MF Global and Financial Audit - Assignment Example

MF GLOBAL A financial audit is essentially conducted to verify the financial ments of a legal entity in order to make an audit opinion about the statements. In this case, the opinion seeks to provide some level of assurance that the statements have been made in line with the given financial framework. The extent of an auditor in this regard is to provide a totally independent and objective examination of those statements as a way of enhancing their value and credibility. Considering that financial statements are made for many users, conducting a financial audit increases the confidence of the users in these statements and the investors can therefore freely use them to make their decisions. A financial audit is therefore one of the assurance duties conducted by auditing firms. In case an organization engages external auditors, the level of responsibility of such auditors goes beyond the duties of the internal auditors. More importantly, the extent of the responsibilities of the auditors is defined by the International Standards on Auditing (ISA) (Haas, 2012). A fraud audit is conducted in instances where fraud is suspected in the financial statements and such auditing is therefore meticulously conducted by thoroughly reviewing the statements. In most cases, organizations conduct fraud audit just to ascertain that nothing suspicious occurs within the financial statements and to discover any misdealing before it is too late (Haas, 2012). An auditor conducting a fraud audit does not really conduct an investigation as might be supposed. Rather, it is just a way to identify any fraudulent transactions. The auditor traces each transaction in the statements for accuracy. Their duty transcends the ledger records in looking for fraudulent transactions in the financial statements. Any form of inconsistency in the financial statements can therefore help towards uncovering fraud in the organization (Haas, 2012). 2) Indeed, there is always a major issue regarding the responsibility of corporate CEOs on the financial activity of their organizations. In the case of MF Global, it was realized that several issues relating to accounting partly accounted for the bankruptcy of the organization. As the overall executive of an organization, it is imperative that the CEO is much abreast with all the financial activity in the organization. Considering that such financial scandal can lead to the collapse of the organization, it is important for the CEO to be much aware of the financial activity of the organization. The stakes in becoming a CEO are normally high given that much experience is required with regards to organizational growth and performance. In this case, a CEO should have the ability to know what really transpires in the organization. Essentially it boils down to paying much attention in the financial performance of the organization and keeping an eye on any complaints however slim that might arise from within or outside the organization. In the case of MF Global it is seen that Jon Corzine was much involved in the financial activity of the organization and was therefore in the capacity to have knowledge on the missing customer funds. More importantly, it should be realized that the CEO has the power to look into the financial activity of the organization at any time and this can be a source of much information. On the other hand it can be seen that the duties of the CEO are majorly supervisory and cut across the whole organization. In this regard, it is not possible for the CEO to have much detailed information on every single financial activity occurring. It might therefore take some time before the CEO is aware of any financial fraud occurring within the organization. 3) Indeed, the financial world characterized by the complex global instruments partly contributed to the failure of MF Global and its subsequent bankruptcy. The complexity of the financial world and the nature of the operations ion the organization made it much difficult for auditors and regulators to uncover any cases of fraud before it was too late. The company had initially purchased heavy sovereign debt from countries which had been plagued by the European Debt Crisis like Spain, Belgium and Ireland. The massive debt was basically leveraged through the use of client’s monies which were under the control of the organization. There are certainly major challenges in regulating the complex global financial firms and this largely contributed to the crisis at the organization. The use of the controversial repurchase agreements for leveraging profit and funding to the tune of $ 6 billion was largely conducted off balance sheet. The failure of the repurchase agreements position led to the liquidity crisis in the organization. The major business for the organization was to execute and clear debt for the clients. However even when the whole industry had shifted to electronic trading, operations at MF were still conducted over the phone. As a result, the company reported losses for the last for years before its collapse (U.S. G.P.O, 2011). The collapse of the organization represented a challenge not only to the market players but to the regulators and auditors as well. It indicated the failure or inability of the regulators to act fast and avert a crisis that had been brewing over time. The complex nature of the global financial world and the market dynamisms realized are certainly a major concern that should be taken into account by every market player. In the case of MF Global, it is realized that the bankruptcy was a result of causes within and beyond the organization (U.S. G.P.O, 2011). 4) In order to avert some of the fraudulent cases and scandals often realized in organizations, it is important for the organization to have measurers in place through which ordinary employees can blow the whistle on any improper dealings within the organization. In the case of MF Global, the failure of the organization could be prevented in case there were measures through which employees could report cases. Such fraudulent schemes normally happen in the full glare of employees who are either participants or are unwilling to report out of the fear risking their jobs. In the case of Enron Corporation, employees knew most of the fraudulent activities in the organizations but were afraid to raise the alarm. In this case, it boils down to creating an organizational culture where employees have the liberty to question any fraudulent activity in the organization. All employees in the organization should be empowered to take it upon themselves in ensuring that every activity within the company is in line with the set out procedures. Such an organizational culture makes it very difficult for anybody to conduct any fraudulent activity in the organization without being reported (Leung, 2011). More importantly, every organization should have effective internal systems through which the grievances of the employees are better addressed. This is done to ensure that employees are well attended to so that they can also reciprocate by being committed to the success of the organization. In the presence of such an organizational culture, it becomes possible for all employees in the organization irrespective of their positions to freely share information which can help in uncovering any fraudulent activity within the organization (Leung, 2011). 5) As realized, the importance of proper ethical behavior cannot really be overemphasized. The organization can greatly benefit from a culture where every employee conducts themselves in the most ethical manner. In such a case, it is important to encourage such behaviors in the organization. It is indeed much difficult to instill the aspect of ethics within the employees in an organization. It therefore creates the need for rewards for employees and executives just as a way of encouraging ethical behavior. While each and every employee is expected to adhere to a specific set of organizational ethics, the success of such programs normally depends upon the individual employees. In most cases, an employee has to decide whether or not to ethically conduct themselves. Rewards and other forms of motivation are therefore effective ways of promoting ethical conduct within an organization. References Haas, R. J. (2012). Governmental accounting, auditing, and financial reporting. Chicago, Ill. (180 North Michigan Ave., Suite 800, Chicago 60601): Municipal Finance Officers Association of the United States and Canada. Hearing to examine the MF Global bankruptcy hearing before the Committee on Agriculture, House of Representatives, One Hundred Twelfth Congress, first session, December 8, 2011.. (2012). Washington: U.S. G.P.O.. Leung, D. (2011). Inside accounting the sociology of financial reporting and auditing. Burlington, Vt.: Gower. Read More