The Dynamic Oil Trading Company Financial Scandal - Case Study Example

The Dynamic Oil Trading Company financial scandal Financial markets conditions are ever changing. Consequently the risk factors in the financial markets are high. Firms which participate in the financial markets are therefore required to assess risks in a suitable manner. Credit assessment is also an important part of the risk minimization strategy for companies. Failure to assess risks may lead to negative consequences. The current paper analyses the negative impacts of faulty risk assessment and mismanagement of credit. The scandal associated with the dissolution of Dynamic Oil Trading Company has been selected for vivid analysis in the current paper. Efforts are taken to identify the potential causes behind the downfall of the company. The purpose of the study is to gain understanding regarding the importance of financial risk assessment, compliance of regulations and proper management of credit grants. Table of Contents Company background 4 Aims and objectives 5 Methodology 5 Literature review 6 Risk management 6 Credit management 7 Findings in respect of the case 10 Recommendations 12 Conclusion 13 Reference list 13 Company background Dynamic Oil Trading was established in the year 2012, with its headquarters in Singapore and operations spread across the globe. It is a subsidiary of the Danish firm OW Bunker. Apart from Singapore the company is strategically present in Dubai. It also has ambitious plans of expanding into the nations of Europe, Asia and America. The company is operates in the field of oil bunkering and marine fuel logistics. It has been successful at establishing strong corporate relations in Singapore and run an efficient fuel supply chain. The company works with global partners and traders who believe in fast paced growth and operates in high energy environments. The prime objective of Dynamic Oil is to provide consumers with timely delivery of oil and lubricants, irrespective of different issues and challenges. The company is stated to be made up of traders possessing high experience in the field of oil bunkering and logistics. The company remains proud of its successful of corporate links which has facilitated in the establishment of a strong and well integrated supply chain. Dynamic oil believes that acquiring high liquidity and possessing suitable financial strengths is essential for the delivery of products on time and with bets possible deals. Shipping and fuel procurement in general is a complex business process, which requires trading oil and lubricant profitably. Hence the company is strategically involved in the financial markets. In order to attract business, the company assures its clients with full value for money. However the recent involvement of the company in alleged scandals and fraudulent dealings involving the financial markets has led the company into bankruptcy and possible liquidation. The company was accused of fraud business activities due to failure of internal risk management. OW Bunker has filed its subsidiary Dynamic Oil Trading for liquidation under chapter II bankruptcy. KPMG has been appointed as the liquidator for the company (Dynamic Oil Trading, 2014). Aims and objectives Financial mismanagement due to inefficient risk and credit assessment is common phenomenon in the corporate world. Lack of proper control of financial activities and improper decision making has led to severe losses and closing several firms. The current analyses the case of Dynamic Oil Trading scandal which has impacted the overall oil market trading negatively. The study analyses what factors led to the dissolution of the company. The study aims to put light upon the importance of regulating financial activities of subsidiaries by parent companies. It also specifies the importance of risk assessment and credit management for the long term success of a company. Methodology The current study is based upon the secondary research method and is qualitative in nature. The data required for fulfilling the requirements of the paper has been collected from online sources and research works published by scholars and financial experts. Since obtaining primary resources is beyond the scope of the researcher, considering the subject matter of the paper, much reliance is developed on secondary sources. The information obtained from secondary sources is analyzed theoretically. The philosophy adopted by the researcher is interpretivism. Interpretivism philosophy allows the researcher to understand the issues and the subject matter of the research on the basis of the personal understanding abilities of the researcher and resources accessed. The paper follows the case study method of research where all theories and the subject matter of discussion are incorporated on the basis of the Dynamic Oil Trading company scandal. The case study method requires the researcher to remain focused upon a given organization or a particular subject matter. The information collected for the paper tries to analyze the case vividly and develop suitable understanding of the