MFGlobal was an American based company that was established in 2007.Having been founded by Man Group, the last company CEO was JonCorzine. was dealing with financial services with majorproducts being options, futures, spread betting, contracts fordifference and foreign exchange. The company was publicly held, afterbeing separated from Man Group in 2007. According to 2010 financialreports, the company total assets and total equity were $42.460billion and $1.490 billion respectively. The operating income was$100 million. The company was declared bankrupt in 2011 after facingliquidity problems for several months. Various financial analystsindicated that MFGlobalinvolvement in repurchase agreements was the major cause of pressuresthat resulted to liquidity problems. In 2011, the company executivesconfessed that more than $700 million was transferred to brokers fromthe customers’ accounts. To cover the liquidity deficit, a loan ofmore than $150 million in customer funds was also transferred to thecompany branch in UK. MFGlobal was liquidated in November 2011. According to the liquidatingtrustee, the company losses as at 2012 stood at $1.6 billion. Thiswas followed by a legal petition where the judge approved the paymentof $1.2 billion to customers which represented 93% of the accountholders’ investment.
Auditor& How the Firm Succeeded in Fraud
MFGlobal auditing was conducted by PricewaterhouseCoopers(PwC), a multinational professional company operating in more than150 countries. Even though the fraud took one year, the auditing wasdone in less than 2 years.
MFGlobal used one key strategy to prevent the auditors from discoveringthe fraud. This included the use of loopholes in the company’sfinancial reporting. The European sovereign debt was hidden in thebalance sheet. This was made possible when Corzine’s decision totreat the trades in the European markets as repurchase to maturityagreements was successful. In addition, the European bonds were usedas collateral by the company(Nanette, 2011).Based on the fact that the structure was in line with the FederalAccounting Standards, board indicated that the Europeansovereign debt stood at $6.3 billion but the actual figure was $11.5billion. The company also adopted window dressing, which involvedshedding short-term debt at quarterly basis to ultimately reportreduced debt.did not indicate the true debt from theinvestors.
Anothertactic that was employed by MFGlobal management was to convince the auditors that since there was amatch between repos and the maturities of the collateral used by thecompany, the revenue obtained from debts could be deposited tocounter-parties thus avoiding the middlemen in . Corzineand his counterparts also argued fruitfully to the auditors thatrepurchase arrangements could be reported as actual company sales.Even though the two cases could easily be discovered clearly by theauditors, they resulted into extensive faulting of accountingrecords.
Specificsof the Fraud
MFGlobal fraud occurred as a process when Corzine initiated a strategicmakeover in his efforts to transform the company. The CEO adopted twostrategies. First, he obtained the permission of Federal Reserve Bankto participate in securities market. Secondly, the company embarkedon using its capital in European debt securities as a way ofincreasing its revenue. The company entered a risky trading strategythat was referred to as repos to maturity (RTM). This was followed bypurchasing of short-term debts from European market. Despite hisexperience in business activities, Corzine overlooked the risk ofengaging in RTM transactions, which included losing value andcreating a huge margin that would reduce the company liquidity(Michael, 2011).As the CEO was undertaking the strategies, the board of directors andMichael Roseman, the chief risk manager, were supervising him. Thisis an indication that they were all involved in the fraud.
Asnoted earlier, the fraud was concealed by management bywindow dressing its balance sheet in the form of not indicatingactual European sovereign debt in its balance sheet. According toregulators and financial executives among other parties, Corzine wasinvolved at a greater extent in the fraud. Since he was chairman and CEO, the company followed his directions regarding theEuropean sovereign debts. EdithO`Brien was also named by Corzine and his lawyers as having played arole in transferring customer funds. Michael Stockman, the chief riskofficer who replaced Michael Roseman, when the latter declined totake side with Corzine, was also involved in the fraud since he tookthree months to sound an alarm on the excessive risks that thecompany faced.
MFGlobal fraud continued from 2010 to 2011. Even though during BernardDan as the CEO the company was facing financial problems at theresult of 2008 financial crisis, Corzine entry in 2010 led to theloss of $1.2 billion customer funds.
Oneof the accounting errors was the lack of recording transactions andfund transfers in general ledger. As a result, theinvestigators could not clearly identify the particular accounts thatwere affected by the transactions. To have an idea of places wherethe customer funds were transferred, the investigators relied onthird party records and bank statements. Failure to record repurchaseagreements in the balance sheet resulted in inaccurate valuation ofassets. As a result, the investors and customers did not know thetrue financial condition of the company.
Touncover the fraud, there are various internal auditing steps thatcould have been adopted. First, there was a need to track everytransaction that touches on customer accounts using journal entriesin the company’s books(Ladda, 2012).Secondly, there was a need to scrutinize revenue recognitionprinciple adopted by . The auditors could have used thisground and compare it with the Financial Accounting Standards Board(FASB) treatment of revenue to fully understand the implications ofrepurchase agreements which Corzine used to misappropriate thecustomer funds(Associated Press, 2012).Keen scrutiny of off-balance sheet items by the directors andinternal auditors was also a method through which the non-posteditems could be identified. Through undertaking impairment of assets,it was possible for investigators to ensure that assets were notrecorded at higher cost than their recoverable value.
MFGlobal lacked effective monitoring systems that resulted intoexcessive use of customer funds to finance its operations. This madethe company to breach the rules set up by the Commodity FuturesTrading Commission relating to the use of customer funds.Additionally, engaged in activities of a primary dealer inthe US market even though it was to wait for the approval from theregulators due to the changed Fed policies.
JonCorzine resigned in November 2011 after MFGlobal became bankrupt in October 2011. The former CEO was latercharged by Commodity Futures Trading Commission in 2013 due to hisfailure to supervise the company diligently resulting to loss ofcustomer money. Currently, he engages in financial matters andpolitics. Even though Michael Stockman was hesitant to report aboutexcessive risk taken by , he sent the alarm just before thebankruptcy. Thus, he played a role in whistleblowing the financialproblems that the company was undergoing.
AssociatedPress (2012). customers might get money back. Retrievedfromhttp://bostonglobe.com/business/2012/12/29/global-trustee-some-clients-may-madewhole/79Ye8N9TCOPX918o3xjymO/story.html.
Ladda,L. (2012). BasicConcepts of Accounting.Solapur: Laxmi Book Publication.
Michael,R. (2011). Masked Debt Risks, WallStreet Journal.
Nanette,B. (2011).Analysis: proves Enron-era accounting lives on.Retrieved fromhttp://www.reuters.com/article/2011/12/02/usmfglobal-accounting