Introduction
Metrobank is a retail and commercial bank that operates in the United Kingdom. Founded in 2010, the bank was the first new high street bank to be licensed in the United Kingdom in over 150 years. Metrobank is also listed in the London Stock Exchange. The bank planned to open between 200 and 250 branches in the United Kingdom as part of its business strategy. The bank was received positively by investors and managed to raise $200 million in funding. Most of the company’s branches recorded significant progress, with the Holborn branch garnering over $200 million in deposits. However, the bank recorded losses in 2013, with its pretax losses exceeding £100 million in less than three years after its launch. The bank attributed the huge losses to its focus on expansion. Despite making the losses, Metrobank increased its account holder by 50 percent during the same year, indicating that the bank was destined for success.
However, Metrobank’s inefficient business model continued to hurt its bottom line. The banks business model focuses on service rather than pricing. The bank targets customer who value quality over prices. In order to differentiate its services in the market, the company has focused on increasing its branch network. The extensive branch network is aimed at maintaining close relationships with customers through retailer type operations that foster face to face interactions. Metrobank invest in advertising. Instead, the bank relies on word of mouth to reach out to customers. As a result, the bank has been unable to accelerate the growth of its sales. The ineffective business model has contributed significantly to its irresponsible management practices, particularly in its accounting and reporting function (Megaw et al., 2019).). For instance, the bank began to face difficulties in 2019, following the discovery of an accounting error that meant that it no longer had enough capital to meet its regulatory requirements.
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Accounting and Reporting Issues at Metrobank
Accounting and reporting is one of the most important functions in an organization. It involves the disclosure of an organization’s financial information to the various stakeholders of an organization. The financial information indicates the financial performance and the financial position of a given organization. Investors, creditors, debt providers, public, and government agencies are some of the stakeholders that need to be provided with the financial information. There are several objectives of financial information in organizations; providing information to management, providing information to shareholders, providing information about the economic resources of an organization, enhancing social welfare, and providing information to statutory auditors. The management utilizes financial reports to make the most appropriate business decisions. The information can be used to determine whether a business can consider expanding or not. An organization’s shareholders also require financial information because they want to determine whether their investments are profitable or not. Financial reports also serve to indicate the nature and value of an organization’s economic resources. It is also important to realize that financial reports serve to enhance social welfare in organization because the information highlights the interests of employees and trade unions. Despite the importance of financial reporting in organizations, Metrobank failed to maintain the integrity of its reports.
The Accounting Error
Metrobank admitted in January 2019 that it had incorrectly classified a certain portfolio of commercial loans for capital purposes. As a result, the bank had failed to hold sufficient capital to meet its regulatory requirements. The accounting error affected approximately 10 percent of the bank’s loan book. Despite the gravity of the issue, the bank handled the accounting error inappropriately. For instance, the company was not honest enough to provide the relevant factual details about the accounting error. The bank initially claimed that it found out the error as it went through its end year reviews. However, it was later revealed that the problem had been pointed out by regulators at the Bank of England. Metrobank had lied to the public that it was the one that discovered the error. Unfortunately, it was later revealed that the bank had been dishonest in providing the relevant details about the accounting error (Megaw, 2019). Every organization has the responsibility to be honest when dealing with its stakeholders. Honesty is one of the most critical values of an organization.
The fact that Bank of England’s Prudential Regulatory Authority revealed the error means that Metrobank was unwilling to disclose the error on its own, significantly betraying the trust of its customers. The revelation led to the withdrawal of some of the bank’s major customers. Apparently, the customers who withdrew may have been disappointed by the bank’s lack of transparency in terms of communicating issues to its stakeholders. The customers wished that the bank unearthed the error rather than waiting until when the Bank of England discovered the accounting error. Such accounting errors indicate that an organization does not focus on maintaining the integrity of its books of accounts, a serious business issue that threatens the long term growth. This is because the error will reduce the bank’s chances of increasing the number of customers, as well as revenue. In business, winning the trust of customers is critical to brand building. Lack of honesty reduces customer trust, negative affecting an organization’s brand.
Metrobank’s failure to maintain accurate financial reports reflecting the nature and the risks of its huge loan book has the potential to decrease the bank’s market share. Additionally, the accounting error resulted in the loss of hundreds of millions of pounds off the bank’s market value (Markotoff, 2019). Although the bank claims that it has learnt a lot of important lessons from the chastening experience, the damage is significant. The error has impacted negatively on the bank’s brand image, as well as it potential to grow. The reduction of the company’s market value meant that it had to raise more capital from the public. This is because it value nearly halved in the days following the disclosure of the accounting error. The value fell from £2.1 billion to as low as £1.1 billion. The reduced valuation impacted the company’s performance in the stock exchange negatively.
