MF Global financial crisis and bankruptcy

MF Global

Discuss the key difference between conducting a financial audit and a fraud audit, and the related level of responsibility of the auditing firm.

Financial audits are typically carried out by certified public accountants or outside agencies or firms that work directly on behalf of individual companies. At times financial audits may be initiated by government entities. The audit itself is more of a "double-check" of financial reports and practices (Weinberg, 2003). Financial audits are deemed complete upon verification that numbers are accurate. Completed financial audits may prove or disprove information, but discrepancies will typically not result in the same serious consequences as those uncovered during a fraud investigation or audit.

Fraud auditing usually comes at the demand of the U.S. court system - usually the work is carried out by the government or privately-held third parties. Fraud audits look for dishonesty and hidden figures. They probe deeper than the average financial audit. A fraud audit may not be complete until auditors have the evidence they need or a court is satisfied. If a fraud is revealed or confirmed, serious legal repercussions will result. Financial auditing firms have a responsibility to uncover the warning signs of fraud; however, the fraud examiner has ultimate responsibility for the more forensic fiscal checks and balances that reveal misappropriations and deception (Spencer, 2011).

Investors and portfolio managers are typically outsiders when it comes to internal financial matters that go on within companies. In order to make informed decisions, they must rely on the due diligence of corporate insiders. The Sarbanes-Oxley Act offers protection by interjecting ethical behavior and integrity in the public company management and auditing process. Signed into law by President Bush on July 30, 2002, it offers the most massive across the board changes to securities law since the 1930s (Weinberg, 2003). Such legislation was established to oversee auditors and put severe restrictions on questionable financial and auditing reporting and processes.

Discuss the obligation of corporate CEOs to shareholders and employees to know- about the financial activity of the corporation.

The best way to protect investors from fraud is to require companies selling stocks and bonds to the public to disclose detailed information about their financial strengths and weaknesses. Without complete and accurate information, investors cannot make rational decisions. Ill-informed investment choices hurt individual investors, but are also costly for the national economy in terms of wasted resources, job losses, and missed opportunities.

CEOs and other senior leaders in organizations cannot simply claim ignorance or unawareness about the financial happenings within their organizations. CEO duties include responsibility and accountability for the corporation abiding by enhanced corporate governance standards and procedures. CEOs must personally vouch for their companies' financial statements and public reports. Newly expanded criminal penalties are significant for CEOs who fail to ensure proper financial and accounting oversight and corporate disclosures.

CEO responsibilities have come under greater scrutiny and focus since the Enron scandal. Similarly, MF Global's CEO's role in the demise of the company and unauthorized borrowing from customers accounts was criticized in the aftermath of the bankruptcy. Other senior leaders and employees confirmed he was clearly aware of the activities called into question and that many decisions were made at his behest (Spencer, 2011). CEOs today take a much more active role in the preparation of a company's financial statements and SEC reports and are required to obtain certification in the Sarbanes-Oxley Act. Most public companies also require "sub-certifications" from more junior members of the management team who are responsible for discrete portions of the report.

Analyze how complex global instruments contributed to the fraud and the failure of it to be detected by regulators and auditors of MF Global.

MF Global dealt in complex items such as contracts, options, and derivatives. There were also many spreads and foreign exchanges, futures and options and over-the-counter products such as contracts for difference (Spencer, 2011). Further complicating matters, the company also utilized U.S. treasuries and bets on complicated European debts. When faced with large fines, MF Global proceeded to clandestinely borrow from customer's accounts without permission in complex investments. This fraudulent, unsanctioned, leveraged borrowing was carried out under the CEO's direction, despite internal warnings from the company board, who ultimately signed off on it. According to Lee, "He pushed through a $6.3 billion bet on European debt; a wager big enough to wipe out the firm five times over if it went bad; despite concerns from other executives and board members. And it is now clear that he personally lobbied regulators and auditors about the strategy." (2012).

The instruments didn't pay off in time ultimately leading to financial failure and the declaration of bankruptcy. The Trustee for the liquidation of MF Global Inc. determined that the company executed securities transactions totaling more than $100 billion during its final week of operations, including the liquidation of customer securities. The securities included complex instruments, such as off-balance sheet repurchase transactions involving sovereign debt securities and derivative structures.

Discuss what measures can and should be taken to make it easier for corporate employees to blow the whistle on a fraudulent scheme within an organization.

Whistleblowing has to be a deliberate and carefully planned part of an organization's business strategy to be effective (Weingberg, 2003). Employees must be educated about the appropriate steps to take to voice ethical concerns. Anonymity should be allowed, but beyond that employees must feel that their report of fraudulent activity will be taken seriously and will be investigated. If the organization is unresponsive or fails to follow-up, many employees opt to take their concerns public. Perhaps most importantly, employees must feel confident that they will not suffer personal reprisals for using internal channels to report perceived wrongdoing. Fear of retaliation by management keeps many employees silent or sends them outside of the organization to expose what they know.