importance of risk management and credit management. Globalized business operations have increased business risks remarkably. While many firms accurately predict and are able to dissolve risks, many lack making sound financial judgments which lead towards major organizational issues. In order to maximize the understanding of the case, the researcher has incorporated a literature review which studies the relevance of risk and credit assessment in the corporate world and how they prevent financial crisis. Since the current study focuses upon theoretical analysis, complete efforts have been taken by the researcher to collect valid information pertaining to the case (Kumar and Phrommathed, 2005). Literature review Risk management The current study largely focuses upon the problem of risk mismanagement. The fall of Dynamic is a suitable example in respect how inaccurate risk related predictions lead to severe losses. The increase globalization of trade related activities have induced much risk in the prices of goods and services. Such risks are a result of constant interaction of the financial markets of different economies. Since globalized business activities have deeply linked the economies of different nations and entities, the downfall of a single economy may impact the economies of nation. Currency value fluctuations are considered to be one of the prime risk factors in business. In order to mitigate the effects of such risks organizations are seen to enter into a number of derivate contracts. However, successful risk management lies in the aspect of adequate prediction of the fluctuations of currency values and prices of commodities. A firm must be able to adequately predict how stock market fluctuations are likely to impact prices of underlying commodities such as oil and accordingly take positions in the financial markets. Risk assessment is given high importance by most modern day organizations. As commercial activities become more dynamic and spread across different nations, companies are required to interact with different currencies and economies. The shifts in economic or demand condition may adversely impact the decisions taken by international organizations. This necessitates organizations to estimate in advance the likely business environment factors of the future and accordingly develop plans of operations. Risk assessment not only facilitates organizations to prevent loses but also supports earning tax benefits and planning of resource utilization. In order to mitigate the effects of business risks, hedging contracts are often procured. Hedging fixates business dealings so that changes in the economic conditions do not alter earnings. Additionally hedging contracts also facilitate organizations to take advantages from the rise in prices by trading at pre established rates. Futures, forwards, swaps and options are the most commonly traded financial instruments which facilitate risk minimization. Once an organization determines to hedge their risks, it becomes essential to pick the right tool. This requires careful understanding of the nature of business activities and type of risks which may impact the business dealings. Forwards and futures are considered to be the most effective tools for mitigating risks. Swaps are mostly acquired by banks and for essentially mitigating currency risks. Multinational companies across the globe are seen to ruse financial derivatives in some form or the other for dissolving risks. Most of such risk dissolving instruments can prevent loses only from the short run perspective. Long run risks can only be mitigated through proper business evaluation (Basch, et al., 2000). Credit management The problems at Dynamic and its parent company OW bunker have also risen out of improper credit management and breach of formal regulations. The credit grant allowed by Dynamics was not authorized by its parent organization. Authorization becomes particularly essential when the transaction is financially large in size and may impact the course of business activities adversely. Due to the unrecoverable credit allowed to Tankoil, Dynamics bad debt position had went up drastically. Financial efficiency requires firms to establish strict policies in respect of companies operations. OW Bunker had failed to monitor the activities at its subsidiary at Singapore. This had led to inappropriate business decisions potentially impacting the organizations liquidity and profitability. The board members are still investigating how such an incident could occur at the organization. The issue brings into light the understanding that accurate credit related decisions are essential in financial management. Credit assessment refers to the manner in which an organization obtains permits and develops different types of assets and overall level of the firm. Credit management is an important aspect for trading organizations for reducing risks effectively. If firms lent out a large portion of their goods and services on credit without proper assessment of the credit worthiness, it may lead to potential loss of investments and loss of