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This research paper will discuss the application of the forensic financial analysis principles to study the financial departments of the Blockbuster Inc. (Blockbuster). The paper further examines the sectors within the Blockbuster which are vulnerable to Securities and Exchange Commissions (SEC) action. Additionally, this paper will cover the company's corporate governance and finally it provides a concise conclusion which puts forward a succinct summary of the body of the paper. A universal recommendation is given which applies to both the Blockbuster inc. and every company aiming at excelling by satisfying the stakeholders needs.
Sean (2009) affirms that Blockbuster Inc. (Blockbuster) is an international organization that provides home and theater rental facilities, DVD and retail movie. Also the corporation deals with all sorts of entertainment including the game entertainment. The movie rental business is not only done directly to the clients but also through the electronic methods. These methods include; renting and retailing over internet, mail, personal computer (PC) downloads amongst other methods.
Blockbuster inc. is based in United States of America and more specifically Dallas, Texas. As at the beginning of the year 2010, Blockbuster inc. had over 7,000 stores in US and the established branches in around 20 countries globally. Most of the branches are found in the following countries; some countries in Europe, Canada, Latin America, Mexico and some regions in Asia. The company operates in a double locality i.e. domestic and global locations.
Many organizations are recently facing financial constrains. Most of these problems are attributed to the loopholes in managerial sectors; as such, most financial and procurement departments are some of the departments which deliberately or unknowingly get involved with many scandals. These lead to economical strain to the little available resources in the company. As result, the least sensitive companies get on with their transactions without solving and strategizing policies to get rid of these unethical acts (Sean, 2009). When a company proceeds with its transactions with the unsolved or the undiscovered misappropriation, it reaches a point on its financial status when it will not be able to perform, a situation referred to by economists as capital utilization. This status will render the company broke and may not even be able to gather for the cost of laying-off the employees.
Such problems can be corrected and avoided if the company is able to discover and handle them in time. As a result, most of these corporations usually find it difficult to arrive at the best agreement on the criteria to apply. There exist different methods to assess company's financial usage and flow. Analysts have been able to use them but their outcome and efficiencies differ greatly. The degree of efficiency, cost, and outcome are some of the distinguishing factors amongst the existing criteria. Forensic Financial Analysis has widely become the most common method of carrying out thorough analysis of the companies' and institutions' financial statuses.
Sheetz & Silvertone (2007) observe that Forensic Financial Analysis is a multidisciplinary study program used to study a given company or institution's financial expenditure and status. It acquires knowledge from economics, accounting, law and criminal justice. The main aim is to find the extensive fraud across several disciplinary frameworks. It uses an insight which can only be found through the integrated disciplines.
Before moving on to analysis of Blockbuster's departments, it appropriate to give a brief overview of Securities and Exchange Commission (SEC). This is a federal body in US holding the security laws applying to all states as a primary role. Some of its other roles are to regulate the investment security and the nation's options and stocks exchanges. SEC actions are the regulatory communication done by the commission. It involves the recommendations against a company which the commission imposes as a result of failure by the company to meet the stipulated conditions. The commission can do this publicly to reach all investors. This will impact negatively on the image of the company and finally resulting in the shying away by the people who could have been in a potential to put their shares on the company. The finally outcome will be a total loss to the company and its shareholders (SEC, 2010).
Analysis based on Blockbusters' departments
Procurement is a process through which a company acquires the resources and materials for the daily operations in the company. These resources include goods and services whereby a service is any work done to a company (Thomson, 2010). The acquisition can be from a third party or the in-company providers. The whole process starts from the identification of needs throughout to the end of a service by the contracted party. The process also involves some decision to be made including; who to contact? What conditions should hold? Should the company buy or make? The company is accused of false advertisement on the membership and hiring. Their adverts on the company's website read that if you buy their goods or rent some services costing certain amount, you will be in a position to be hired. It was only realized later that the advertisement was intended only to maximize sales.
This is a department responsible for communication between the organization and the shareholders. Blockbuster has been on the highlight in media for failing to communicate to the shareholders on its financial status. A minor shareholder was quoted lamenting about the company's failure to communicate to them when it faced economic constrains. According to Tice article on the website Blockbuster is accused of failing to communicate on the shares' status. (Tice, 2010). This can lead to SEC taking action against the company as it requires that the company should communicate to its share with a clear communication of the economic status." Why do they want to vote again? Because, the investors say, they didn't understand that voting it down would get Blockbuster's stock delisted" (Tice, 2010). This immediately happened after the proposal failed. This made their shares worth pennies. After a meeting, the miscommunication led reverse-split being approved and the New York Stock Exchange (NYX) agreed to forestall the company.
Blockbusters marketing department hit by fraud lawsuits in New Jersey.
