Question

a) Briefly explain accountability from the perspective of a finance industry.

(b) How does accountability differ from the concept of governance?

(a) Identify and briefly explain the two main categories in financial contracting.

(b) Further explain financial contracting in finance services industry.

(e) Identify the THREE (3) main sections that arise ethical issues in financial services industry

(f) Briefly explain conflict of interest from the perspective of financial services industry.

(g) There are two main categories of ethical issues in financial management. Identify both categories.

(h) Provide explanation on the duties of financial managers.

(i) Provide detail explanation on risk management from the perspective of financial services industry.

Answer 1

a) Briefly explain accountability from the perspective of a finance industry:

Accountability as “obliged to give a reckoning or explanation for one’s actions; responsibility.” Responsibility is defined as “legally or morally obliged to take care of something or to carry out a duty; liable to be blamed for loss or failure.” Implicit in this definition is that the person/agency that is held accountable (the accountee) has been given a mandate, an objective against which he/she has to give account to the person/agency from which the mandate has been received (the accountor). The accountor gives the mandate, delegates the power, while the accountee receives power.Thus, the traditional conception of accountability has two elements: the idea of checking on the accountee’s performance literally, “holding to account,” and the requirement that the accountee takes responsibility for failure, goes on to make amends for any fault or damage, and takes steps to prevent its recurrence in the future.Accountability presupposes that the financial supervisor’s actions will be assessed according to certain standards and with respect to defined objectives.

This assessment forms the basis on which a decision to apply any instrument of democratic accountability (changing the legal basis, refusing an appointment) is taken.In governance, accountability has expanded beyond the basic definition of "being called to account for one's actions". It is frequently described as an account-giving relationship between individuals, e.g. "A is accountable to B when A is obliged to inform B about A's (past or future) actions and decisions, to justify them, and to suffer punishment in the case of eventual misconduct".Accountability cannot exist without proper accounting practices; in other words, an absence of accounting means an absence of accountability.

(b) How does accountability differ from the concept of governance?

Governance refers to directing & controlling. Whereas, accountability refers to being answerable for the actions and decisions taken. However, both go hand in hand. Where there is governance, accountability is a must.Governing is how the government works. Accountability is the ability of the populace to hold members of the government to a standard of behavior and care, with punishments for failure therein

(c) Identify and briefly explain the two main categories in financial contracting.

Finance Contracts

Finance contracts, or financial services contracts, are contracts that are used in accordance with securities law to allow for individually negotiated agreements involving commodities, securities, currencies, or other interests of an economic or financial nature. These contracts are used for buying, selling, lending, swapping, and repurchasing within the financial markets. Different kinds of financial deals will require different variations of the basic finance contract.

Options Contracts

Options contracts are a kind of finance contract that involve a seller and buyer agreeing to give the option’s purchaser the right to sell or buy an asset at an agreed upon price at a specified date. Such contracts are common to commodities, real estate, and securities transactions.

(d) Further explain financial contracting in finance services industry.

The financial services industry encompasses many types of businesses involved in managing money and plays a vital role in the world's economy. The industry as a whole is vast and includes companies engaged in activities such as investing, lending, insuring, securities trading and issuance, asset management, advising, accounting, and foreign exchange.

(e) Identify the THREE (3) main sections that arise ethical issues in financial services industry

The issue of ethics and economic efficiency in the provisioning and delivery of services becomes complex in the Indian context. Ethical issues in the financial services industry affect everyone, because even if you don‟t work in the field, you‟re a consumer of the services. The public seems to have the perception that the financial services sector is more unethical than other areas of business. This misperception persists for several reasons. First of all, the industry itself is quite large. It encompasses banks, securities firms, insurance companies, mutual fund organizations, investment banks, pensions funds, mortgage lenders—any company doing business in the financial arena. Because of its vast size, the industry tends to garner lots of headlines, many of which tout its ethical lapses. India's services sector has always served the Indian economy well, accounting for nearly 57 per cent of the gross domestic product (GDP). Here, the financial services segment has been a significant contributor.

(f) Briefly explain conflict of interest from the perspective of financial services industry.

