How Nick Leeson Destroyed the Barings Bank
Introduction
How did a trader in Singapore directly cause the collapse of the 230-year-old merchant bank in England? Nick Leeson was the head of Barings Futures Singapore (BFS) which is one of the subsidiary companies of Barings Group. In 1995, His unauthorized trading activities made Barings completely went bankrupt. This is the biggest financial scandal of last century. By interpreting the Barings case and the COSO framework which contains five components of internal control system, we would have an idea of why Barings became insolvent and how to improve in designing, performing and evaluating internal control for the company.
Control Environment
1. Organizational Structure: The connection between departments in BFS is chaotic, which provides Leeson convenience
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Firstly, the internal control is extremely essential for the well-being of a company. Relevant internal controls over all businesses need to be constructed and performed regularly. Once internal audit identify any risk the company may encounter in the future, people need to respond immediately and resolve the problem right away. Secondly, the management teams need to realize that they have a duty to fully understand their businesses, strength, weakness, threats and opportunities of the company. Thirdly, for building an effective and efficient control system, clear and restricted segregation of duties is a significant and basic step. The lack of separation of responsibilities may lead to catastrophic consequence that is harmful for everyone within the group. Moreover, communication is a critical part of business and management. Effective communication brings win-win situation to both sides. Barings’ failure of risk management systems, internal controls and managerial confusion directly brought huge risks for the company and give Nick Leeson chances to conduct deceptive
“The control environment sets the tone of an organization, influencing the control consciousness of its people. It is the foundation for all other components of internal control, providing discipline and structure.” The Committee of Sponsoring Organizations of the Treadway Commission (COSO) published the Internal Control–Integrated Framework in 1992. As summarized above one can see the importance of the implementation of an effective control environment, as it sets the foundation for the other 4 components of internal control. The control environment is made up fundamental smaller components. The ones that were particularly relevant to BMIS are the use of board of directors and audit committee, management philosophy and operating style, and human resource policies and practices. If management doesn’t prioritize control, then the rest of the organization will not put precedence on following policies and procedures either. This was clearly evident at Bernard L. Madoff Investment Securities LLC (BMIS), and ultimately led to their downfall.
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Internal control is one of the integral parts of an organization. It is a system which controls different types of risks,
● Monitoring — Internal control systems need to be monitored–a process that assesses the quality of the system’s performance over time. This is accomplished through ongoing monitoring activities, separate evaluations or a combination of the two. Ongoing monitoring occurs in the course of operations. It includes regular management and supervisory activities, and other actions personnel take in performing their duties. The scope and frequency of separate evaluations will depend primarily on an assessment of risks and the effectiveness of ongoing monitoring procedures. Internal control deficiencies should be reported upstream, with serious matters reported to top management and the board.
There are many rules companies must follow whenever documenting financial information or any other data which is gather during any business transactions. In order for said companies to report financial information internal controls have to be put in place as companies have to adhere to certain laws and regulations. Internal controls can be defined as a process which companies follow in order to ensure all financial reporting is done in a reliable and lawful manner. Some think of it as a system which works within a system as it plays a major role on the success of a company’s accounting system. At the organizational level, internal control objectives relate to the reliability of financial
So what are internal controls? And why are they so important? Internal controls describe the policies, plans, and procedures
Internal controls are vital to any company’s business and financial sustainability. Internal controls consist of measures taken by a company safeguarding against fraud, and theft. Internal controls ensure accuracy and reliability in accounting data, and secure policies within the organization. Further, internal controls evaluate all levels of performance. These are addressed with five principles
Internal Controls are to be an integral part of any organization's financial and business policies and procedures. Internal controls consists of all the measures taken by the organization for the purpose of; (1) protecting its resources against waste, fraud, and inefficiency; (2) ensuring accuracy and reliability in accounting and operating data; (3) securing compliance with the policies of the organization; and (4) evaluating the level of performance in all organizational units of the organization. Internal controls are simply good business practices (Strauss, 2003). And, since internal controls can have many more meanings in the world of accounting, the more we understand what were dealing with, the better we can analyze internal
o Segregation of duties, allows the correction of mistakes and ensures that tasks are assigned to individuals who were segregated from processing and managing the same task, this process helps companies to ensure balance check. In the case of MCI, Pavlo was collecting and applying the cash which allowed him to manipulate the transactions. A red flag that an auditor did not challenge.
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Another principle is to have a separation between the physical handling of the assets and the recording of it. This takes away the temptation for personal gain and lessens the chance of misuse. Segregation of duties and functions is another safeguard companies can utilize to promote internal controls. Having one person responsible for multiple tasks often leads to mistakes and causes more confusion when trying to catch discrepancies. Independent internal verification is a useful internal control. An example would be having an outside auditor check your books. Another principle involves documenting procedures. The more documentation a company has the better equipped they are for keeping solid internal controls in place. The final principle involves other controls such as bonding employees through insurance policies, rotating duties often and ensuring thorough background checks on employees prior to employment (Weygant, 2008). These additional checks and balances are critical because they not only lay the foundations for ensuring a company’s internal controls are working as designed, but they also help to maintain the momentum of such controls.
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There are several procedures that should be considered when implementing internal controls for your business. There should be a segregation of duties between different individuals to lessen the threat of
Century National Bank has offices in several cities in the Midwest and the southeastern part of the United States. Mr. Dan Selig, president and CEO, would like to know the characteristics of his checking account customer. To better understand the customers, Mr. Selig asked Ms. Wendy Lamberg, director of planning, to select a sample of customers and prepare a report. To begin, she has appointed a team from her staff and the team has selected a random sample of 60 customers. All the information gathered is tabulated in the table below:
COSO cites the control environment of the organization as the foundation of any internal control structure. The control environment reflects the overall attitude or actions of the board of directors, management, and others concerning the importance of internal controls in the organization. This overall attitude of upper management sends a message to the rest of the organization referred to as the “tone at the top.”For example, if upper management stresses high-quality products, a strong positive message is sent to the organization. This would create a strong internal control environment. On the other hand, if upper management has a reputation of looking the other way regarding policy violations, a negative message is