Case Study: Risks Of Unethical Business Actions And Compliance Issues In Australian Financial Planning Limited

Major Risks Identified

Question:

Discuss about the Employer Surveillance Versus Employee Privacy.

From the case study two major risks had been identified. First, the Australian Securities and Investment Commission (ASIC) had provided warning notice to Australian Financial Planning Limited (TAFP) indicating that 38 planners of the company had been classified as “critical risk” for non-compliance with the protocols of financial advising.  It had been found that, some of the employees like Donald (Don) Vanvo, are engaged in unethical business action. He had a bad reputation of notching through unscrupulous means. He was under the protection of management due to his status as top performer at Terra Australis Bank (TAB). 

Secondly, Australian Financial Planning Limited (TAFP) has nurtured an aggressive culture with the help of ambitious sales-driven program and excessively short-term remuneration incentive scheme. It provides a little place of honesty for the employees. Employees like Don, started to deceive their clients that their money is lost due to misfortune (for Don’s personal benefit). Other planners like Steve McDuck and Adam Gillespie are also the part of this fraudulent. Despite of all the attempts made by the whistleblowers to warn the management about the fraudulent, the top management has no taken any action. In the year of 2010, the management team had developed a “divide and conquer” compensation policy for the clients. It allowed TAB to incur minimal expenses in the compensation. Hence, lack of customer protection is considered as the major risk faced by the company.

Form the case study it can be identified that these kinds of ethical issues and compliance risks occurred in the company due to the faulty management. Hence, Sam Venus needs to redevelop the management team by removing the existing one from the company. Sam Venus needs change the aggressive business driven culture used in the company and develop ethical policies that every employee has to follow. A team has to be developed who will observe and report about every activity of the company employees. In addition a new compensation scheme for the victims needs to be developed.

It has been found from the case study that majority of the planner’s total remuneration depends upon the short-term incentives like bonuses. Commissions of planners depend on the risk levels of investment assets sold. Hence, financial planner’s behaviour is highly affected by this remuneration plan.  They get incentives for encouraging their customers to opt for more risky investment portfolios. The behaviour of the top management is unforgiving “meet your sales targets, or surrender your rice bowl.” This type of aggressive culture of company is nurtured with the help of highly sales-driven and extremely short-term incentive scheme. The remuneration plan has only a little place of honesty in its business operation. 

It forced the planners of the company like Donald (Don) Vanvo, Steve McDuck and Adam Gillespie to follow unethical approaches. They secretly manipulate the risk profiles of their customers into adopting hyper-aggressive and risky investment portfolios to draw high commissions. They often forged the signature of their customers in order to transfer their capital to high risk products that were eventually wiped out when financial crisis stuck during 2009. In these cases, they often deceive and manipulate their customers by saying that their investment was lost due to misfortune. It gave rise to issues such as lack of compliance with financial investment policies and conflict of interests in the financial planning arm (Bodie 2013).    

Aggressive Culture and Fraudulent Activities

In this case study, Australian Securities and Investments Commission (ASIC) was criticized for being very slow and inadequate in its response. During February 2008, ASIC had provided TAFP a warning notice. It indicated 38 planners for non-compliance with the financial planning protocol. . On 30 October 2008, under the alias of “The three Masketers”, Bloes and two other planners faxed a report to ASIC, to take urgent actions of Don. However, ASIC had not taken any initiative to gather evidence from TAFP about Don. Instead in December 2008, they opted for a discussion with TAFP. It resulted a joint solution to closely supervise Don. On 24^th February 2010, the whistleblowers went to the office of ASIC and demand to seize the client files from TAFP and take decisive action. On 24^th March ASIC ordered TAFP to hand over their client’s file undergoing investigation within 2 weeks. It can be considered as the first sign of confrontation between TAFP and ASIC. Then the ASIC had started investigation confirmed the frauds of Don and financial planners in TAFP.

In this context some major issues had been faced by the ASIC. The main concern is that the reputation of ASIC as a government is not very good. In this context in the final report, the Committee chairman Senator Alexander Pope stated that “ASIC appears to miss or ignore clear and persistent early warning signs of corporate wrongdoing, or troubling trends that place the interest of consumers or investors at great risk.”

