Academic journal article Journal of Financial Management & Analysis

Ethic - Based Management vs Corporate Misgovernance - - New Approach to Financial Statement Analysis

Academic journal article Journal of Financial Management & Analysis

Ethic - Based Management vs Corporate Misgovernance - - New Approach to Financial Statement Analysis

Article excerpt


The subjects of insolvency, bank and company failures; corruption; bribery; frauds like accounts manipulation, forging of letters of credit (LCs)/ bankers' receipts (BRs), etc. - - the norms of presentday business - - though very important, have received scanty attention-cum-analytical treatment by financial economists and practitioners. There is a human tendency to cover-up, and to assume that the future will be better and that everything will come right. The human mind has a great ability to deceive itself and direct itself along predetermined channels. Among the numerous diseases prevailing in the world, the disease of greed has grown beyond bounds. There is no worse disease than this as aptly pointed out by His Holiness Pope Benedict XVI:

Profit is useful if it serves as a means towards an end.., once profit becomes the exclusive goal, if it is produced by improper means and without the common good as its ultimate end, it risks destroying wealth and creating poverty.., greed has brought about the worst economic downturn since the Great Depression. The economy needs ethics in order to function correctly - not any ethics, but an ethics which is people centered1.

Corruption is rampant throughout the world. Empirical research shows that basically there are two causes of corruption namely: Greed and Need. While Needs can be met by reviewing pay packages, etc, no package can take care of the Greed which has no end. As an offshoot of moral bankruptcy and consequent devaluation of man - plaguing practically all countries (developing and developed) - there is an increasing tendency to channel funds (to get rich too soon) to maintain unproductive! non- performing assets2.

The subject ethics: corporate business and government, has, of late, assumed great significance in theory and practice - as encoded in customer service manual and employees rule book of organizations and as a teaching subject: course in educational institutions and organizations. This relates to almost all countries of the world - industrialized, developing countries and lately Russia and, in fact, the focus of the June 2, 2001 Congress of the Russian Association of Industrialists and Entrepreneurs held in Moscow, was on introduction of civilized rules (based on good ethics) for corporate governance in Russia1.

Writing on this revolutionary and new approach to financial statement analysis is a difficult assignment as aptly pointed out by renowned applied financial (accounting) statisticians-cumcorporate finance experts, Lusk, et., al. (of the Wharton School : The University of Pennsylvania, U.S.A.) in their seminal paper relating to 'Idiosyncratic Risk':

....although most often social reaction to moral dilemma is to increase regulation, monitoring and sanctions, we wish to offer the creative alternative offered by Professor M. R. Kumara Swamy's Idea of Ethical Based Financial Statements. . . This is a provocative idea (the first time that we have encountered such a revolutionary concept) in the sense that it is an attempt to use a moral or spiritual context for the development of financial statements4.

Corruption and Moral Bankruptcy

It is true but a sad commentary that to-day's business world has been characterised by moral bankruptcy violating all norms of good business ethics which, in turn, has caused mounting financial problems due to frequent bank failures and/or insolvencies - - the result of their engaging in fraudulent deals like currency and drug trafficking, smuggling, corruption, forged letters of credit and bankers receipts and manipulating accounts, etc.

Corruption as uniquely classified after detailed research by renowned financial management expert M. R. Kumara Swamy5 as -

(i) Democratic Corruption, refer to illegal payment by the people, of the people and for the people;

(ii) Hierarchic/Anarchical Corruption, relating to bribery which must be compulsorily paid to get - - political party-interested-cum-social utility -work, devoid of prudent financial management considerations, accomplished/executed with the blessings of the political party (Government) in power through the chain of middlemen (who may not belong to any political party) acting as agents, money laundering, fraud and allied issues are important issues and which have caused government collapse/instability, - -

have received scanty analytical treatment by financial economists. …

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