The company was in 2005 hit by a fraud lawsuit in New Jersey. The N.J Attorney General Peter Harvey sued the company the company with the accusation of deceiving the customers. The company with its "No More Late Fees" rental policy violated the states consumer fraud laws within its new policy. "Blockbuster boldly announced its 'No More Late Fees' policy, but has not told customers about the big fees they are charged if they keep videos or games for more than a week after they are due," the attorney general said. (Delahunty, 2001). The new policy stated that the consumers can keep the movies more than a week before the return date expires after which the he/she will be charged a restocking charges of $ 1.25. If the 30 days elapses the consumer is charged a full retail price of the item. This is a clear indication that the Blockbuster marketing department involves itself in fraudulent activity hence the possibility of action by SEC
This is a department in any organization which is responsible for hiring and using resources including both human resources. This is a department which involves so many activities done which open it to fraudulent activities. The quality and quantity of resources subject most companies to engage themselves on this unethical process. This ranges from the officers in the departments who acquire some bribe which finally can make the reverse the tradition with which the process is carried out. The leading entertainment company has the wide range of employees either subordinate or executive staff. The company had hired James Keyes as a president who served for a very long time. One of the company's former worker admitted that the Blockbusters movies are cheating their customer (Delahunty, 2005).
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The organization is involving fraud on their products. The expectations by the customers are higher than the movies can satisfy. This fraud is referred to as appearance-reality fraud. The company should therefore carry out customer awareness campaigns to make them understand the facts and fictions surrounding their movies. This will make customers save the amount they falsely and unknowingly spend buying its products.
Blockbuster on several occasions has been found engaging on illegal double charges on their goods and services offered as post-paid through VISA. A client is quoted lamenting about Blockbuster Online. "....... Two days later, I noticed that my VISA was debited twice for the monthly fee of $15.14 .....THESE PEOPLE DON'T CARE WHAT THEY ARE DOING AND THEY ARE WILLING TO LOSE GOOD BUSINESS FOR A MERE $15.14. I will be contacting my bank to report them, as they are submitting unauthorized charges. RENTERS BEWARE!" (Complaintsboard.com, 2009). This further enlists Blockbuster of the illegal charges done on the clients account for the goods and services rendered on loan. The organization should do website audit to verify the authenticity of the action. It can be another party outside the company or the unauthorized personnel within the company.
Blockbuster's Corporate Governance assessment
One of the sections in a company where fraud can find its way in to the company is the corporate governance section. Corporate governance is defined as the ability of an organization to put the stakeholder's needs at the forefront from which it will strive to satisfy them. The satisfaction is described as the ability of an organization to perfectively and timely meet the stakeholder's set goal (Thomson, 2010). The paper analyses Blockbuster inc. from this perfective. It examines the operations of different boards and committees where their weaknesses are featured alongside recommendations for it to adhere to the laid down principles. These principles are common to any investment corporation.
In other words, corporate governance is a set of stipulated process (by law) and the laid policies on how a corporation is administered or is managed. Mostly, the corporate governance surrounds the issues of shareholding and the existing relationship between the stakeholders of various categories. The governance aims at attaining the set goals. The main stakeholders in any company are; board of directors/governors, employees of all categories), customers, bidders and the community as a whole.
The main aim Blockbusters corporate governance is ensuring the accountability of particular shareholders in an organization with an aim of avoiding or reducing any associated problems. Through the interactions by various stakeholders, an organization may succeed or fail in its activities (Delahunty, 2010).
As a result, joint investors have come up with a list of principles through which a company wishing to succeed has to follow. Amongst several of them, the most accept are; disclosure and transparency, according to this principle, a company should ensure the openness in its operations. It should be able to publicly clarify its roles and responsibilities to the appropriate departments and concerned individuals. The disclosure of information relating to finance should be done timely and regularly. The second principle is the integrity and ethical conduct; this allows an organization to maintain its public relations and avoidance of lawsuits. According to the corporate governance, a company should therefore establish a code of conduct for the executive stakeholders like directors.
Sean (2009) indicates that the third principle of corporate governance is the interests of other stakeholders; according to this, the corporation has to recognize the existence of obligations including the legal to all stakeholders. The fourth principle is the right of equitable treatment; this states that every stakeholder has a right to be respected helped to exercise such rights. This can be done by making them asses information with ease at the right the time. This can be achieved by organizing meeting and forums and subsequently encouraging the stakeholders to attend. The final popular principle concerns the role and the responsibilities of stakeholders. This states that the board members should be competent and acquainted with skill to carry out the managerial roles its size also is a determining factor and should be made as small as possible.
The following categories of people and their corresponding duties play a major role on the success of an organization. These include board, audit committee, stock options policies, pension fund policy among others.
In blockbuster like any organization, the board is a legal authority which is composed of directors. Its role is mainly to hiring and firing the executive management. Apart from this, the board is further responsible for compensating the suspended or the expelled top management. The financial role of the board is to safeguard the invested capital. The board does this through the regularly held meeting during which the identified problems are solved by applying the suitable remedial measures (Tice, 2010).
