Moral Hazard Vs Adverse Selection

From a utilitarian perspective, the ‘greater good’ may be believed to be the greatest amount of profit, potentially leading to a ruthless attempt to maximise income. This could come in the form of using cheap labour to be able to create maximum profit for the shareholders – and, furthermore, could end up blatantly disregarding human rights. This is a major issue of utilitarianism – basing ethical decisions on goodness for the greatest number of people allows for a

E.g. the decisions taken at Enron to create off-balance-sheet transactions (disguising that failed corporation’s true, deteriorating results) • When the board overpays a CEO, it’s the shareholders who lose a share of the profits which could have been either shareholder dividends or capital gains are instead going into the CEO coffers. • Though there is a divide that executives incentive plan actually motivated them to cause their companies to perform better , if company results improved for any reason (including pure serendipity), the executives received higher pay: cause and effect didn’t matter. The company’s performance itself drove the incentive compensation—whether under the control of the CEO and his team or not. •

Results will be in the form of descriptive report, facts, tables and figures that will cover the cost savings for the stakeholders and the company because of ignoring the collusion between auditors and management. We will analyze the potential advantages when the collusion is ignored and try to access real cases of the organizations when they ignored the collusion. This topic also relates to the management fraud, where fraud can be any activity that might be intentional in a way that would result in the loss of one party over the gain of the other party, and in the case of management and auditors’ collusion, that means that there would be loss of the stakeholders and loss to the reputation of the company in the market. Research Limitation: Collecting the primary data might not be possible because of the access problems to the companies.

I. INTRODUCTION According Jensen and Meckling(1976, p 8), executives have a tendency to put more emphasis on their own interest when they share little mutual interest with shareholders. They would not take bold action but only try to maximize their perquisite. In order to mitigate such insincerity, executive compensation system have developed into two direction. First, companies offer substantial amount of remuneration to executives.

As much as company managers face a lot of burden in their works, it is better to get along with some of the issues that we might face along that might hinder the success capability. First, precise decision making which via voting to ascertain on matters pertaining the company, this is much better as an individual is not the one that makes decision on behalf of the whole organization, he voting are acquired after shares are divided such that each share is a one count vote. Secondly, there is unbiased structure as CEO’s and managers cannot make decision for their own self-gain but for the company, (Michael &Andrew, 2001). This means that the top level managers and the executives are not basically the owners as they are differentiated from those who own the company’s daily operation from stock

Even more, since a 401(k) plan is not insured, it is possible to lose money based on the investments you have invested in. Risky investments are meant to either result in a large capital gain or a large capital loss; however, remaining conservative will not guarantee you payout you desire. Therefore, it is recommended to spread out your investments to minimize the possible capital losses (Advantages and Disadvantages to 401(k) Plans, (n.d.), p. 1). Consequently, employers are able to limit employees on how much they would like to contribute; with this intention, the employee would not be able to save as much as he or she wants

Overlooking negative social and environmental externalities when valuing a company might be equal to ignoring significant tail risk. The risks related to CSR could be grouped into three categories: corporate governance, environmental aspects, and social aspects. Companies that adopt the CSR principles are more transparent and have less risk of bribery and corruption. In addition, they may implement stricter and, thus, more costly quality and environmental controls, but they run less risk of having to recall defective product lines and pay heavy fines for excessive polluting (Palmer, 2012). They also have less risk of negative social events which damage their reputation and cost millions of dollars in information and advertising campaigns.

In addition, penalties for activity of fraudulent financial are much more critical (M Bazerman &Messick D,1996). In place with some standard rules and regulation, mostly corporations are less possible to commit any activity of fraudulent because from lawmakers more scrutiny. Also, to survive corporations have a better opportunity as a company with their investor when they are truthful with their lenders and investors upfront, than if they were to attempt to hide any activity of

One of many reasons is to protect the company from information leaking to the competitors and if that were to happen, the competitors can easily take away market share/profit from the company; worst case scenario wipe out the company. Another reason is employees were to find out the pay of each employee, it will result in an unhealthy work environment, or employees may choose to quit. Clients exposed to the information can gain bargaining power of dictating how much they’re willing to pay if they’ve been unreasonably charged in the past. Also, if the intent is to keep the confidential information only to the president and not share with vital management, it may stunt growth and remove opportunities/ideas that some management may be able to provide if they could contribute. Therefore, most companies, as mine as well, the confidential information is built with rules of who can be provided with how much information, and where to draw the line when certain questions are asked; many a times I’ve been asked sales numbers of the company by curious salespersons and my response every time is apologetic that I cannot share that information and to seek to their

Usually it is the management that has more information about the firm. This can lead to an imbalance as the management is in a greater position to manipulate or take advantage of the situation and perhaps not in the firms best interest. Self-interest of the managers, this is often times one of the most common problems arising from principal-agent relationship. Some examples include using firms resources for personal benefit, avoiding positions of high risk even if the outcome would be beneficial to the firm and thereby the owners.