My Finance Diary 2021 - Page 3

 

Financial Ethics - Wirecard’s accounting fraud

Hello, I am back after my 2^nd blog.

Having learned the final lecture on financial ethics, I think Businesses should adhere to financial ethics in planning and executing the financial management practices and representing the financial statements to the public. I believe that external parties especially investors attract business organizations based on the financial data represents in the financial statements. I have read certain publications and news relating to unethical actions of the businesses to under or overvalue the financial performance to mislead the external parties such as investors, lenders, vendors etc.  I would favour categorizing the unethical misrepresentations of financial statements of the business as a fraudulent activity. Generally, fraudulent activities within the business can be occurred due to three factors such as pressure, opportunity and attitude. I believe that unethical misrepresentations of financial statements are pressure oriented fraudulent activity.

The interesting part is, Wirecard has published the misrepresented financial statements with the involvement of top management and operational level employees have to involve in those activities due to the pressure of the top management people. I have realized Wirecard is involved with fraudulent inflation of revenue and profit of the business to mislead the shareholders. I believe when business is at net loss position and low revenue position, it reflects the poor managerial skills and incapability of making profits from the normal course of business activities. If shareholders notice these issues through the net loss position and low revenue position, sometimes it will cause to replace the management team of Wirecard.

I realized the importance of faithful representation accounting principles and the role of the accounting and financial reporting standards to ensure the faithful representation of the financial statements without unethical misrepresentations of financial statements. I would like to recommend that all business organizations should hire professional accountants who are capable of managing the financial reporting process as per the guidelines and standards of accounting and financial reporting.

In some scenarios, businesses inflate the revenue and profit fraudulently to mislead the lenders such as banks, financial institutions etc. The main purpose of fraudulent inflation of revenue and profit of the business is to show artificial debt repayment strength and interest coverage to approve more term loans. I believe that it will cause to reduce the financial power of the business as a result of increasing the financial risk to increase debt capital compare to the equity capital.

Key management people of the business organizations are responsible to manage the financial reporting process and publish the financial reports for the external users free of misstatements. However, I would like to highlight the importance of an independent auditor's role to confirm whether the financial statements of the business organization are free of misstatements or not. Generally, an independent auditor of the business organization is appointed by the shareholders using a general resolution. Independent auditor is responsible to give an independent opinion to the shareholders whether financial statements are free of material misstatements and independent auditor gives three opinions as true and fair view, qualified opinion when there are materials misstatements and disclaimer opinion when the auditor cannot give an opinion due to having lots of material misstatements in the financial statements.

I believe that management people of Wirecard should not involve in unethical misrepresentations of financial statements since, at any point, those unethical practices will be disclosed and sometimes it will end up jailing the management people. Further unethical misrepresentations of financial statements of the organization will cause to damage the reputation of the organization and it will lead to destroying the trustworthiness of the shareholders and potential investors of the business. Not only that disclosing the activities relating to unethical misrepresentations of financial statements of the business organization will impact to reduce the share prices of the organization and it will reduce the net wealth of the business.

Considering the overall implications over the unethical misrepresentations of financial statements, I would like to suggest that businesses including Wirecard should establish the proper corporate governance framework within the organization to mitigate the potential risk of unethical misrepresentations of financial statements. In addition to that, it is required to implement the internal control mechanism within the organization with proper delegation of authorities to reduce the risk of unethical misrepresentations of financial statements in the business organization.

Storbeck, O. (2021). Wirecard chair's house and office were raided by German police. FT.Com. Retrieved from https://www.ft.com/content/f31502f2-2976-40b8-85a8-7ad8ef62d3d5