Fraud and Financial Audit of MF Global - Research Paper Example

? MF Global MF Global As a commodities brokerage firm, MF Global provided exchange-traded derivatives such as futures andoptions. It was a well-established firm that was on top of its game before its shocking collapse through issues relating to liquidity problem and large fines. This collapse came in the year 2008 and 2009 where the firm was hit with fines of over 10 million U.S. dollars. In late October of 2011, the organization faced a financial meltdown due to improper transaction of funds from their customer accounts to cover some of their debts. The executives by the end of that month made it official that over 700 million USD had been transferred. They, however, could not pay back this capital with their revenue making it plummet into more debt. At the end of the liquidation period, customers of MF Global made losses that totalled over 1.6 billion dollars, and a majority have not received their funds till today. Difference between conducting fraud and financial audit Audits are done to ensure the smooth running of operations. They may be done after some time as per the organization’s request, as in the case of financial auditing. Furthermore, they may be arbitrary and without warning, as in the case of fraud auditing. There are different types of audits, carried out for different purposes. There are reasons that surround each of these audits. One main reason is the accuracy of financial information in the organization. This is one reason why financial audits are carried out, and they can be done by a qualified, independent party or government unit. Fraud auditing is often done to discover some of the hidden figures in the financial data of an organization (Hagan, 2012). This means that, outside parties may be brought in to conduct a fraud audit, but internal auditors of an organization may be responsible for financial auditing. Third parties are involved in fraud audits sometimes upon the request of the court, while certified accountants take care of financial information about the firm. In a fraud audit, there must be proof of any wrongdoing, or until there is satisfaction from all parties that nothing is out of place. Financial audits just require the confirmation of information already present. Finally, financial audits that prove or disapprove any information acquired may not have serious consequences as compared to the results of a fraud audit. If there is the confirmation of fraud, serious legal ramifications may result (Hagan, 2012). There must be a level of responsibility for the auditing firm in both cases. If there are any financial discrepancies in the financial departments or operations, it is up to them to disclose this information. This may lead to the saving of capital that would have otherwise been lost in data. Fraud auditing may need a little more time and effort to identify what information may be missing that is crucial in the financial docket. A code of ethics needs to guide all the parties involved to ensure their tasks are carried out accordingly. The obligation of corporate CEOs to shareholders and employees about the firm’s financial activity The growth of an organization means that the CEO may have a daunting task of keeping an eye on everything that goes on in the firm. They must delegate some of the duties to subordinates. This helps in ensuring that there is a chain of command that is followed before getting to the top. However, they may not have full control over what subordinates may do, so it is up to them to ensure all matters relating to the financial sectors of the firm are reported directly to them. The shareholders of the organization are the most crucial part of the firm. CEO’s should be the voice of the organization and any financial activity going on should be reported to the people involved (Hagan, 2012). The CEO needs to tell the shareholders of the people in charge of the activities, and what they need to do if they have any complaints or suggestions. As CEO, it is one’s job to understand what goes on in the firm in relation to finances. There is a higher group of individuals that need the report, i.e., the Board of Directors. They ensure that they have a competent CEO who will manage the financial activities of the firm since not all of them can run the organization. Through such techniques, the board may have financial reporting on the activities of the firm through the CEO, and any failure may lead to their dismissal. It is tantamount that any CEO should be accountable to the individuals they are meant to serve. If there is any shady activity going on in the firm, it is their responsibility to tell the shareholders about the problems they are facing as a firm. The reason behind this is; if the firm loses money, the shareholder ultimately loses money (Hagan, 2012). Complex global instruments and their contribution to the fraud in the MF Global case Their choice to use re-purchase agreements as an instrument for brokerage may have led to the financial meltdown of the firm. They did this as a means of leveraging profit from the many activities they conducted over time. Unfortunately, they did all these activities off their balance sheets so it made it difficult to track most of the financial activities. They were known as ‘repos’ during that time, which led to the firm creating a bet on its behalf to some of the continents indebted regions. Auditors may find it hard trying to track down some of the capital that is allocated or provided to the firm, if it is not recorded in the financial books (Donatienne, 2011). There was a sudden failure of these repo positions in the firm and this might have aided in the liquidity crisis at the firm. The repurchase agreements made it difficult for auditors to monitor the firm’s accounts. This was because the funds being used were coming from customer accounts, and without their knowledge. After dipping into the initial funds of up to 1.2 billion, they took another 700 million to cover up the shortcomings of the first operations or plans. A failure to disclose the nature and size of its portfolio made it difficult for all those in business with MF Global to fully comprehend the debt in which the firm was in at the time. Regulators in the open firms did not find problems trying to link some of the firm’s operations with their current assets (Donatienne, 2011). Some of the transactions that were recorded were done erroneously, or not done at all. Measures to take to ensure employees find it easier to blow the whistle on fraudulent schemes First, employees must be taught on the importance of voicing their concerns internally in the organization. This may make it possible for all employees to talk about what they feel may affect their moral integrity, and have these issues addressed. There is knowledge that is common between employees in an organization. This is when they are familiar with internal channels, the possibility or likelihood of them reporting any wrongdoing in the organization is higher (Rowland & Lawson, 2012). Secondly, ensuring that employees understand that their concerns will be taken seriously is another way of ensuring that they assist in eradicating fraudulent activities. It is imperative to have their concerns heard as this makes them believe that they do not need outside help to have these problems addressed. Another step to take is to ensure that employees do not become afraid of the repercussions of blowing the whistle on some of the firm’s operations. In some instances, there are scenarios where employers terminate or end an employee’s career due to whistle blowing. This may prevent employees from coming forward to report any operations that may compromise the integrity of the firm. In light of this, every organization must have an avenue in which all employees can have their concerns heard. It is the belief of many that this should be anonymously, and by an independent group of individuals. This is so that it may not affect the working relation of employees in the firm (Rowland & Lawson, 2012). Should organizations, businesses, and accounting firms explicitly reward ethical behaviour? Organizations should define what is ethical and what is intended to assist the organization, and this should be through moral standards. It may be wise to think of the consequences or results of advocating for rewarding ethical behaviour in the organization. It is vital to think of whether there are any unethical or undesirable tendencies that such a program might encourage in the firm. It is crucial to build in behavioural expectations to show or indicate the expected results of such a program. By pushing toward an ethical, performance culture, the results may be exceptional in terms of behaviour and attitude (Rowland & Lawson, 2012). Organizations should build a base of ethics and other values, but it should be turned into a non-cash reward program. Cash rewards are the main source of any unethical attitude that develops in an organization. It is wise to stick to non-cash rewards in the firm. This works to restrict any thoughts about getting ahead through immoral tendencies in the firm (Rowland & Lawson, 2012). Financial institutions may be more at risk of this. If there is any exchange of cash due to favours, the ethical boundaries have been broken and may end up in the collapse of the firm. References Donatienne, R. C. (2011). MF Global. London: Macmillan Publishers. Hagan, J. (2012). Who are the criminals?: The politics of crime policy from the age of Roosevelt to the age of Reagan. NJ: Princeton University Press. Rowland, C., & Lawson, J. M. (2012). The permanent portfolio: Harry Browne’s long-term investment strategy. Hart Publishing: New York. Read More