Financial Scandal Leading Insolvency

Introduction

Insolvency of a business involves gross underperformance that is recorded by a company or rather a business. Often, businesses incur the stale of insolvency due to their inability to pay debts or manage their own bills such as the wage bills. Insolvency can also be denoted by the fact that the liabilities of a business precede the number of assets that are owned by the business. There are many factors and reasons that facilitate insolvency of business and among them include financial scandals. Many companies have fallen victims of financial scandals since the auditors perhaps never did their work well or they deliberately conspired to let the financial scandals to take the center stage of the business. This business report shall put emphasis on some of the events that lead to insolvency of the Royal Bank of Scotland Group. Capturing of the topic shall be done by looking at the roles that auditors played on the bank's financial scandal and using critical thinking model to evaluate the impact that cooperates scandal have in United Kingdom's business management. If you require assistance with business dissertation help, understanding the nuances of financial scandals and their impact on businesses can provide valuable insights for your research.

Insolvency of the Royal Bank of Scotland Group (RBS)

The collapse of RBS came to reality in 2008, October 7th. Before then, there were a number of scandals in the management and secrecy on documentations that befell the bank. However, when an oil group came and made a transaction of billions of pounds, the bank was crippled and this denoted the biggest withdrawal in the RBS history (Bogle, 2018). In reports filed by different agencies that were investigating the ultimate collapse of the bank indicates that the inconsistency in the banking system had started long before, in 2005 (Fabrizi, Huan, & Parbonetti, 2017). During these times, the general managers of the bank had the best of performances for the bank but it reached time secrecy dominated the bank. As the events unfolded, every stakeholder in the bank started becoming curious and all manner of suspicion clouded around the management (Sikka, 2015, March). The interest regulatory board had their sanctions on the bank and the performance started dwindling.

As the financial crisis started chipping in, the management of the company had twelve billion euros’ rights issue (Fabrizi, Huan, & Parbonetti, 2017). The money seemed to be enough for the managers to start reviving the bank but the losses made on the investments owned by the bank were too much and the management could not stand it. It was during this time that the insolvency of the bank started being a reality. Individual wholesale business funding started fluctuating since the bank was not stable (Bogle, 2018). Other businesses started experiencing instability in financial management due to the inconsistency of sustainability of the bank (Sikka, 2015, March). The British stock exchange market began to feel the collapse of their value and precautions had to be taken. When investigations were set for the bank, to look into its instability, the matter had already gotten out of control. The state could not sustain and perhaps finance the bank so that it keeps its inflows at the best niche. The only remedy to the situation was the insolvency of RBS.

Role of Financial Auditors in the Financial Scandals of the Bank

The insolvency of RBS attracted the attention of both the local and international media. The financial control agencies in the British government had to give their own report for documentation for the reasons behind the collapse of RBS (Bogle, 2018). Across the reports filed, the outstanding reason for the collapse of RBS is attributed to the incapability of the financial auditors to perform or rather execute their tasks well. The financial proceedings of any business entity are governed by financial auditors (Fabrizi, Huan, & Parbonetti, 2017). These are the group of people who tell the stakeholders and the management, the financial position of the company. The auditors also give the report on the feasibility of the business to the market sphere.

Profitability and financial performances are gauged by the auditors such that in every fiscal year, a report must be given that aid in giving the financial position of the business which includes its profitability and market permeability. Should a company fail in financial analysis and feasibility, it means that the financial auditors did not do their jobs well (Bogle, 2018). In RBS, different occasions had been reported on the inability of the financial auditors to give an account of some of the money proceeds in the bank (Sikka, 2015, March). The inability could translate to them having conspired to some loss of the funds in the bank which leads to severe consequences that included the collapse of the bank. The roles of financial auditors are to give the financial position of the bank and perhaps its stake in financial scandals.

Theoretical Context

The theoretical view contains the role of financial auditors to any business entity. The major role played by financial auditors are the identification of financial scandals, reporting the financial scandals and to give the best ways possible in handling the financial scandals. Businesses hire and employ auditors to give the loopholes in their financial performance in order to upgrade and perhaps realize profits. The theoretical review shall entail the role of financial auditors in financial scandals

Identify financial scandal

Financial statements harbor all the financial proceeds of a company. During the planning stage of the audit, auditors are given the privilege to assess fraud and risk of errors that may have been encountered in financial statements (Sikka, 2015, March). After the assessment of the financial statements, the auditor develops the audit procedure which will help in the identification of any error or fraud that exist in them. Whenever fraud is identified or even the error, the financial auditors should provide the full report on all the happenstances that are associated with the audit system (Fabrizi, Huan, & Parbonetti, 2017). Identification of financial scandal aids in many ways in the processing of books of account which include processing of final reports in the company. The integrity of management is always likely to be questioned during the process of auditing. Therefore, during such times, the auditors may be at risk of withdrawal since they may be threatened should they identify problems in the books of account.

