethical behavior in financial institutions showed that use of policy is one of the most effective methods. From this research done in financial institutions in the Southeastern region of the United States, it is clear that institutional leaders play a pivotal role in creating and building an ethical culture in their institutions (Anderson, 2018). One way they achieve this is by creating and implementing policies that promote an ethical culture and heavily punish unethical behavior. This study gives a foundational backdrop that demonstrates the effectiveness of policies in dealing with unethical behavior.
The second action to deal with unethical practices in corporate finance is the creation and support of independent institutions to enforce the created policies. These institutions are both auditors and regulators. Institutions should be independent to ensure they are partial when dealing with corporations. Partiality can propagate negative agendas against specific institutions. The institutions should also be independent to ensure that their actions are swift, effective, and conclusive. Working together with law enforcement and the judiciary, there is a need for institutions that focus on bringing back and maintaining ethics in corporate finance.
The role of the institutions should be to educate, investigate and take action against non-compliant corporations. The role of educating on ethics in corporate finance should help corporations to develop checks and balances within themselves that ensure they are compliant with policies governing corporate finance. This education should also detail what is expected of the corporation and what action they risk if they do not comply. The institutions should have access to details that will help them investigate corporations on whether they are toeing the line or not. This means they have methods to allow whistleblowers to give them information which can be a good starting point for checking compliance. Finally, unless the institutions can take action against corporations, their responsibility would remain diagnostic and not curative. It is for this reason that is paramount that the institutions are empowered to take appropriate action.
Corporate finance is often plagued with unethical practices. These practices hurt corporations, shareholders, and the economy in which these corporations operate. Some of the unethical practices include tax evasion, insider trading, accounting fraud, and corruption. These unethical practices significantly reduce the longevity of corporations and cause the general public to have a negative image of the viability of stocks and ruin the goodwill of the public. This often negatively impacts the economy of a country and has a ripple effect of negatively impacting shareholders. These unethical actions can be countered by ensuring that there are policies in place that prevent them from taking place. These policies should be enforced by independent institutions that work hand in hand with law enforcement as well as the judicial system. The independent institutions ought to educate corporations, investigate whenever there is the possibility of unethical activity, and take action when necessary. This way, corporate finance can be rid of all forms of unethical activity.
