Learning Outcomes
By completing this article, you will be able to identify and analyse ethical considerations in mergers and acquisitions (M&A) and corporate finance advice, apply professional ethical principles to real-world scenarios, recognise common conflicts of interest, and recommend actions to ensure ethical conduct and compliance in financial decisions. You will also gain an understanding of relevant ACCA Code of Ethics principles as they apply in M&A and financial advisory contexts.
ACCA Advanced Financial Management (AFM) Syllabus
For ACCA Advanced Financial Management (AFM), you are required to understand the ethical responsibilities of finance professionals during M&A and when making financing recommendations. This article addresses the following syllabus points:
- Analyse ethical and governance issues encountered in corporate finance practice and M&A transactions
- Assess conflicts of interest, independence, and professional behaviour in deal-making and financing advice
- Apply ACCA’s fundamental ethical principles to financial management decisions and recommendations
- Identify and recommend strategies to resolve ethical dilemmas in corporate finance activity
- Discuss implications of unethical conduct for organisations and the profession
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- Which ACCA fundamental principle is primarily threatened when an advisor recommends a financing structure that benefits them at the client's expense?
- True or false? It is ethical for a financial adviser to withhold relevant risk information from a client in an M&A transaction if disclosure could jeopardise the deal.
- List two potential conflicts of interest that can arise during an M&A engagement.
- Identify an example of an unethical practice relating to management incentives when recommending a financing structure.
Introduction
Ethical conduct is critical in corporate finance, especially in mergers, acquisitions, and the provision of financial advice. Decisions in these areas have far-reaching effects—not only on shareholders but also on employees, creditors, customers, and wider society. Unethical actions can result in reputational damage, regulatory penalties, and personal liability for advisers and directors. This article explores common ethical issues in M&A transactions and financing advice, the dangers of conflicts of interest, and best practices for upholding the highest professional standards.
Key Term: ethical dilemma
A situation where a finance professional faces competing duties or interests, making it difficult to decide the most ethical course of action.
ETHICAL PRINCIPLES IN CORPORATE FINANCE
Corporate finance professionals must comply with the ACCA Code of Ethics and Conduct. Five fundamental principles shape professional behaviour:
- Integrity: Being honest and straightforward.
- Objectivity: Not allowing bias, conflict of interest, or undue influence.
- Professional competence and due care: Maintaining and applying up-to-date knowledge and skill.
- Confidentiality: Protecting information acquired through professional work.
- Professional behaviour: Complying with laws and avoiding conduct that could discredit the profession.
M&A and financing recommendations often test these principles, particularly integrity, objectivity, and confidentiality.
Key Term: conflict of interest
A circumstance where an individual or firm has multiple competing duties or incentives, which may affect their ability to act in the best interests of a client or employer.Key Term: professional scepticism
An attitude that includes questioning information, challenging assumptions, and being alert to evidence that may indicate misconduct or bias.
COMMON ETHICAL ISSUES IN M&A AND ADVISORY ROLES
Several recurring ethical issues arise during M&A and financing recommendations:
Conflicts of Interest and Independence
Advisors may receive fees based on transaction completion, creating incentives to push clients toward deals that are not in their best interests. Directors and managers may benefit personally from the success of a deal, such as through bonuses or increased power.
Information Asymmetry and Disclosure
Executives or advisors might possess confidential or price-sensitive information. Failing to disclose relevant risks, valuations, or conflicts to stakeholders breaches both ethical and regulatory standards.
Pressure to Misrepresent or Conceal
There can be pressure to overstate synergies, understate risks, or selectively present data to justify a particular outcome or financing structure. Unethical conduct may also include collusion between management and advisors to benefit themselves at the firm’s or stakeholders’ expense.
Insider Dealing and Market Manipulation
Access to non-public information during M&A creates risks of insider trading if such information is used for personal gain or improperly shared.
Financing Recommendation Bias
When recommending sources of finance, an advisor may favour products with higher commissions or structures that benefit management but are costly or risky for the company.
EXAMPLES OF ETHICAL DILEMMAS IN PRACTICE
Worked Example 1.1
A finance advisor is engaged by both the buyer and the seller in a proposed acquisition. The fee is contingent on the transaction's completion. What ethical concerns arise and how should they be handled?
Answer:
The situation creates a dual conflict of interest: acting for both sides and having a financial incentive to close the deal, possibly at the expense of objectivity or client interests. Transparency is essential—advisors should disclose the conflict, obtain informed consent or decline one engagement, and structure fees to avoid undue pressure to close at any cost.
Worked Example 1.2
A CFO recommends a leveraged buyout financed by high-yield bonds that will trigger immediate bonuses for executives based on completion, but substantially increase the firm's risk. Discuss the ethical implications.
Answer:
The CFO and executives may benefit personally, even if the financing exposes the business to excessive risk. This threatens integrity and objectivity. Incentives should align with sustainable performance, and decisions must be justified based on independent, comprehensive analysis—not on personal gain.
Exam Warning
Overlooking the need to identify, disclose, and properly manage conflicts of interest in M&A scenarios can lead to lost marks on the exam. ACCA expects recommendations to be grounded in ethical analysis—not just financial reasoning.
PROFESSIONAL CONDUCT AND GOOD PRACTICE
All finance professionals have a duty to:
- Disclose actual or potential conflicts early and transparently
- Avoid advising when independence or objectivity is compromised
- Present information honestly, including all material risks, costs, and uncertainties
- Decline or withdraw from assignments in cases of unacceptable ethical risk or unresolved conflict
- Report unethical behaviour or breaches using appropriate channels
Adhering to these standards protects both the organisation and the individual adviser from reputational or legal harm.
Key Term: due diligence
The process of thoroughly investigating and verifying all facts, risks, and relevant circumstances before concluding a financial transaction or making recommendations.
STRATEGIES FOR RESOLVING ETHICAL DILEMMAS
When faced with an ethical dilemma, professionals should:
- Identify the relevant facts and stakeholders
- Evaluate options against the ACCA Code of Ethics principles
- Seek advice from independent colleagues, internal ethics committees, or the ACCA helpline if needed
- Consider the long-term risks to the firm, stakeholders, and profession, not just immediate financial rewards
- Document the decision-making process and rationale
Summary
Ethical issues are especially acute in M&A and financing, where large sums and conflicting incentives are common. Practitioners must comply with both the spirit and letter of the ACCA Code of Ethics, especially around objectivity and integrity. Clear disclosure, proper management of conflicts, robust due diligence, and transparent, client-focused communication are essential to maintain professional standards and protect stakeholder interests.
Key Point Checklist
This article has covered the following key knowledge points:
- Recognise the main ethical challenges in M&A and financial advisory roles
- Apply ACCA Code of Ethics principles to real-world corporate finance scenarios
- Identify, disclose, and manage conflicts of interest appropriately
- Understand and avoid unethical practices such as information withholding or biased recommendations
- Advise on, and implement, professional strategies for resolving ethical dilemmas in corporate finance
Key Terms and Concepts
- ethical dilemma
- conflict of interest
- professional scepticism
- due diligence