Detection of fraud in the books of account can be performed in different procedures. The existence of different internal audit systems and accounting systems are systematically designed and operate distinctively. The procedure of carrying out the audit process is hence well defined by audit evidence that is needed to prove a dispute (Fabrizi, Huan, & Parbonetti, 2017). The audit procedure includes detail tests that entail transactions, detail tests pertaining to balances and analytical procedures. During the audit procedure for the transactions that are carried out in the accounts books; the auditors are allowed to access the transactions that the company in question had done. This enables the auditor to analyze the debit and credit accounts.

Detail testing of the balances in the books of account is used for the accounts balances of individual cases and transactions that take place in the company. The auditor is required to provide the evidence that is required to prove given cases in the court of law or rather give detailed evidence for the purposes of filing the yearly reports to the management of the company (Bogle, 2018). The auditor is allowed to access all the supplier transactions that have been incurred or rather done in the company by the procurement officials (Fabrizi, Huan, & Parbonetti, 2017). Analytical procedures are initiated for accounting correlations with the aim of identifying the trends that are the finances in the accounts are done (Sikka, 2015, March). Identification of the fraud or the financial scandals will hence be successful when the procedures are all complete and done perfectly as required by the standards of the company. Therefore, it is the responsibility of the financial auditors to identify the scandals.

Reporting financial scandals

It is the responsibility of the auditors to give a report to the management of the company and even other interested parties that need to see the financial trends and proceeds of the company. In a banking agency, the auditors are required to give detailed information and report on the financial proceeds in the company. The report filed by the auditors is very significant in the determination of the next financial proceeds of the company (Sikka, 2015, March). The procurement and supply departments in companies are dictated with the previous financial performance. Auditors do report on their findings after scrutinizing the financial position of the company. In the reporting criteria, the auditor can give a presentation on what he found the while scrutinizing the books of account or the auditor can decide to give a report on what he has found to be suspicious or points to note in the financial performance.

Financial scandals are hard to deal with when it comes to the final reporting. This sometimes can be influenced by who was involved in the fraud cases and those who conspired about the finances (Fabrizi, Huan, & Parbonetti, 2017). Whenever the managers are involved in the financial scandals, there is a high chance that the process can be compromised since they are the head of the business entities and they govern everything they need. They sometimes can compromise the procedures and process of financial auditing (Markham, 2015). To avoid this, a company can hire more than one, auditor to give an account of the financial proceeds in the company (Sikka, 2015, March). Should there be variations in the auditors' reports, then it must be suspicious of the financial position of the company.

Giving recommendations on how to correct financial scandals

The other function of the financial auditors is to give some recommendations on some notable disparities in the books of account. Whenever a financial scandal is encountered during the audit process, some are perpetuated by obvious problems within the company. Some the financial disparities include miss-entry of financial data from the pressure of work or even just finding a way of avoiding the correct entry of the data (Sikka, 2015, March). The latter reason is always aimed at avoiding questions since the money may have been accidentally stolen or rather intentionally conspired by the officials in the company. In such cases, the auditors give the best financial advice on how to handle such cases (Sikka, 2015, March). In the cases of inside jobs by the officials and influential parties in the business, the auditor encourages the business ‘stakeholders to hire more auditors who shall give the report on the financial position of the company (Markham, 2015). The auditors also encourage the process of auditing to be executed when all the workers except those handle the books of account.

At the RBS, auditors are reported to have been involved in the collapse of the bank. The total orientation of the managerial structure of the bank had auditors at supreme positions. At different instances, auditors were reported to give wrong reports on the financial position of the bank. When the financial crisis was approaching in 2008, the managers wanted to hide the image they had from the inside for them to lose the market value (Fabrizi, Huan, & Parbonetti, 2017). The collapse of the RBS started when the financial reports were done to cover up some of the losses done in the bank. Some entities such as large oil companies made transactions which ended up having some great impact on the financial position of the bank (Markham, 2015). It was during then that the financial auditors found disparities on the existing financial statements.

Summary of the current situation

It is about 10 years since the imminent collapse of RBS. During the pre-crisis period of RBS initiated numerous investigations to look into some of the triggers of the bank's collapse. Currently, the bank is under public ownership with the government having the shares (Markham, 2015). It was imminent that the bank would have incurred severe penalties since they contributed heavily towards the initiation of the financial crisis that hit the United Kingdom in late 2008 (Markham, 2015). Ever since its collapse, RBS has undergone numerous dodgy takeovers which have enabled it to survive. Despite the sanctions, the bank is still facing some atrocities (Sikka, 2015, March). In the recent 2018, August, the bank sold out mortgage packages deliberately which warranted it to be fined 3.9 billion euros. The financial position of the bank is still not stable. The scandals, happening recently like the selling mortgage packages lead to insolvency of small businesses. Currently, the bank is pushing on a move to close its branches. The bank has incurred vast projections in lending and hence falling short in the market space. The bank seems not to have learned from the 2008 financial crisis since there is stability in the banking system.

