Ethics and Financial Decisions: Basics of Financial Governance, Compliance and Investor Protection

Overview

Ethics in finance focuses on doing what is right and fair while making financial decisions such as investment, financing and dividend decisions. Good governance, strong compliance, transparent disclosure and active investor protection reduce fraud and improve trust in markets (concept).

Learning objectives

You should be able to:

• Define ethics in finance and explain why it matters.
• Identify common unethical practices in financial reporting and markets.
• Explain basics of corporate/financial governance and its principles.
• Define compliance and list key areas where compliance is required.
• Explain investor protection and common mechanisms.
• Write an ethical decision-making flow in exam style.

Meaning of ethics in finance

Ethics refers to moral principles that guide behaviour. In finance, ethics means:

• honest reporting and fair dealing (concept)
• avoiding conflicts of interest (concept)
• protecting stakeholders’ interests within legal boundaries

Why ethics matters in financial decisions

Ethics matters because financial decisions influence:

• investors’ savings and wealth
• lenders’ safety of funds
• employees, customers and the public (stakeholder impact) (concept)

Benefits of ethical behaviour (concept):

• builds trust and reputation
• reduces legal penalties and compliance costs
• supports sustainable long-term value

Common unethical practices (examples)

Typical exam examples:

• misrepresentation / window dressing of accounts (concept)
• insider trading (use of unpublished price-sensitive information) (concept)
• misleading projections and false disclosures (concept)
• conflict of interest: biased advice for personal gain
• bribery and improper payments (concept)

Corporate/financial governance (basics)

Corporate governance is the system by which a company is directed and controlled (concept).

In financial context, governance includes:

• board oversight, independent checks
• transparency in financial reporting
• accountability of management for resource use (concept)

Core principles of good governance (table)

Compliance: meaning and scope

Compliance means following applicable laws, regulations and internal policies (concept).

Finance-related compliance areas often include (concept):

• financial reporting standards and disclosures
• taxation and statutory payments
• lending/borrowing covenants and regulatory requirements
• anti-fraud/anti-money-laundering rules (where applicable) (concept)

Investor protection: meaning and mechanisms

Investor protection refers to steps that safeguard investors from fraud, misinformation and unfair market practices (concept).

Mechanisms (concept):

• mandatory disclosures and periodic reporting
• independent audit and audit committee oversight
• grievance redressal mechanisms and investor education
• rules against insider trading and market manipulation

Role of audit, internal control and disclosure

• Internal control: prevents errors/fraud and improves reliability of accounts (concept)
• Audit: independent verification increases credibility of statements
• Disclosure: reduces information asymmetry between insiders and investors (concept)

Ethical decision-making framework (flow)

Identify decision → Identify stakeholders → Check laws/regulations (compliance) (concept) → Identify conflicts of interest → Evaluate alternatives (fairness/transparency) → Decide and document → Disclose appropriately and review (concept)

Quick recap (1-minute revision)

• Ethics = right conduct; finance ethics = honesty, fairness, avoiding conflicts.
• Governance principles: transparency, accountability, fairness, responsibility.
• Compliance ensures adherence to laws/policies.
• Investor protection uses disclosures, audit, controls, and market rules.
• Ethical decisions follow a stakeholder + compliance + disclosure framework.