It has been found that media had a significant role in exposing the fraud in TAFP. It had been found from the case study that a series of articles was published by Gotham Investor during 2009. They had highlighted 14 cases of forgery from early 2008. Form this case study, it is clear that the media has important role to play in promoting good governance. Harford et al. (2012) stated that governance is a key concept for democratic development in majority of the countries around the world for the last few years. According to Liu and McConnell (2013), the media has the duty to perform the monitoring duty and play the role of mirror of the society. They have important role to play to acknowledge people about good governance and information Act. Miller and Skinner (2015) mentioned that disclosures of the government information by the media can turn people into informed citizen and help them to enjoy their freedom of speech. It also helped them to take rational decisions. Lee et al. (2015) stated that social media can also play an important role in enterprise risk management. Comments over Facebook and Twitter can police makers and officials to become more aware and sensitive about their activities and decisions that can affect the livelihood of people.  The major issues faced by the media in present days are such as:

• Interference of government in the course of action is one of the major issues faced by the media. Jansson et al. (2016) stated that, often the operation of media is controlled by government.
• There is a bad reputation has been developed about the media that they often twit news and provide paid news. It can question the reliability and authenticity of media.

Tricker and Tricker (2015) stated that, employees often reluctant to report about their suspicion about misconduct. It is due to the fact that they fear retaliation from those who are engaged in the misconduct. Hence, it can prevent companies from discovering employee related frauds. Ghoshray (2013) argued that employer surveillance is a very long term process to indentify wrongdoing of employees. Hence, whistle blowing is required. Hence, it is required for a company to encourage its employees to encourage them for whistle blowing. In order to do that, a company must develop an effective whistle blower protection policy.

From this case study, it has been found that the whistle blowing policy did not provide enough protection for Bloe and other whistle blowers. When Bloe and the two other whistle blowers went to the Gotham Investor to publish about the fraud at TAB, they have to face immense pressure from the top management, which resolved to recognize the source of leaks to the media. With their covers blown and yet no action is taken by ASIC, the “Three Musketeers” had become defenseless.

In order to influence employees more about whistle blowing about the wrong doing, they need to develop an appropriate protection plan and rewarding system for the whistle blowers.  

From the case study, it has been found that TAB had an excellent reputation amongst its customers but TAFP severely damaged it. Behaviour of different employees of the company had been discussed below in table:

 The major challenges faced by TAB to promote ethical behaviour, compliance and good governance are such as:

The top management of the company TAFP is engaged in partiality and discrimination.  The top management provided protection to Don, as he was the top planner of the company. This type of partial behaviour forced planners to non-compliance and unethical behaviour.  

TAFP management had nurtured an aggressive culture with the help of ambitious sales-driven program and excessively short-term remuneration incentive scheme. The behaviour of the top management is unforgiving “meet your sales targets, or surrender your rice bowl.” It provides a little place of honesty for the employees.

Despite of all the attempts made by the whistleblowers to warn the management about the fraudulent and non-compliance, the top management has no taken any action to improve it.

The management team had developed a “divide and conquer” compensation policy for the clients. It allowed TAFP to incur minimal expenses in the compensation.

Reference list

Bodie, Z. 2013. Investments. McGraw-Hill.

Ghoshray, S. 2013. Employer surveillance versus employee privacy: The new reality of social media and workplace privacy. N. Ky. L. Rev., 40, 593.

Harford, J., Mansi, S. A., and Maxwell, W. F. 2012. Corporate governance and firm cash holdings in the US. In Corporate Governance (pp. 107-138). Springer Berlin Heidelberg.

Jansson, A., Stafsudd, A., Andersson, A., and Petersson, L. 2016. The role of mass media in corporate governance: A study of how Swedish corporations are affected by the character of publicity. In SASE 28th annual conference, Berkely.

Lee, L. F., Hutton, A. P., and Shu, S. 2015. The role of social media in the capital market: evidence from consumer product recalls. Journal of Accounting Research, 53(2), 367-404.

Liu, B., and McConnell, J. J. 2013. The role of the media in corporate governance: Do the media influence managers’ capital allocation decisions?. Journal of Financial Economics, 110(1), 1-17.

Miller, G. S., and Skinner, D. J. 2015. The evolving disclosure landscape: How changes in technology, the media, and capital markets are affecting disclosure. Journal of Accounting Research, 53(2), 221-239.

Tricker, R. B., and Tricker, R. I. 2015. Corporate governance: Principles, policies, and practices. Oxford University Press, USA.

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