Potential conflicts of interest are a fact of life in financial intermediation. Under perfect competition and in the absence of asymmetric information, exploitation of conflicts of interest cannot rationally take place. Consequently, the necessary and sufficient condition for agency costs associated with conflict of interest exploitation center on market and information imperfections. Arguably, the bigger and broader the financial intermediaries, the greater the agency problems associated with conflict-of-interest exploitation.

It follows that efforts to address the issue through improved transparency and market discipline are central to creating viable solutions to a problem that repeatedly seems to shake public confidence in financial markets. In recent years, the role of banks, securities firms, insurance companies and asset managers in alleged conflict-of interest-exploitation involving a broad array of abusive retail market practices, in acting simultaneously as principals and intermediaries, in facilitating various corporate abuses, and in misusing private information – suggests that the underlying market imperfections are systemic even in highly developed financial systems. Certainly the prominence of conflict-of- interest problems so soon after the passage of the US Gramm-Leach-Bliley Act of 1999, which removed some of the key structural barriers to conflict exploitation built into the US regulatory system for some 66 years, seems to have surprised many observers. Moreover, recent evidence.

(g) There are two main categories of ethical issues in financial management. Identify both categories.

Financial managers must have the skills to handle large sums of other peoples' money, but skill alone isn't enough. The potential for financial managers to line their own pockets or ruin a client or company through bad judgment is immense. It's essential to have a code of ethics in finance and to live up to those principles every day.

Conflicts of Interest

Underlying the role of ethics in financial management is a fiduciary duty. Managers must act in the interests of their clients and employers, not their own. If there's a conflict of interest where you can enrich yourself while harming a client, you must side with the client.

Bernie Madoff, for example, served as both a broker for his clients and a custodian for their money. With both roles combined, there was no independent auditing of his operations, which made it easier to defraud his clients of millions.That's why establishing internal controls is essential. When the risk of exposure is high, it's less tempting to steal.

Security and Information

In the networked 21st century, ethical conduct includes how you handle and secure information. The security breach at the Equifax credit bureau, for example, may have affected confidential credit and personal data belonging to 143 million Americans. Strategic CFO magazine suggests that a proper code of ethics could have led to better protection for people's data and more transparency after the breach occurred.

(h) Provide explanation on the duties of financial managers.

• Daily reporting.
• Analysing targets.
• Meeting with department heads.
• Managing and coordinating monthly reporting, budgeting and reforecast processes.
• Providing back office services such as accounts payable, collection and payroll.
• Monitoring cash flow.
• Liaising with accountant teams.

(i) Provide detail explanation on risk management from the perspective of financial services industry.

Financial risk management is the practice of economic value in a firm by using financial instruments to manage exposure to risk: operational risk, credit risk and market risk, foreign exchange risk, shape risk, volatility risk, liquidity risk, inflation risk, business risk, legal risk, reputational risk, sector risk.

• Policy: The ERM Policy set forth the governing principles and personnel responsible for specific aspects of risk management activities. Robert explained that, “To every strategy that is put forward you have a measure of Risk attached to it; ensuring that the organization’s business strategy is in tandem with its risk appetite and risk tolerance. Organizations today not only want their risk measures to be back tested, but also want that risk should be properly disclosed internally as well as externally on a drill down and integrated portfolio management basis. A good policy ensures that the board, senior management has a clear picture of risk portfolio. A good list has around 50 top risks that company faces; with enterprise-wide awareness of what the top 10 are. If something wrong happens, it should be something out of 10 risks listed in the list - indicating that you are measuring risks well.”
• Methodology: The CROs ensures that ERM methodology and ERM technology are in sync. Here Value at risk and stress test methodologies are integrated across all risks and all lines of business. Risk Related methodologies are properly vetted and back tested from independent source and positions are properly valued.
• Infrastructure: Another key factor behind successful ERM is the infrastructure which is supporting the processes. From risk identification, assessment, management till risk mitigation and reporting- all these processes in an organization need to be well coordinated to have successful implementation. Rob stressed on the importance of having appropriate people in place as well. The view was supported by S. Jean Hinrichs who held that fostering a risk culture that encourages candid discussions about key risks can help increase our visibility into the risk portfolio.