The Issue of Ethics and Governance - Case Study Example

Principle financial management Name Institution Introduction In finance, the issue of ethics and governance is an issue that is highly appraised (Paul et al 13). It is a requirement within the law that all the transactions in corporate governance follows some ethical forms. The law also gives consequences if the ethical formalities are violated. Finance and banking are industries which are very vulnerable to fraud. To prevent fraudulent events and activities from happening, these institutions employ professionals who have very high ethical standards. These ethical standards act as guidelines and protocols that should be followed strictly when conducting financial transactions (Mounira 128). However, sometimes people act or conduct their affairs without following ethical protocols and guidelines. These ethics, or lack or rather make a thin line between making and losing money in a financial transaction (Aktan et al 100). This essay takes a look into one such transaction and how the concept of ethics was breached. The paper will explore in details the case study involving the purchase of a machine and the consequences that may accrue if the ethical issues are ignored. The paper will also explore the options that are available for the proprietor in this case study. The case Jill, who owns a furniture making company is experiencing problems. Her profitability is decreasing following rising costs of raw materials and labor. To minimize these costs, she decides to purchase an equipment for $15000, an amount she intends to buy from a bank loan. However, she finds that even if she buys the equipment, the fixed costs will be too high. However, she still decides to go ahead and borrow the loan without showing how the fixed costs will implicate on the decision. She used the cost-volume-profit (CVP) analysis in her presentation and shows how the machine will reduce labor costs and cost of materials. Stakeholders in this situation There are various stakeholders in this scenario. Jill is the owner of the business and as the sole proprietor, she is among the major stakeholders in this situation. She is responsible for the management of the company. She is the person who ensures that the company makes and keeps its profitability scales. Another stakeholder in this situation is the bank from where Jill plans to borrow $15000. The bank is interested in knowing whether the business will be able to repay the loan that she borrows from them. Their primary interest is to establish whether Jill’s company will be able to repay the loan that they lend to her. For this reason, they must ensure that they scrutinize all avenues through which losses could occur and b able to make a clear decision pertaining to whether they should lend her the money or not. To be able to make this decision, banks need to have access to all the financial information that pertains to the company. This information includes all the income streams that the company has and all the expenses that the company has. Cash flow analysis is also important at this level but it is not the most important aspect. It is important that the bank understands the amount of money that Jill’s company makes and how much she gets to keep as profit at the end of the day. This will give them a picture of the business operations and enable them to assess whether she will be in a position to repay the amount that they advance her. All the expenses, including overheads should be analyzed in this case. Another stakeholder, though on a lower scale is the employees of the company. The employees who work for Jill in her company draw their livelihood from the company. For this reason, it is important that they know what actions their employer is taking so that they may be able to know whether their future with the company is guaranteed. The new machine is likely to affect the jobs that most of the employees in this company have. This will consequently affect their means of livelihood as they stand to lose their jobs. Ethical issue in this situation The CVP analysis that Jill does on her business does not support her desire to buy a new machine for the business. However, she still goes ahead and decides to find ways to finance the equipment. It has been shown that the equipment does indeed succeed in the reduction of labor costs as well as the costs of the raw materials. However, the increased fixed costs have been shown to considerably eat into the business to an extent that even with introduction of the new machine, the company can barely break even. Jill decides to go to the bank and seek financial assistance. In her presentation, she only speaks of one side of the picture. She presents the machine as having the capacity of reducing labor costs as well as costs of material. She does not show how the fixed manufacturing costs increase to an extent that the company will not break even. This constraint has an implication that if not well monitored, the cash flow could be giving a false representation of the nature of the business. The stakeholders of the company will not be able to recover their cash-input into this business. Jill had an ethical obligation to inform the bank about these increasing costs that would eat into the profit of the business. The bank officials who will be looking into the request for the loan from Jill will be working on a false assertion. They will look into the business from her perspective and probably find that it would be viable to finance the machine. This false representation is a breach of ethics. In her presentation, Jill should offer all information, in absolute honesty so that these officers will not be biased when it comes to deciding how to finance her machine. Jill acts upon the fear that if she discloses all the information pertaining her business and the new machinery, the bank will not finance the machine. This presents an ethical issue in the situation. A reflection of my action were i in Jill’s shoes If i was in Jill’s shoes, chances are that i would have disclosed all the information pertaining to the business. This includes even the information that shows