liquidity. The cash reserves of the firm may get exhausted. Efficient Debt management ensures that debtors have adequate financial capacity for returning the money which is due. In order to efficiently manage debt sit essential that firms vividly analyses the credit repayment history of debtor firms. The analysis requires being conducted both from internal and external sources. The external sources would include communicating and direct verification of the financial records of the debtor firms and obtaining information regarding the financial policies of the debtor firms from other companies with whom transactions had previously been carried out. Internal sources would include deploying employees and appointment of officers who are experts in verifying credit worthiness of firms. The reports provided by such executives also form an important source of evidence for the organization. The quality of debtor’s credit assessment can further be improved by checking their current liquidity position. Firms are also required to understand that faulty credit decisions may not only lead to the loss of an individual firm’s revenue, it also impacts the business of other companies since economy is globalised. Another significant aspect of efficient financial market regulation is the implementation of proper financial policies of reporting. Many subsidiary organizations do not fulfill the reporting related needs and breach the regulations which are imposed upon them by their parent organizations. In order to gain autonomy and easier management of business, many parent organizations allow their subsidiaries to take financial decisions by themselves without much correspondence. If subsidiary firms do not possess necessary financial management skills, it may lead to huge losses. Therefore it is essential that organizations remain vigilant in terms of decisions and financial steps taken by their subsidiaries. Strict reporting and codes of conduct must be laid down and followed by all members of the organization so that fraudulent practices can be minimized (Crotty, 2009). On the basis of the above discussion, the following conceptual model has been developed for implementation of financial efficiency in organizations which participate in financial markets and are a part of the global trade. Findings in respect of the case The Singapore Shipping fuel issue involving the Dynamic Oil Trading is seen to be the largest financial market scandal of Singapore in the recent times. The sudden fall of the OW Bunker subsidiary has affected the oil shipping industry aggressively. Creditor claim against Dynamic oil are approximately S$27 million. The largest of the claims were made from the Hin Leong Trading Pte. Ltd and Mitsui and Company Energy Trading Singapore Pte. Ltd. The liquidation process is likely to take place in the following few months resulting in the complete closure of the Dynamic Oil Trading Company (The Strait Times, 2014). As published in the newspaper “Straits Times”, Niels Henrik Jensen, the chairman of OW Bunker in Denmark had stated that Lars Moller had walked into the headquarters of OW Bunker’s unexpectedly in the month of November. Lars Moller is head of Dynamic Oil in Singapore. He had arrived with some of his colleagues at OW Bunker’s headquarters to explain the situation to the chief executive of the company, Jim Pederson. Jenson stated that much of the information known to the company is based on the testimonial provided by Lars Moller. The failure of the companies Singapore subsidiary had caused it to wipe out its equity earnings. The losses at Dynamic were estimated to be around $125 million (Bloomberg, 2014). Clear details in respect of the fall of the company have not been made public as the legal proceedings are still in process. However it can be understood form the firm’s financial performance that the recent downfall the oil prices in the international market was one of the prime reasons behind the decline of Dynamic. Many crude oil futures had dropped by almost 30% in value since the month of June this year. Such a weak financial market performance in respect of oil futures, contracts and swaps has not been witnessed since 2010. Oil traders are of the opinion that Dynamic must have assumed a long position on their hedge contracts when the prices of oil had began falling (Reuters, 2014). In case of underlying commodities such as oil, investors in hedge contracts are required to assume long positions in order to benefit from rising prices. However traders having the long position incur losses if the prices begin to fall. Dynamics shares have been suspended causing losses to many investors. The company has fired its risk management head due to such inefficient performance. Company authorities had claimed that internal mismanagement and lack of proper estimation of the financial markets had led to its fall. Due to the fall of the company’s subsidiary, many suppliers of OW Bunker have canceled their long term contracts with the company, suspecting potential future losses. Financial experts are of the opinion that if Dynamic falls in the