The accounting error also led to a sharp incline in exposure to higher risk mortgages in the bank. The review of Metrobank’s risk-weighted assets in January 2019 revealed that higher risk mortgages could negatively affected the company’s overall financial performance. For instance, the bank’s risk-weighted assets increased by approximately £900 million, significantly piling pressure on the bank’s capital buffer and raising market expectations that capital increased would be inevitable. The bank’s core capital ratio fell from 15.3 percent down to 13.1 percent. The core capital ratio is a critical measure for determining a lender’s resilience. The decline showed that the bank’s resilience was gradually declining. Moreover, the PRA declined to allow the bank to use its own risk models for its mortgage portfolio in order to help boost its capital buffer.
The error also compelled Metrobank to slow its growth plans, negatively affecting the bank’s ability to achieve its strategic objectives. The bank had to cut back on its plans to establish more branches and reduce deposit growth to 20 percent annually. Furthermore, the bank had to go for an earlier than expected equity raise as its ability to self fund was limited by the decline in deposits.
Loss in Human Trust
Trust is an important element in an organization. It is important for all stakeholders to trust an organization. Trust is important for attracting and retaining competent employees. Trust also enhances investor confidence in an organization’s stocks. This implies that organizations should emphasize the importance of trust in the entire organization.
An organization should ensure that the investors feel that their investments are safe with it. Successful organizations inspire trust in investors. Trust is also essential in establishing a safe workplace environment where all employees feel safe to work. Intimidation and abuse of power only serve to demoralize employees. As such, communicating expectations can play a significant role in increasing the productivity employees. However, Metrobank’s inability to maintain credible books of accountant has the potential to discourage investors and demoralize employees. Lack of trust can limit the bank’s ability to sustain its growth in the market.
Expensive Fundraising Activities
The accounting error significantly dwindled Metrobank’s chances of raising enough revenue to fund its activities. Essentially, retained earnings are some of cheapest sources of business capital for Metrobank. However, the accounting error limited the bank’s ability to raise sufficient capital to continue funding its growth. Since the error reduced the bank’s market value, the company set out to raise money from the public, requesting investor to pump funds into the business. However, the cost of raising the funds from the public is high. For instance, the investors require higher interest for their investment, significantly raising the cost of running the business.
The bank’s tarnished brand reduces its ability to attract new investors. The investors that will be willing to invest in the bank are those that are promised high interests, given the perceived risk. The inability to self-fund makes expensive fundraising initiatives inevitable. Costly sources of funds serve to increase the cost of doing business.
Corporate Investigation
Metrobank’s accounting error led to its investigation by the Bank of England’s Prudential Regulation Authority. The investigation had significant negative impacts on the bank’s brand. The regulator sought to establish Metrobank’s regulatory reporting, controls and governance, as well as the timing and content of the bank’s market updates (Withers $ Hussain, 2019). The scrutiny process saw the bank’s shares fall for as much as 5 percent, negatively impacting the organization’s market value. The bank could also incur significant expense, following the investigations.
The investigations launched by the regulator can go a long way in determining the long term growth and expansion. The company’s new market valuation can have a negative impact on the bank’s overall performance in the market.
Social and Ethical Challenges Faced by Metrobank
Social Challenges Facing Metrobank
The concept of scattered ownership in modern day organizations has made financial reporting inevitable. Furthermore, the rapidly increasing number of organizations in the corporate sector has given birth to the concept of social corporate reporting. Currently, organizations are obliged to report their social performance. Corporate social performance related to an organization’s impact on the society. The various social challenges facing Metrobank include transparency and accountability issues, stock markets and social disclosures, and accounting and sustainability issues.
Transparency and accountability is one of the major social challenges currently facing Metrobank. Organizations should focus on promoting transparency and accountability in their operations. For instance, Metrobank has the responsibility to comply with legal requirements regarding financial reporting. Additionally, the shareholders should be provided with all the necessary financial reports. Thus, transparency and accountability generally refers to the responsibility of an organization to supply the relevant accounting information to shareholders and government agencies ( Pullen & Rhodes, 2015 ). This is because organizational stakeholders have the right to receive the right financial information in order to determine the health of certain the business. Essentially, every organization has a social responsibility in wherever businesses are located. Social responsibility is part of the reason behind businesses looking for greater accountability for corporate management. Therefore, lack of accountability and transparency is a major social challenge facing organizations, particularly those involved in accounting malpractices.
Metrobank failed to provide accurate accounting information to its stakeholders, leading to the challenges it is currently facing. Lack of accountability and transparency in the bank’s financial reporting system represents a major social challenge to the organization. By failing to account for the risk involved in some of its loan products represented a significant breach of trust ( Kuvaeva et al., 2019). All the investors, customers, and government agencies should be supplied with accurate information regarding an organization’s financial performance. Ideally, an accountable organization should bring transparency to the market by providing both financial and non-financial information to all the stakeholders.