Evaluation and analysis

The evaluation process entails a critical thinking model which explains the effects of corporate scandals on business management. Critical thinking model involves organization of information, structure reasoning, considering of evidence, identification of assumptions, argument evaluation and communication of conclusion (Sikka, 2015, March). Corporate scandals have intense effects on the general orientation of business status in the United Kingdom. Some of the effects of co-operating scandals include economic recessions, financial misstatements, unfair nepotism in trading, and corporate theft (Billings, Tilba, & Wilson, 2016). The effects of corporate scandals are not only felt by the government but also by the citizens of the United Kingdom. In the case of RBS, the effect was felt by both the government and the small businesses (Fabrizi, Huan, & Parbonetti, 2017). The government was forced to chip in and bail RBS from its stale. Small businesses in 2018 quite a number were rendered insolvent when the RBS bank fell a victim of 3.9 billion euros fine. The business had little finance to enable the funding of normal operations in the business. Therefore, corporate scandals have intense effects on the financial capabilities of the business systems.

Corporate scandals initiate economic recessions. Whenever there are corporate scandals such as financial scandals, some businesses are likely to close down and get some time to build up a new to sustain the market demands. Financial scandal leads to loss of money which is an essential asset in ensuring the running of the operational entities (Billings, Tilba, & Wilson, 2016). Production procedures require money and when its availability is scarce, other operations are crippled and they will struggle in managing other production departments. Economic recession affects the economic structure of the government through the economic recession (Fabrizi, Huan, & Parbonetti, 2017). Whenever businesses are closed down in order to sustain other operations in the business, the stock exchange market is likely to get a blow. Money circulation is likely to be tampered with since individuals will be hoarding money hence scarcity in circulation. In the UK, the effect of the economic recession was experienced a financial crisis. Therefore, a corporate scandal affects business management.

Corporate thefts are quite often encountered when there are corporate scandals at play. Corporate scandals attract the attention of financial agencies and other bodies that deal with handling corporate scandals. Whenever the agencies are handling the issues of scandals, thefts have been recorded in a number of occasions (Billings, Tilba, & Wilson, 2016). Corporate thefts also arise when most of the activities in the business world concentrate on the corporate scandal. When a robbery happens at a bank, some managers take advantage of the situation by over-quoting the amount of money lost (Markham, 2015). When the robbers take, say 2 billion euros, the managers would then report to the media and the public that 3 billion euros were stolen such that the robbers are used to hide the whole crime while the managers pace away with 1 billion euros as their personal gain. Corporate scandals act as a cover-up to other crimes in business which leads to loss of focus.

Market dynamics are likely to change upon inception of corporate scandals. Market dynamics include demand and supply which are the major factors that determine business’ capabilities to rebound. Corporate scandals have an influence on determining customer perception on a given commodity. This affects the behavior of customers. When the behavior is influenced, the business' profitability is greatly influenced and hence demands and supply is compromised. Customers’ perception towards the credibility of an organization determines the efficiency in the promoting supply and demand (Billings, Tilba, & Wilson, 2016). When a business is known for scandals, the customers are likely to abstain from products of such a business. Supply and demand determine the stock exchange market of United Kingdom and when the scandals compromise the two business parameters, there is likely to be a great loss to the general profitability of businesses.

The scandals at the business level tarnish the general reputation of managers and all its stakeholders negatively. Upon change on reputation which affects the consumer perception brands from the businesses are affected. However, in some instances, corporate scandals help in improving the reputation of a business. When the scandals arise, some of the business brands get the airtime and more viewership hence attracting more customers (Billings, Tilba, & Wilson, 2016). In investor reaction, scandals play a major role in shareholder value and stock price. Scandals portrayed by the media mostly at giving a negative impact to the business. Investor reaction is influenced by how the scandals are displayed to the public. It is worth noting that the investor reaction is temporary and felt within a very short period of time.

Conclusion

Financial performance is not only determined by the prowess of the business in terms of sales but also affected by the reports given by the financial auditors. Auditing is important in businesses since it boosts the credibility of the financial statements. Should the business be constantly in financial audit, the success of the business is likely to be staked high? RBS's collapse would have been salvaged if the management would resort to having credible financial auditors.

Reference

• Fabrizi, M., Huan, X., & Parbonetti, A. (2017). When LIBOR Becomes LIEBOR: Reputational Penalties and the Contagion Effect of Corporate Misconduct in Banking.
• Billings, M., Tilba, A., & Wilson, J. (2016). ‘To invite disappointment or worse’: governance, audit and due diligence in the Ferranti–ISC merger. Business History, 58(4), 453-478.
• Bogle, J. C. (2018). The Modern Corporation and the Public Interest. Financial Analysts Journal, 74(3), 8-17.
• Markham, J. W. (2015). A financial history of the United States: From Enron-era scandals to the subprime crisis (2004-2006); From the subprime crisis to the Great Recession (2006-2009). Routledge.
• Sikka, P. (2015, March). The corrosive effects of neoliberalism on the UK financial crises and auditing practices: A dead-end for reforms. In Accounting Forum (Vol. 39, No. 1, pp. 1-18). Elsevier.

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