Roles and Responsibilities for Compliance
There are three major categories of decisions financial managers are tasked with making: investment, financing, and dividends (Brealey, Myers, Allen, & Mohanty, 2012). Investment decisions are normally listed first because they are deemed the most important decisions a financial manager makes. They involve acquisition of assets to be held by an organization, calculating their proportions, and dealing with various risks to address investor confidence. When an organization acquires assets, its subsequent concern is how to support those new commitments, i.e. how to finance, which is the second category of decisions. Since there are many different tools for financing and structuring capital, particular attention should be dedicated not only to what is being financed, and how much is spent, but also as to how finance flows to different destinations and the interconnection between the various strands. Finally, the third category of decisions relates to dividends, which deals with distributing an organization’s profits among its shareholders. When making all these decisions, a financial manager should pursue profit maximization, which is the primary objective of this role.
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There are two major spheres of ethics in financial management: legal and corporate. Legal aspects of financial management ethics include complying with the law and ensuring that the financial operation of an organization for which a financial manager works does not violate or create opportunities for violating relevant legislation. These involve proper, i.e. accurate and complete, reporting of financial performance to eliminate possible fraud. Corporate aspects of financial management ethics include protecting the rights and interests of an employer, such as confidentiality. The two spheres may come into conflict, and this is where most ethical dilemmas associated with financial management occur. Financial managers may find themselves torn between the need to serve the best interests of the employer and to preserve ethical integrity. As for most ethical dilemmas, there is no universal solution, and each case should be examined specifically, but the general principle is that financial managers should never opt for unethical actions, such as inaccurate reporting, for the mere purpose of profit maximization.
There are various safeguards to reduce financial reporting abuse, and some of them were adopted or reinforced after a series of corporate fraud scandals in the United States in the early 2000s. Major safeguards are laws that require companies to disclose and make public a considerable portion of their financial documentation—it had been legal to keep this information confidential before the adoption of the Sarbanes-Oxley Act of 2002 (Brealey et al., 2012). Another measure is providing law enforcement authorities with additional powers to access and inspect companies’ financial documentation. Both approaches are open to debate as to their viability and effectiveness, although the latter has been more heavily criticized for making the operation of businesses less convenient. However, the measures were deemed appropriate by the government because financial reporting abuse had damaged the national economy to a considerable extent.
For a private company, “going public” means starting to sell its stock publicly. There are various reasons for a company to opt for this, and the decision has both advantages and disadvantages. The primary advantage is that a company that has “gone public” receives new capital that it can use for expanding and developing its business, conducting market research, or dealing with existing financial complication, such as debts. Overall, becoming publicly traded increases the number of opportunities and the potential reach of the company. However, with expanded scope, new challenges also arise. The key disadvantage of “going public” is becoming subject to new regulations and requirements which a company may find difficult to comply with. Publicly traded corporations are controlled by the Securities and Exchange Commission (Coffee & Sale, 2012), and the particularly challenging requirement is extensive disclosure of financial and customer-related information.
The two largest stock markets in the United States are the New York Stock Exchange (NYSE) and the National Association for Stock Dealers Automated Quotations (NASDAQ). Understanding the differences between the two is fundamental to all financial decision-making (Robert, Robert, & Jeffrey, 2012). Most importantly, the NYSE is a securities market operating under auction conditions where brokers buy stock on behalf of their clients, while the NASDAQ is a securities market with a dealer-based approach, i.e. dealers sell stock to investors directly. Also, the NYSE is usually associated with the trade of well-established companies’ stock, while the NASDAQ is where volatile and growth stocks are traded. The NASDAQ is widely acknowledged as a technological market demonstrating important trends in the technology industry and, as such, is, arguably, a smarter option for private investment.
An investment product is something purchased with the intention to receive favorable return. There are many kinds of such products, major ones being bonds (loans to the government), stocks (partial ownership of a publicly traded company), mutual funds (investing in combinations of assets managed by professionals), and money market accounts (obtaining lower interest rates by providing large deposits). As a result of opting for particular products, investors may deal with governmental agencies or public corporations. The choice of a product should be based on the investor’s short-term and long-term goals. For example, stock markets are largely influenced by economic forces that are hard to predict and impossible to control, which is why many companies may opt for bonds because fewer risks are normally associated with them.
Brealey, R. A., Myers, S. C., Allen, F., & Mohanty, P. (2012). Principles of corporate finance. New York, NY: McGraw-Hill Education.
Coffee, J., & Sale, H. (2012). Securities regulation: Cases and materials. New York, NY: Foundation Press.
Robert, E., Robert, F., & Jeffrey, R. (2012). Measuring and modeling execution cost and risk. The Journal of Portfolio Management, 38(2), 14-28.