market without paying out its existing position would negatively impact the oil industries stand in the financial markets, potentially leading towards a domino effect upon other industrial sectors as well (The Wall Street Journal, 2014). In case of the Dynamic Oil Trading Company, risk mismanagement had not only arisen out of oil price fluctuations but also out of lack of proper credit assessment, improper credit assessment was also seen to be a potential cause behind its downfall. The company had claimed to have provided unrecoverable credit facilities leading to the increase of debt and induces high risk position. The firm had provided Tankoil Marine Services an estimated credit line of about $130 million. This credit grant was not submitted to the board at OW Bunkers or authorized by it. Jenkins had also stated that any credit grant above $10 million was required to be authorized by the board. In the light of such issues, OW Bunker had filed for bankruptcy. Accordingly Dynamic had filed for claims against its creditors (News Strait Times, 2014). As per the records collected from Dynamic Oil Trading, the company reportedly uses swap contracts for hedging risks related to price fluctuations. The company has $1 million in paid up share capital and $53 million as bank overdrafts. Also about $144 million is trapped in trades receivables and $71 million in trades payables (Bloomberg, 2014) Recommendations The financial data and statements extracted from the company vividly shows that a huge sum of losses had occurred due to the improper assessment of potential risks. The firm was not capable of assessing the fall in oil prices and therefore assumed a long position in hedge instruments. The loss arising out of fall in prices of oil was coupled with bad debts. Dynamic’s prime cause of downfall was the breach of regulations. If the company had adequately reported its activities to its parent firm OW Bunker, much control could have been established in respect of risk assessment as well as providing of debts. The parent firm would have adequately regulated the manner in which the company enters into financial contracts. Dynamic had entered into faulty hedge contracts (Today online, 2014). Due to assuming a long position and the effect of fall in prices, many of the business dealings entered into could not reap profits. Much of the dealings were closed with adequate losses as prices had fallen much beyond the costs at which they were procured by Dynamics. Considering the current circumstances, OW Bunker is seen to have taken the right decision by filing for bankruptcy. The huge losses can be paid off only through external debt support. This might however put OW Bunker in a risky position in the financial markets for a considerably long time till it revives its financial situation and is able to pay off the debt. Complete dissolution of Dynamic Oil Trading is expected to realize some revenue which might help OW Bunker to settle claims and losses. Conclusion Failure of firms due to inappropriate risk management and lack of proper utilization of resources are seen to be common in the present day economy. While many state that the downfall of Dynamic Oil Trading was due to inappropriate financial decisions and lack of internal control, it can also be started that some of the issues where beyond the control of the organization. This includes fluctuation of demand conditions which had led to drop in prices. While many risks can be pre-estimated, some risks such as changes in demand condition may be sudden and cannot be predicted in advance. As a result organizations are left with poor decision making and financial loses. Similarly it is also essential to mange credit proceedings and grants. Firms must review the financial strength of client companies before allowing massive credit facilities. Reference list Basch, C. A., Bruesewitz, B. J., Faith, P. and Siegel, K., 2000. U.S. Patent No. 6,119,103. Washington, DC: U.S. Patent and Trademark Office. Bloomberg, 2014. OW Bunker Oil-Trading Unit at Center of Fraud Had $2.1 Billion in Sales. [Online] Available at: [Accessed 27 December 2014]. Crotty, J., 2009. Structural causes of the global financial crisis: a critical assessment of the ‘new financial architecture’. Cambridge Journal of Economics, 33(4), pp. 563-580. Dynamic Oil Trading, 2014. About Us. Available at: [Accessed 27 December 2014]. Kumar, S. and Phrommathed, P., 2005. Research methodology. New York: Springer. News Strait Times, 2014. US stocks sinks as oil shares tumble. Available at: [Accessed 27 December 2014]. Reuters, 2014. Ship fuel market in turmoil after OW Bunker files for bankruptcy. Available at: [Accessed 27 December 2014]. The Strait Times, 2014. Singapore shipping fuel scandal sends traders scrambling. [Online] Available at: [Accessed 27 December 2014]. The Wall Street Journal, 2014. Second OW Bunker Unit in Singapore Files for Liquidation. . [Online] Available at: [Accessed 27 December 2014]. Today online, 2014. OW Bunker’s board didn’t approve credit line that caused collapse. Available at: [Accessed 27 December 2014]. Read More