Ethical Issues Facing Financial Managers

by Chirantan Basu; Updated September 26, 2017

Financial managers prepare reports, oversee accounting functions, plan investment strategies and direct cash management functions. They also are involved in branch management functions at banks and other financial institutions. They are required to uphold the highest ethical standards because internal and external stakeholders depend on transparent, timely and complete financial documents to make decisions.

Accuracy

A company’s financial manager ensures that all financial publications accurately and fairly reflect the financial condition of the company. Accounting errors and financial fraud, such as what was seen in the cases of Enron and WorldCom, damage the interests of shareholders, employees and affect confidence in the financial system. Some organizations document ethics guidelines specifically for financial managers. For example, the ethics code of the United States Postal Service requires senior financial managers to maintain accurate records and books, maintain internal controls and prepare financial documents in accordance with generally accepted accounting principles.

Transparency

Financial documents reflect a company's performance relative to its peers, and its internal strengths and weaknesses. Regulatory agencies require publicly traded companies to submit periodic financial statements and make full disclosures of material information. A change in the senior executive ranks, buyout offers, loss or win of a major contract and new product launches are examples of material information. Transparency also means explaining financial information clearly, especially for those who aren't familiar with the company’s operations. Financial managers should not hide, obscure or otherwise render relevant financial information impossible for ordinary shareholders to understand.

Timeliness

Timely financial information is just as important as accurate and transparent information. Management, investors and other stakeholders require timely information to make the right decisions. Many cases exist of a publicly traded company's stock reacting sharply and negatively to negative earnings surprises or unpleasant product-related news. For example, a company should promptly disclose manufacturing problems that could temporarily affect sales. Similarly, the company should not hold back news of a major contract loss in the hope that it can replace the lost revenue with new contracts.

Integrity

Financial managers should strive for unimpeachable integrity. Customers, shareholders and employees should be able to trust a financial manager's words. Managers should not allow prejudice, bias and conflicts of interest to influence their actions. Managers should disclose real or apparent conflicts of interest, such as an investment position in a stock or an ownership interest in one of the bidding companies for a procurement contract. The structure of certain stock-based incentive compensation schemes could also result in ethical issues. For example, managers might be tempted to manipulate stock prices by selectively disclosing or not disclosing relevant financial information.

About the Author

Based in Ottawa, Canada, Chirantan Basu has been writing since 1995. His work has appeared in various publications and he has performed financial editing at a Wall Street firm. Basu holds a Bachelor of Engineering from Memorial University of Newfoundland, a Master of Business Administration from the University of Ottawa and holds the Canadian Investment Manager designation from the Canadian Securities Institute.