Stock markets and social disclosures are critical to economic development. Stock markets play an important role in the economic development, particularly in developed countries like United Kingdom, United States, and Japan. The share markets indices are generally influenced by investors. As such, the market prices of an organization’s shares should reflect its financial condition. The price of an organization’s shares should neither be underpriced nor overpriced.
Metrobank deliberately failed to disclose its accurate market valuation by overstaing its value. As a result, its shares were priced higher than necessary, leading to shareholder losses. The shareholders lost much of their investment because they sold their shares at a loss. Had the bank provided an accurate account of its financial statements, the shareholders would not have lost their investments.
Ethical Challenges Facing Metrobank
Although accounting and reporting is a straight-forward task, it often comes with a variety of ethical challenges. For organizations, breaches in ethics can lead to major scandals that could adversely impact a brand. Ethical issues result in loss consumer and investor confidence. Thus, it is important to understand some of the most common ethical challenges facing organizations. There are several ethical challenges that can arise from financial reporting in organizations ( André & Pache, 2 016 ). Metrobank faces several ethical challenges in its financial reporting; cooking books, cute accounting, and conflicts of interest.
The financial reporters at Metrobank focused on cooking books in order to project a positive outlook of the bank’s financial performance. The reporters could have made up figures in order to overstate the bank’s market value. Cooking books is a major ethical challenge facing the bank. It is important to realize that cooking books includes the intentional omission of important asset of liability from financial reports ( DeCamp et al., 2016). For instance, a company could decide to overstate how much it earned as profit in a bid to attract investors.
Cute accounting is another serious ethical challenge facing Metrobank. Cute accounting refers to act of bending accounting standards to the limit. For instance, Metrobank accounting reporters utilized their own risk model for the bank’s mortgage portfolio in order to help boost its capital buffer. The practice is unethical because it allows unscrupulous companies to misrepresent their assets and liabilities. Although cute accounting less serious compared to cooking books, it reflects a lack of respect for accounting principles.
Conflict of interest often occurs when an employee seeks to get an inappropriate personal benefit resulting from an action performed in his official role. For instance, a financial reporter may seek to get rewarded by overstating a firm’s income. By overstating a firm’s income, a financial reporting may benefit from a huge bonus. Such practices disregard professional code of practice. The accounting professional requires a high level of objectivity as the information can be used to make important live decisions.
Course of Actions
Metrobank should take several measures to counter the negative impact of accounting error. The bank should establish an appropriate organizational culture, adopt a new business model, and rebrand.
Establishing a New Organizational Culture
Metrobank should establish a new organizational culture that fosters honesty, accountability, transparency, and professionalism. An organizational culture defines an organization’s internal and external identity ( Ali Taha et al., 2016). A culture that is based on honesty, accountability, transparency and professionalism will help in preventing malpractices among employees ( Chatman & O’Reilly, 2016) . The new organizational culture will reverberate across all the aspects of the bank because it will define the way the business will be run. The culture will also determine how customers and stakeholders perceive the bank’s brand.
Essentially, organizational culture is entirely a matter of living an organization’s core values. The culture reflects the various core values of an organization. Thus, the bank should conduct a series of trainings focusing on inculcating the new organizational culture in the workplace. The culture could help significantly enhancing the promotion of honesty, transparency, accountability, and professionalism.
Developing a New Business Model
The current business model utilized by Metrobank is generally inefficient. The company relies on retailer type operations that are carried out in physical branches. The physical branches increase the cost of doing business because they require a lot of funds to run and maintain. Instead of focusing on physical branches that are costly, the bank should utilize technology in order to increase efficiency and drive down costs ( Guibaud, 2016 ). The current business model utilizes physical branches as the primary distribution channel, a significantly inefficient approach.
Focusing on increasing efficiency and driving down costs will help Metrobank improve its bottom line. The reduced costs will help the bank to continue pursuing its relevant expansion strategies. Leveraging technology helps in enhancing customer experience and in enhancing the quality of the services provided.
Rebranding
Rebranding is one of the effective tools for promoting organizational growth. It is effective in developing a new brand, breathing new life to a business. It is important to realize that rebranding can be auctioned with a focused strategy. Rebranding could involve changing almost every aspect of a business. Metrobank can rebrand and depart from the currently branch-based business model. The new model could help increase efficiency and increase customer satisfaction.
The Current System of Addressing Issues
Metrobank focuses on firing top management during crisis. For instance, the bank’s top executives were forced to resign following the accounting error. Essentially, compelling senior executives is not the answer to the banks problems. The bank requires a complete overhaul in order to ensure the establishment of a new organizational culture aimed at promoting the firm’s core values. The approach does not address the social and ethical challenges facing the bank. Thus, alternative course of actions should be taken to increase the efficiency of the bank’s operations.
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