Mf Global Holdings Ltd. Case

Abstract

MF Global Holdings Ltd. (OTC Pink: MFGLQ), formerly known as Man Financial, was a major global financial derivatives broker, or commodities brokerage firm. MF Global provided exchange-traded derivatives, such as futures and options as well as over-the-counter products such as contracts for difference (CFDs), foreign exchange and spread betting. MF Global Inc. was its broker-dealer subsidiary. MF Global Inc. was a primary dealer in United States Treasury securities. MF Global experienced a lot of problem in the past such as liquidity problems, large fines and penalties for risk supervision. A large part of these pressures on MF Global were a result of the firm's involvement in a significant number of repurchase agreements. Management and traders at MF Global hoped these high-risk, complex and controversial "repos" would provide funding and leveraged profit. Many of these repo agreements were conducted off their balance sheet. In late October 2011, MF Global experienced a spectacular meltdown of its financial condition, directly caused by improper transfers of over $891 million dollars from customer accounts to a MF broker-dealer account to cover losses created by trading losses. On October 31, 2011, MF Global executives admitted that transfer of $700 million from customer accounts to the broker-dealer and a loan of $175 million in customer funds to MF Global's U.K. subsidiary to cover (or mask) liquidity shortfalls at the company occurred on October 28, 2011. MF could not repay these monies with its own funds. MF Global declared bankruptcy on October 31, 2011, and faced liquidation beginning in November 2011. MF Global was a leading financial futures and derivatives brokerage firm until, on October 31, 2011, it filed for bankruptcy. This made MF Global the eighth largest corporation (by assets) to fail in United States history, and the largest in the financial sector since Lehman Brothers in 2008. At the time of its filing for bankruptcy, MF Global had $41 billion in assets (Kolakowski, n.d.).

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

A financial audit is the critical analysis of a business's financial records and documentations. A financial audit will be released by the auditor or forensic accountant after completion of the analysis and are usually done by certified public accounting firms and forensic accountants who provide an objective view of the true financial integrity of a company. Audits are intended to show whether a company's financial documentation matches its financial claims. It is not uncommon for a business to employee an internal auditor to monitor financial controls of a company in addition to hiring outside auditors. Financial audits allow a company's management to have a creditable picture of the company's financial landscape. A company usually hires a firm to give an outside opinion of the financial documentation to the company's shareholders and investors. Financial audits help a company prove they are not "cooking the books," or altering the financial picture of a company. Audits significantly reduce alternations to company records and can catch accounting errors (Stuart, n.d.). A fraud audit is a meticulous review of financial documents, while one searches for the point where the numbers and/or financial statements do not mesh. Fraud audits are done when fraud is suspected. Some companies do them as a precaution to prevent fraud from happening and to catch it before the offender takes too much money. Fraud auditing is used to identify fraudulent transactions, not to figure out how they were created. The auditor traces every transaction performed by the company, looking for the one that is fraudulent, if any. A regular auditor simply checks the numbers for accuracy. Fraud auditors often go outside the ledger of accounts to find fraudulent transactions. This may include reviewing receipts, not only from the company, but from customers as well. Any inconsistencies in these numbers could help uncover an act of fraud. These auditors also interview employees, customers and sometimes clients to find out if a fraud has taken place (Davis, n.d.).

The key difference between conducting a financial audit and a fraud audit is that in financial audits a certified person searches the books for accuracy and in a fraud audit the certified person searches for any fraud. According to SAS 1 (AU 110), the objective of the ordinary audit of financial statements by the independent auditor is the expression of an opinion on the fairness with which they present fairly, in all material respects, financial position, results of operations, and cash flows in conformity with generally accepted accounting principles (PCAOB, 1972). It also states that in a financial audit the auditor has a responsibility to plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether caused by error or fraud. The objective of a fraud audit is for the auditor to assess the likelihood that fraud will be detected or prevented in a corporate or regulatory environment. Typically this assessment is made by reviewing existing controls to prevent and detect fraudulent transactions. Recommendations to implement procedures to detect or prevent fraud may also be made. Fraud audits are usually conducted on a proactive basis, and should not be confused with fraud investigations which are conducted after the fact, and possibly by forensic accountants. The fraud auditor is obligated to its employer or client (nafanet.com). In a fraud audit, the auditor has no responsibility to plan and perform the audit to obtain reasonable assurance that misstatement, whether caused by errors or fraud, that are not material to the financial statements are detected. Allegations of fraud are often resolved through court action and auditors may be called to testify on behalf of a client or to defend their audit work, a point at which auditing fraud examination and financial forensics intersect (Kranacher, Riley, & Wells, 2011, p. 9).

2. After the recent bankruptcy declaration of MF Global, the Chairman and CEO, Jon Corzine, indicated that he had no knowledge of the missing customer funds. Discuss the obligation of corporate CEOs to shareholders and employees "to know" about the financial activity of the corporation.

A CEO, or chief executive officer, is the top position in a corporation. The CEO oversees the CFO (chief financial officer), CIO (chief information officer) and CTO (chief technology officer). In most companies, CEOs bear a huge amount of responsibility for the success or failure of the company and are compensated very well