Thursday, August 22, 2019
The Great Catastrophe of Barings Essay Example for Free
The Great Catastrophe of Barings Essay Introduction In 1995, Barings Bank, the first merchant bank in the world met its downfall due to the Singapore International Monetary Exchange or SIMEXs act of a rogue trader. The reason behind the collapse of the Barings Bank lies under the failure of COSO (Committee on Sponsoring Organizations) Internal Control Integrated Framework application in the company in terms of: environment control, risk assessment, control activities, information and communication monitoring. The person who is behind COSO Framework is Nick Leeson. However, the same person violated the said framework without the knowledge of the bank that led to the downfall of the merchant bank. Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã This paper aims to discuss the causes of the collapse of Barings Bank. Specifically, it also intends examine why the bank failed to apply proper integration of COSO and how Nick Leeson contributed to the downfall of Barings. Control Environment Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã In every company, control environment is important in order to give knowledge to the employees and increase their environmental awareness. This provides employees with the necessary discipline in order to incorporate other internal control components to all business operations in the company. Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã When Baring was on its first level of establishing its figure in SIMEX, Simon, who happened to be the supervisor of Nick Leesson, wanted to hire green traders. This means that in order to save money to be given out to employees, the company will only be accepting fresh graduates who do not demand high salaries. This is a great risk in the control environment that Barings took. SIMEX was internationally recognized financial institution which was ruled by highly competitive and knowledgeable traders. Thus, hiring ignorant traders who are not accustomed to the operations of SIMEX was a wrong move for Barings.Ã In addition, the responsibility of hiring traders should go under the companyÃ¢â¬â¢s human resource and not with Nick Leeson. Once a trader is accepted for the job, the company should rigorously train him or her, provide him or her with the right resources, and teach him orher the necessary skills in trading.Ã Traders should not be brought to the trading floor until they fully master the trading system and procedures. The management philosophy of Barings as a company also appeared to be delinquent since the start of its operations. Simon already warned Leeson that the former was a bottom-line kind of person. Simon was someone who prioritized profitability over quality. For Leeson, loss and mistakes should be avoided at all costs, while maximizing profit. He did not care what steps should be taken in order for the company to earn money. The increase in profit was the only thing in his mind. In this situation, the delinquency philosophy of management was adopted. As per SimonÃ¢â¬â¢s instructions, Leeson and the other traders were obliged to always seek the most profitable option. Since they are pressured to do so, if a trader was not able to do his job well, they need to cover it up and find ways to settle the problem immediately in order to maintain the companyÃ¢â¬â¢s reputation. The lack of human resource policies and procedures can be seen in the case of Kim, one of the traders. She was tasked to sell securities. However, she was not properly trained as a trader. Thus, she got confused about the deal and ended up buying security instead of selling. This mistake which is part of the 1st Barings liquidation can be avoided if only the company was able to check the background of Kim before hiring her. Leeson was not the only person who was pressurized by Simon. The Head of Barings Financial Products Ron Baker was also tasked by Simon to do things in order for them to receive bonuses. Going back to the case of Leeson, aside from work pressure, he was also going through some personal problems. His father-in-law had just died and he had lost an unborn child due to miscarriage. Because of the said incidents, his wife, Lisa, asked Leeson to resign from his job in Barings. She thought that her husband has been overworking for the company while he was not well-compensated. When he informed his supervisors that he was resigning, they suddenly gave him a special treatment. The company pampered him and gave him a special pass to trade for SIMEX when he was in London. He was also given the privilege to name his price when it came to bonuses and rewards. Although the employee retention strategy that the company used appears attractive, it had negative effects on Leeson. Providing this kind of privilege negatively affected his personality and his work performance. It caused him to become overconfident which led to insubordination as he tried to overpower his superiors. If only Simon or Ron had quickly discovered this transition in Leesons performance, they could have stopped him immediately from becoming a thief or an inefficient worker. Risk Assessment Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Risk assessment is the companys ability to control the costs of materials occurring in the company. It also identifies the organizationÃ¢â¬â¢s risks, and analyzes the potential and likelihood of costs. This is also important in order to assess that benefits should always be higher over costs. Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã In the case of Barings, the companys board management was not able to evaluate properly the risks of hiring new personnel in this new line of business. At that time, Barings was on the peak of expanding businesses all over the world. Because of his amazing performance in Jakarta where he was able to solve bonds problem, most of the responsibilities were assigned to Leeson. He was given a lot of power being the manager of the trading floor and the settlement office. He gained authority in giving permission to all transactions and activities involving the trading market. Giving him much authority was a grave mistake as it placed the company at risk. He easily manipulated the accounting system which was supposed to be for trading purposes only. There was a time when Leeson authorized trading floor transactions without the banks approval. Although there were auditors who examined incoming and outgoing transactions, they were easily bribed and manipulated by Leeson. He was also accountable for hiring traders who were not skilled and trained. Control Activities Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Control activities focus on safeguarding the assets of the company. This involves segregating the duties of employees, authorizing transactions, documentation and checking incoming and outgoing deals. Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã There were control deficiencies in the newly put up Barings in Singapore. However, it was raised accordingly on the managementÃ¢â¬â¢s table. Leesons case was about the missing 7.78 billion yen which was demanded by the external auditor for him to explain where such huge amount went to. The auditor required Leeson to present 3 valid documents which can prove that the money was not missing and was used properly. Due to the lack of internal control within the company, Leeson was able to produce the documents immediately. Although the management was already notified, there was no investigation conducted to see more supporting evidence where such materials came from. There were no independent checks made by the higher management to ensure that the internal controls were implemented. Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Responsibilities were also not properly segregated in Barings. Leeson was the man responsible for both the trading floor and the settlement office, both risk-taking and reconciliation activities. In addition, there were no internal controls that can prevent Leeson from conducting certain control procedures. Since he had the custody of the transactions on the trading floor, he was also the one who authorized the transactions between BaringsÃ¢â¬â¢ clients and SIMEX. At the same time, he also had the power to determine which authorized entries would be recorded into the journal and what reconciliation was supposed to be made at the end of the month. If there was a higher management responsible for controlling activities in the company, the company could easily detect the activities of Leeson which the company would never authorize Leeson to do. The control activities that were established in Barings were not structured and conducted properly. There were plenty of loopholes that could be taken advantage of. Information and Communication Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Financial reports are vital materials in every company. In proccessing financial reports, having an established information and communication procedure is very important. This procedure enables the employees to understand their responsibilities in making company financial reports. This also involves the accounting system which records, processes, and summarizes the transactions concerning the companys assets and liabilities. Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Lack of information and communication can be seen in the case of Barings. The company was only looking forward to the end of the month period where they gain profits. It did not seek to understand how and why the company achieved such profits; it only sought profitability and less accountability. Barings financial reports lacked accuracy. Thus, Leeson was able to do fraudulent activities while exploiting the companys resources. Even though Simon was curious about the missing 7.78 billion yen, he just demander for a brief report and did not ask for a more extensive investigation concerning the money. Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Barings accounting system was also horrible as it was not properly controlled. Because of this, Leeson was able to manipulate every amount of transactions that were entered in the system. The financial statements that were given to the higher management were altered by Leeson first before they were presented to the board of entity. Meanwhile, Simon may be the main reason why Leeson turned out to be like that. He should be the one responsible in monitoring and supervising Leeson. However, he preferred to be preoccupied with the resultsÃ¢â¬âwhether the company made a huge profit or not. Monitoring Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Company activities should undergo monitoring process in order to fully asses the quality and performance over time. This can be evaluated by internal auditors through financial reports, Continual management review of exception and operation reports, an auditing per period basis and a RegulatorÃ¢â¬â¢s suggestions for improvement. Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Politics is considerably present in Barings organizational structure. Improper support from the board members or a senior executive is given to the internal audit department. The missing 7.78 billion yen was not sensationalized and the news subsided easily without further investigation. Leeson easily made ways to make that 7.78 billion yen case vanished into thin air. The quality of Leesons work was not properly monitored. The senior executives were easily confined on Leesons explanation rather than going through the reports that were submitted. Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã On the other hand, the audit personnel that were sent to audit NickÃ¢â¬â¢s work did not possess the appropriate level of expertise. Nick was at first given a very strict and competent auditor but due to lack of support from the board of members, she was later called back to London due to some political issues and two rookies were sent to audit Nick. Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Too much trust on Leeson that lead to the downfall of Baring lies on his managers accountability and the internal audit as well. Simon was not able to focus attention on Leesons performance like for instance when one of LeesonÃ¢â¬â¢s traders was making a mistake; and both Ron and Tony, the Senior Settlement Clerk from London, was not able to monitor NickÃ¢â¬â¢s works properly. Tony was only ferreting around NickÃ¢â¬â¢s office for about a month and found nothing. There was a total mess in BaringsÃ¢â¬â¢ management reviews; there was literally no monitoring on NickÃ¢â¬â¢s doings. Conclusion Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã There are warnings given to the management but they refuse to accept the fact behind it. Profitability blinded them so much believing that it measure success. Since Barings is a big corporation, segregation of responsibilities should be given properly and at the same time employee should understand true responsibility and discipline. Proper training should be given to newly hired individuals so that they will not be lost in their filed of work. There are problems that can be easily solved because of signs along the way but the management chose to ignore it and carry on with operations. Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Too much slacking in the internal control was present in Barings. Leeson was able to perform nasty activities and he has vast opportunities that made him loss his integrity. He relied too much on Simons demand of gaining profit every end of the month. His mind is focused on this goal that he made dishonest ways of achieving it. He made things beyond his control even manipulating transactions and financial reports. Too much greed led to Barings bankruptcy and his imprisonment. With the additional pressure and problems that he was facing from both his marital and company side, as a regular human being, it was just a matter of time before he would crack open. Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Ã Taking immediate actions could cut Barings losses. Barings should be able to overcome this financial shock, only if the board of entity and higher management had responded spontaneously to the problems that they were facing. Everyone was surprised to know that Leeson who was a well trusted employee counter attack them by his power. Devising a solution immediately can be done to counter the companys loss. Securities should be prioritized to avoid another kind of scenario like Barings downfall. The case of Barings teaches the importance of internal controls in everyÃ companyÃ¢â¬â¢s success. Right management and good supervision is needed in every company. Dedicated and honest employees are needed to lead the company and do managerial decisions that results in a win-win situation. Better internal controls are needed to fully analyze company transactions. A lesson well learned from Barings that will avoid future company losses in the future.
Posted by Clinton Wright at 1:08 PM