Essay On Unethical Lending Practices: Cash Converters' Accounting And Auditing Research.

Analysis of the issue, faced by Cash Converters under the relevant ethical theories, and code of ethics for professional accountants.

Discuss about the Accounting and Auditing Research for Tools and Strategies.

Cash Converters International Limited is a company registered in Australia which provides services of pawnbroking as well as providing small loans to needy customers. It also operates in US, UK and South Africa etc. the Company began its operations in 1984 from Perth, Western Australia and soon spread its wing to many other cities. The services are generally limited to retail buying and selling, pawnbroking and providing small scale financial loans.

The Cash Converter Limited also engaged in Buyback agreements. However, this was only made available in its UK operations. Under this service, a customer would sell an item which has monetary value at a cash converter outlet and then would be eligible to buyback the same item by paying the amount borrowed plus a fee. At present, it is estimated that the fee is approximately 32.5% and the same is considered quite high.

Analysis of the issue, faced by Cash Converters under the relevant ethical theories, and code of ethics for professional accountants.

A payday loan is a kind of loan which is given to an individual who wants to avail the same like a salary loan or a cash advance. In most cases the loan is linked to the borrower’s payment day. These loans are unsecured and thus has great amount of risk to the lender. Cash converter company is one of the biggest payday lenders in Australia. In Australia, the regulations prevent any lender to charge in excess of 48% APR on such short duration loans. However, in general the prevailing rates vary between 36% to 40% (Hargovan, 2014).

In one instance a low-income woman form Victoria was issued 23 payday loans and also granted 76 pawnbroking agreements by the company in between 2013-2015 and under those agreements the low-income woman as required to pay interest which ranged from 360% APR to 420% APR. in general many payday and pawnbroking loans issued by Cash Converters were found to be violating responsible regulations of lending and inflicted uncalled for hardship on unsuspecting borrowers in Australia and elsewhere (Weirich, 2013).

There were concerns amid reports that despite widespread reporting and an investigation by the ASIC into the matter the unethical practice of charging exorbitant interest and other fees continued by the Cash converter company.

Issued loans without verifying the customers’ ability to pay.

The loans were issued again and again against existing norms.

Unethical practices:

The company followed its own internal norms and ditched the regulatory requirements.

This advocated a practice of over-indebtedness.

As per reports of the NCA or the National Credit Act the issuance of loans to those who can’t afford to pay amounts to reckless lending by the payday lenders including Cash Converters(Kane, 2015).

Professional accountants are needed to be straight forward and full of integrity in communicating with the consumers and clients. Integrity in general implies being truthful to the client and indulge in fair dealing. A professional accountant is mandated to not indulge in communications which are believed to be or he / she has reasons to believe that such communication includes false information and hides required and material information. The professional accountants are also required to report information which they believe if omitted to be communicated would surely amount to misleading information. However, in the case of the cash converters pawnbroking and payday loans the integrity of the company’s accountants were clearly breached and they failed to communicate the terms of the same to their clients and the regulators (Picker, 2015).

Explain how this unethical practice was portrayed in the annual report of Cash Converters, and how the company’s share price, was affected?

After being subjected to an investigation regarding unethical practices adopted in lending to small scale borrowers by ASIC and settling for paying the class action suit by a payment of over $23 m the Lender company cash converter has decided to amortize an amount of $13m in the year 2015-2016. The amortization of the amount was provisioned to make way for any fines resulting from compliance issues.

However, the ASIC investigation was criticized to be half baked as refunds of extra fees collected form borrowers were settled for those borrowers who borrowed form cash converter through online means and no refunds were issued to those who borrowed form their sores by physical means (Eisen, 2013).

After investigations by the ASIC and payouts to more than 118,000 borrowers in a $11m approx. settlement and a further fine of $1.35m, the Cash converter company took steps to reduce unethical business practices in all lending’s. This has reduced the company’s profits in the first half of the 2016-2017 FY by 27% as against the previous years and profits form the personal loan segment fell by over 20% in the same period. However, during the previous years, the company registered considerable amount of growth in these segments. The company has attributed the lowering of the margins to lowering of the lending volumes possibly because more consumers are now aware of the higher interest charges and hidden fees in these short-term borrowings (Luenberger, 2012).