The board also has the mandate to establish relevant committees and delegate the specific roles. It is also responsible for establishing a specific audit by nominating its committee. The right board is balanced i.e. should be composed of the executive and non-executive directors who have diversified level of skills and expertise. This avoid the domination of any group in the decision making process.
Blockbuster inc. should also ensure that its board has the independent and non-executive director. The independent directors will be those who are not employed by the company in an executive capacity for a period ranging from 4 to 5 years. They should have no personal services commitment through contracting with the either the company or the company's executive management. Above all the independent directors should not have any relationship with any of the top-management members (Sean, 2009). The non-executive director will be those not involved in managerial or any administrative duties. This will allow the corporation's board in managing and delegating duties to departmental committees as; production, movie copyrighting and theatre presentation committees. All these should be appointed under a very formal and transparent process. This is ca be accomplished by attaching available job opportunities together with the advertisement of the movies and other entertainment which are usually done on internet or though mailing of the subscribers.
This is a committee consisting of internal control procedures and the internal auditors. The internal control procedures are the regulations imposed by the company's audit committees, management, board and any personnel with an aim to facilitate the achievement of the corporations' objectives. On the other hand, the internal auditors are the executive employees whose role is to study, analyze, design and implement the organization's control procedures. After this, they usually provide reliable financial reports done periodically. Blockbusters' auditors are also responsible for maintaining sound system of internal control to safeguard the shareholders assets and investment.
The big challenge to the corporation is to involve the external auditors exclusively during any audit. These can be an independent body who can be appointed by the board during the annual general meetings. Upon establishing, the board should create a formal and a transparent arrangement for maintaining a professional interaction within the Blockbuster's auditors. The audit committees also work jointly with the auditors to review the stock size and the audit program with their results alongside the recommendations. (Thomson, 2010) They are also responsible for the appointment and laying-off of its senior staff. The body and the committee is headed by a finance director who organizes the regular meetings after which the agenda and the recommendation are given to the public (stakeholders.)
Stock options policies
According to investors, stock options form the major financial derivative to be trade on and are described as being more liquid. All investors usually take high degree of risk by moving and trading their stock options. In this regard, Blockbusters for the last few years have not shown much interest by neither moving nor trading their stock. This can be attributed to the associated leverage and the time limitation. The policies laid by this organization may have not taken into account the fact that; when the stock options are traded properly, they can actually extend the portfolio's return by a large margin. However, if these stock options are traded recklessly, the loss expected is actually unimaginable as it can lead to total loss.
As a recommendation about the stock option, Blockbuster should consider getting approved to get accreditations to trade on the stock option. It should get itself experienced investors as they the only allowed to trade stock options. Upon getting the right brokerage firm, the organization should determine which of the company's stocks can be trade on. This is basically based on the stock which can move and the degree of profitability. It should the time the length of time it should take a stock to make a significant move. The direction is the next factor as the company needs to determine whether the stock should move up or down. Here the call or put actions are applied appropriately depending on the direction the stock takes during the move. Finally the company should select a strike price, which is the price at which the option is exercised or before the expiry date. Here the major determinant are the also call and put options. According to one of the blockbusters' shareholder "when you are a company in financial trouble, it pays to be a clear communicator" (Tice, 2010). This statement is enough to depict the company's weaknesses surrounding the communication. it brings an indication that the don't make clear statements to account any loss. Therefore, it is the company's high time to improve on this.
Pension fund policy
The government guides on the investments policies through the Government Fund Policy (GPF). The GFP philosophy emphasizes on the safety of the principle fund. It aims at overcoming long time economic recession by ensuring proper asset allocation, and the ensured investment choices. Other main policies states how the employees should be compensated upon the laying-off or when they retire. In district courts, several plaintiffs have filed cases against Blockbuster regarding their payment. In a worst situation to have faced the corporation, was when four males formally employed by Blockbuster filed a case against the company with a suit under Title VII and the Florida Civil Rights who were terminated as retaliation for protesting against a policy which was imposed and could not gather for pension policy. (Openjurist.com, 2004).
As a recommendation, the organization should establish clear policies regarding pension. More so, it should be able to take liability by clearing the pensioners after retirement age or when they are laid-off according to the organization's policies.
Having looked at the Blockbuster inc. it is clear that every corporation can have some loopholes which are not easily discovered. The company therefore should frequently hire or use its own forensic auditors to ascertain this. Failure to do so can lead the company into involving itself in both unlawful and unethical act such as fraud. It can avoid all these by also structuring a good corporate governance. This will help it attract the investors who are the sole shareholders in the most successful companies. Its structure should therefore be clear and accountability. The Securities and Exchange Commission (SEC) through its actions recommended for misappropriated organizations are playing a major in shaping the investment sectors. This attributed to the fact that the organizations' have become more sensitive to their stakeholders as the outcomes of SEC actions are not good at all for their survival.