Question

Legislation, regulation and industry codes are applicable to financial management. What is their purpose?

Answer 1

The purpose of legislations, regulations, and industry codes in the field of financial management is to ensure that funds of an organization is managed in a proper, regulated and ethical manner and that all parties involved are doing their tasks in a manner that is responsible, accountable, truthful and ethical.

Financial managers have a fiduciary duty to manage and protect the money, investments and property of the shareholders. Different objectives of financial management include profit and wealth maximization, minimization of cost of capital, maintaining liquidity etc. It is the duty of the managers to ensure that the decisions being taken by them are in the best interest of the shareholders.

However, many a times, managers take decision that violates the principles of fiduciary duty that managers owe to the shareholders. As we can see from the cases of Enron and WorldCom the managers took decisions to further their own interests at the cost of the interests of the shareholders. It is here that legislations, regulations and industry codes come into play and ensures robust and transparent management and governance in the field of financial management.