that the fixed costs will continue to increase exponentially regardless of my decision to purchase the machine. This would be done in the mind of risking the requisition of finance for the machine from the bank being turned down. However, a number of issues will be avoided in this case. Firstly, the ethical issue in the case would not be an anymore. I would not have to worry about breaking any rule or ethics because i would have presented my case to the bank in utter honesty and absolute trust. Secondly, the bank officials are in a better place to be able to offer me the kind of management training that i need to ensure that irrespective of the decision made by the bank pertaining whether to loan me the amount to buy the machine or not. Another aspect that presents itself in this case is the analysis of the current situation vis a vis buying the machine. The current situation as presented by Jill shows that there are a lot of expenses that result in labor and material costs. The introduction of the machine will only solve part of the problem. It will reduce these costs. However, the machine will not be able to reduce the increased costs of overheads and fixed costs. Due to this reason, it is within my opinion that the problem does not lie within the lack of machine to speed up production and reduce labor costs. The problem lies in poor management policies being set in the company. If Jill had instituted management policies that are aimed at the reduction of costs through increasing the efficiency levels and capacities of the workers, she might have been able to make sure that the company is set back onto its profitability scales once again. Options available for Jill in this case Instead of Jill moving ahead to present her case to the bank managers requesting for the loan to purchase the machine, she should have first explored other avenues in this situation. In corporate governance and management theory, there are several available options which one may be able to explore. These options have been discussed in the following paragraphs. One of the option that Jill should have explored is the option of seeking help from professionals. There are management professionals whose work is to ensure that they assist businesses grow and maintain their growth. This is done through the evaluation of the expenses that the business has versus the revenues of the business. These professionals have the capacity to identify various avenues where costs have been incurred in the business. They then offer professional advice pertaining to how the business may be able to reduce these costs and ultimately find itself on the road towards revenue generation and profit maximization. Professional managers may require to get paid for their services. Presently, Jill may find it hard to be able to pay these managers because the business is not doing so well. However, the long run effects of the systems that these managers will effect will enable the business raise above its turbulent times and be in the process of profitability again. Jill should also hire an accountant to be able to keep track of the financial transactions that the company engages in. These accountants are in the position to be able to identify the avenues where expenses come in and they can be able to minimize these expenses (Amat et al 4). Jill should have firstly found ways in which expenses would be minimized. Instead of going to buy a machine that would indeed raise the production capacities, Jill should have found ways to increase efficiency among her workers. When workers are efficient and well knowledgeable with the jobs that they have, the chances of having inexplicable expenses is minimized (Romila et al 6). In this case, Jill could have ensured that all the workers in this company have the necessary training that is required to be able to achieve the goals of the company. The key issues in Jill’s company is increased costs of both fixed and raw materials. To be able to place the company into productivity again, it would be vital to seal the avenues through which the company could be losing money through cost inflations. Improvement in the quality of the products that the company manufactures would also be an option to consider. When the quality of the product is high, it becomes appealing to the clients of the company. Jill’s business has a reputation of making quality products and they have a long list of clientele. These clients are the ones who are responsible for keeping the company in perpetuity. Jill has to ensure that the company maintains these loyal clients because if they are not treated well, they will most likely move on to the competitor. Conclusion The above analysis has shown the various models and options that are available for Jill to explore in her business to enable her go back into the profitability path. The ethical issue of Jill not presenting the whole information to the bank when she went to request for a loan has also been analyzed. The essay has shown that Jill could have employed the services of management professionals to be able to assist her to manage the business. Increase in efficiency of the workers is also an option that Jill can explore if she wants to get her company back into profitability like before. References Aktan, Bora, Masood, Omar and Yilmaz, Senem. “Financial shenanigans and the failure of ethics in banking: a review and synthesis of an unprecedented fraud”. Banks and Bank Systems. 4.1 (2009): 30-33. Amat, Oriol and Gowthorpe, Catherine. “Creative Accounting: Nature , Incidence and Ethical Issues “. Retrieved from http://econ.upf.edu/docs/papers/downloads/749.pdf Mounira, Arab. “Ethical Investment and the Social Responsibilities of the Islamic Banks”. International Business Research. 2.2 (2009): 123-130. Romila Palliam, Lee, Caldwell and Dilip, Ghosh. “Financial transaction and fiduciary obligation: Ethics, economics or commingled commitment? ” International Journal of Banking and ` Finance. 9.4 (2013): 1-27. Paul, Dembinski, Carole Lager,Andrew, Cornford and Jean-Michel , Bonvin. “Enron and World FinanceA Case Study in Ethics”. 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