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Chapter 3 introduces several specific moral problems and duties of accountants, financial analysts, stockbrokers, investors, and other experts in finances.
Edward J. Balleisen begins the chapter by summarizing various types of business fraud. He provides definitions and historical examples of each type, and discusses some of the psychological effects that render people susceptible to such fraud.
Carol J. Loomis addresses the ethical dilemmas faced by accountants with regard to “managed earnings.” “Managing earnings” means adjusting the financial books in a company to reflect expected earnings over time. But this technique, although sometimes legitimate, can quickly collapse—under the pressure of Wall Street or one’s boss—into straightforward lying or at best irresponsible and deceptive accounting. Loomis offers many examples of how “managed earnings” have destroyed businesses and sent accountants and managers to prison. Ed Cohen offers another example with his article on former accounting giant Arthur Andersen, now bankrupt after the scandal caused by their handling of the books of (also, now bankrupt) former Wall Street darling Enron.
Robert E. Frederick and W. Michael Hoffman examine the different kinds of individual investors and ask what sorts of risks they should and should not be allowed to take in securities markets, and how we might justify limiting some investors to certain kinds of investment.
John R. Boatright gives an overview of the moral problems and duties of persons working in finance services and other aspects of finance markets. Jennifer Moore takes a more specific look at those moral conflicts in her discussion of “insider trading,” why it is wrong, and why it is not necessarily always wrong (or is not always wrong for the reasons people usually suppose). She argues that “violation of fiduciary duty”—and not some other moral argument—is the real reason insider trading should be prohibited.
In “F.I.A.S.C.O.,” Frank Partnoy shows the many moral (and legal) dangers associated with the trading of those curious stock market entities known as “derivatives.” The articles by Paul B. Farrell and Duff McDonald illustrate the precarious nature of our current economic model by outlining the risks of derivatives and hedge funds.
Finally, Niall Ferguson’s article explores the financial crash of 2008 from a historical perspective, explaining how banks were drawn to take larger and larger risks, eventually leading to their collapse.
By the close of Chapter 3, you should:
- Be familiar with a variety of type of business fraud and the psychological mechanisms that make people susceptible to them
- Understand the basic principles and difficulties of ethical accounting and finance ethics
- Understand the concept of managed earnings
- Understand the concept of insider trading and be able to construct arguments both for and against its practice
- Understand the moral dangers associated with mergers, acquisitions, and risky investments
- Understand the special fiduciary responsibilities of financial professionals
John Boatright. Ethics in Finance. New York: Blackwell, 1999.
Michael Lewis. Liar’s Poker. New York: Penguin, 1990.
Tibor Machan. “What Is Morally Right with Insider Trading?” Public Affairs Quarterly 10 (April 1996).
Burton G. Malkiel. A Random Walk Down Wall Street. New York: W. W. Norton, 2004.
Edwin J. Perkins. “The Duties of a Stockbroker.” In Wall Street to Main Street: Charles Merrill and Middle-Class Investors. New York: Cambridge University Press, 1999.
Christopher D. Stone. Where the Law Ends. New York: Harper and Row, 1975.
Websites
Become an expert on the issues facing financial professionals at www.afponline.org/
Visit the Institute of Management Accountants and their “ethics hotline” at www.imanet.org
Find many resources for accounting and finance ethics and read the AICPA Code of
Professional Conduct at http://www.aicpa.org/InterestAreas/ProfessionalEthics/Pages/ProfessionalEthics.aspx
Listen to two podcasts from This American Life explaining the 2008 financial crisis in a way that is easy to understand:
“The Giant Pool of Money,” at http://www.thisamericanlife.org/radio-archives/episode/355/the-giant-pool-of-money
“Bad Bank,” at http://www.thisamericanlife.org/radio-archives/episode/375/bad-bank
Check out Planet Money, a thoughtful blog about the economy, at http://www.npr.org/blogs/money/
Read arguments for decriminalizing insider trading at https://www.wsj.com/articles/SB10001424052748704224004574489324091790350.
Read a 2011 story from the New York Times on the federal inquiry into the financial crisis at http://www.nytimes.com/2011/01/26/business/economy/26inquiry.html?_r=0