Explain how this unethical practice was portrayed in the annual report of Cash Converters, and how the company’s share price was affected?

The profits were higher on the back higher fees and interest charged by the company and this helped the company’s stock prices to zoom in the past. Profits in the personal short term loan segment were much higher than what could possibly be earned through responsible lending and this impacted investor in the market. However, the stock prices in the last 6 months have shown considerable amount of decline. The stock prices of the company were higher at $1.30 as on 01-Sep-2013 but the same declined consistently in the last 4 years to reach a lower level of $.32 as of March 1, 2017. The volume of trading the company’s stocks have declined as well. This shows that the company’s capability to survive the crisis is being questioned by the investors (Kane, 2015).

Discuss the social responsibility and sustainability of a financial institutions, in general and of Cash Converters, in particular.

Payday lending in Australia was found to be a business model under which the borrowers and the consumers were not benefitted form the expansion of the market at all. Since July 2013, the payday lending has been capped under cost (48% maximum APR) but the same has not been able to deter the cash lenders or payday lenders form charging exorbitant fees form the unscrupulous borrowers. The research made by the Consumer Action Law Centre found that only 10% of the borrowers of cash as payday etc. are borrowing considering the charges and fees to be paid whereas the majority of the borrowers borrowed from a particular borrower because they found their location nearer to their homes and 17% approx. borrowed from the same lender from whom they have borrowed before. These data clearly demonstrate the fact that the borrowers on the street was unaware of the legal stipulations and the same was fully exploited by the lenders and charged as per their own policies and clearly violating all forms of regulatory requirements (Consumer Action Law Centre , 2014).

Consumer Action Law Centre also found in its research that with a rapid increase in the no of payday lenders in the Australian Market the borrowing rates were suppled to lower on the long term. However, from 1998 onwards it was found that despite a market increase in the no of lenders in the market the rates did not fall at all which was a sharp contrast to the market economics and the same was actually seen to have increased because of hidden charges and greed of the lenders like Cash Converter etc. Financial experts and consumer rights experts have argued in the recent past that the Cash Converters knowingly targeted those borrowers who had very little income and those who has very little knowledge of finance. These issuances of loans often indulge in aggressive marketing, blatant loan terms and creates a form of vicious loan and debt cycles which becomes very difficult to break by the borrowers in many case. The loan collection policies followed by Cash Converter was quite coercive as well. These behaviors practiced by cash converter was against not only unethical but also anti-social behavior and not desirable. It has also come to light during ASIC investigation that the terms of the loans was deliberately not told to the borrower until the loan terms becomes due (Hargovan, 2014).

Discuss the social responsibility and sustainability of a financial institution, in general, and of Cash Converters, in particular.

Conclusion

Consumer Action Law Centre also found in its research that with a rapid increase in the no of payday lenders in the Australian Market the borrowing rates were suppled to lower on the long term. However, from 1998 onwards it was found that despite a market increase in the no of lenders in the market the rates did not fall at all which was a sharp contrast to the market economics and the same was actually seen to have increased because of hidden charges and greed of the lenders like Cash Converter etc (Lekakis, 2017).

Cash Converter management have categorically stated in recent months that they have changed their model of doing business and adhered to regulatory principles. As a result, the no borrowers have increased online while the number of customers availing the services in stores have declined. However, those who are involved with investigation and litigation like the Consumer center for research have been skeptical of the commitment of the cash lending industry in adhering to and adopting a more responsible lending approach and not supporting over indebtedness (Atrill & Eddie, 2012). While it is estimated that cash lending volumes exceed $1bn in a single financial year in Australia, the capacity and the willingness of the industry undertaking change of approach is still questionable and remains to be seen.

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