Ethics for Business and Accounting

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- Should members and executives in investment firms be forced to be members of a profession with entrance exams and with adherence to a professional code such as is the case for professional accountants or lawyers?

Such practice can definitely be helpful to protect the market, especially when those professional organizations usually have their codes of conduct to regulate the ethical behaviors of the members. However, in my opinion, it is doubtful that the financial industry will actively respond to such requirement. For accounting or law firms, their goal or mission is to act for the interest of the principal or the general public. There are more watchdogs and expectations to oversee and regulate their practice. Investment firms, on the other hand, are operating in a what’s called “free-market”. In terms of their trading activities, no matter buying or selling investments, the ultimate goal is to maximize their own portfolios and revenues. When the number of apparent stakeholders are much less compared to those of accounting or law firms, investment firms might care less about ethical practice. Therefore, the financial industry may consider such requirement to be meaningless.

- Identify and explain three important ethical failures that contributed to the subprime lending fiasco.

- Greed: In financial market, higher risk means higher return. In this subprime lending fiasco, banks and investors blinded themselves to risk because of their desperation to achieve what they considered reasonable or attractive returns. On the other hand, rating agencies provided risky securities with high ratings in attempt to make money from those banks and investors. All these parties were trying to make money at the expense of others to satisfy their own greed.

- Dishonesty: The banks certainly recognized the risks of those subprime mortgages because they merely conducted credit history checks on those borrowers. However, they still passed theses loans to investors without properly disclosing the true risks behind them. Meanwhile, there were many investment advisers and other individuals knew what was happening, but they just took very large gains from bonuses and stock options and holdings based on overstated earnings and chose not to be the whistleblower.

- Conflict of interest: The investment executives and individuals who contributed to the crisis were supposed to be acting in the best interest of the investors or shareholders, but they only cared about the profit of their own. Contributing enough disasters to the crisis, some investment firms still asked for bailout in afraid of going bankruptcy. When the whole crisis ended up with a complete fiasco, some executives chose to retire and walked away with millions worth of settlement.