Part I
Financial institutions face numerous challenges one of them being vulnerability to embezzlement or theft of funds. Such kind of an act can take place through various forms. One example is that some individuals can falsify information hence acquiring access to clients’ deposits in turn putting the bank at risk of a lawsuit. The company under focus is Wells Fargo, a public traded entity that offers multinational financial services. For an entity of such states, the likelihood for criminal activities is rather high. More often than not, entities find themselves in need of funding from external bodies or from investors. For a company such as Wells Fargo, it could find itself in a situation where the demand for loans has increased. With barely enough supply to finance loan seekers, the company can seek a loan from other entities for it to remain operational. Therefore, it is important for the company to have financial stability for it to maintain its services in a rather competitive market.
A scenario could occur whereby an individual, a board member, demands falsification or misrepresentation of liabilities such as loans owed to other entities, to retain part of the interest or profits generated. As a shareholder, the board member might be looking to enrich himself and others through avoiding paying for the company’s liabilities. In such a case, an analysis of the company’s balance sheets can help detect any misrepresentations. A balance sheet is a representation of the balance of the cash inflows and outflows based on transactions (Weygandt, Kimmel & Kieso, 2016). Therefore, in case of irregularities for instance when certain liabilities are said to have been cleared, the financial analyst can detect such kind of anomaly through reviewing previous balance sheets. Another potential approach could be assessing how much of the company’s worth is based on debt or equity financing (Weygandt, Kimmel & Kieso, 2016). Through such an exercise, the financial analyst or auditor can detect whether the company has been making payments towards its financiers in the event that it operates on debt financing. Doing so would help identify or prevent cases of misrepresentation of liabilities. Thus, Wells Fargo could use the two methods described above to identify or strengthen its system such that cases of misrepresentation of liabilities do not occur.
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Part II
The advantage of public traded companies is that they can borrow from the public through what is known as bonds. Bonds are a form of investment for individuals who lend money to entities and receive a certain interest for a particular period of time. At the end of the specified period, the investor receives money invested plus the interest accrued. Wells Fargo gives two types of bonds which are tax-exempt and taxable bonds. Tax- exempt bonds are issued by the state-government or local municipalities council, while taxable bonds are issued by corporate entities, the government-sponsored corporations, treasury bonds, as well as taxable municipal bonds (Types of Investments-Bonds, n.d.). For an investor, it is important to know the type of bond that one wants to invest in. A notable difference is that taxable bonds have higher yields, but this comes along with a greater risk. Thus, the implication is that for an individual looking to invest, he or she should consider his or her financial need. The idea is to assess the level of risk one is comfortable with (Houweling & Zundert, 2017). On the other hand, tax-free bonds are buy-and-hold investments whereby the investor can defer taxes on capital gains for a long-term investment (Houweling & Zundert, 2017). Based on the differences noted the tax-free bonds are somewhat better in that they provide individuals with an opportunity to manage the magnitude of risk one can experience.
References
Houweling, P., & Zundert, J. V. (2017). Factor Investing in the Corporate Bond Market. Financial Analysts Journal,73 (2), 100-115. doi:10.2469/faj.v73.n2.1
Types of Investments-Bonds. (n.d.). Retrieved from https://www.wellsfargo.com/goals-investing/investing-types/bonds/
Weygandt, J. J., Kimmel, P. D., & Kieso, D. E. (2016). Accounting: Tools for Business Decision Making, 6th Edition . John Wiley & Sons.
