Accounting and Financial Statements (Ethics)
to its intended users.
• Objectivity – refers to the security of the Commission's information, i.e., protection of the information from unauthorized, unanticipated or unintentional access or revision, to ensure that the information is not compromised through corruption or falsification.
• Integrity - refers both to: (i) presenting information in a proper context to set out that information in a clear, complete and unbiased manner; and (ii) ensuring that the substance of the information is accurate, reliable and unbiased.
www.sec.gov/about/dataqualityguide.htm
With the aid of useful, secure, and accurate information, the SEC attempts maintain fairness and equality in the market. However, when these three elements are compromised by unjust economical gain or criminal activity, the quality of the market diminishes and the SEC is not performing its main function.
A hot topic regarding ethics and security trading is insider trading. When people hear the term insider trading, automatically a negative connotation is applied. However, insider trading is not necessarily illegal. For example an employee of a company is allowed to trade the securities of his/her employer. In fact, it is a sign of good faith in the performance of a particular company when managers purchase the securities of their own firm. Yet, when a person acts upon nonpublic information they are breaking the law. “Illegal insider trading refers generally to buying or selling a security, in breach of a fiduciary duty or other relationship of trust and confidence, while in possession of material, nonpublic information about the security.” (www.sec.gov/answers/insider.htm)
When presented with an opportunity to make guaranteed money, anyone with any sense of business will jump at it. Inside information is a gateway to guaranteed money, however it is illegal. Many assert that “money is the root of all evil,” and there are those that will trade the chance of being caught for the chance to become rich. Many analyze Becker’s Model of the utility from a crime:
E[Uj] = pj * Uj (Yj – fj) + (1 – pj) * Uj (Yj)
where:
E[Uj] = expected utility from the crime
pj = probability of conviction
fj = monetary equivalent of punishment from given offense
Yj = offenders income including monetary and “psychic”
Uj = individuals utility function
The first part is the probability of getting caught times the utility that will be received if caught. The second part is the probability of not getting caught times the utility from the income from the activity. If the expected utility is positive, then the individual would theoretically be willing to commit the crime (Beams 312).
Free money versus ethics comes into play in many situations. A simple suggestion by a friend or an associate to sell or purchase a security can suddenly make an individual a criminal. Drawing the line between a legal and illegal trade is difficult. Managers are allowed to [next page]