BBUS 435 COSO Violations in Rogue Trader Movie

01/28/13

In Rogue Trader movie Nick Leeson makes unauthorized trades and covers up losses which are sufficient to bankrupt Barings bank. While management thinks that Nick brings large profits to the bank, Nick hides losses under fake error account which people think belongs to a customer. Leeson is able to cover up his losses because bank's management allows him to run both the trading floor and the back office facilities. Nick is afraid of management finding out about his first loss and does things such as finding a new client, requesting funding and so on, to hide his losses and show profits. However, Leeson incurred even more losses, which he is not able to hide in the end. It's not Nick Leeson who collapsed Barings, it's Barings' internal controls and standards that were not present or violated and allowed one employee to bankrupt long standing bank. One of the most violated component of the COSO framework is the internal control environment of Barings. When Nick's unethical behavior at the bar got him to jail, management didn't care about his unethical behavior, all they cared about is to get him out of jail because he brings in a lot of profit. No one even sat down and talked to Nick in regards to his actions afterwards. Nick was given a freedom and power to act the way he wanted. Management didn't check or control him. When management found out about loss, they just questioned and tried to get an explanation from him. They didn't try to approach him directly and ask for explanation. Nick was able to swirl and excuse himself from answering to questions about loss. The performance and incentive compensation targets portrayed in the movie were unreasonable and unrealistic. For instance, Leeson got a call in the middle of the night from the Head of the Barings Financial Products Group in London, Ron Baker, telling Leeson that he has to generate another two million pounds next month to secure their bonuses. Such unrealistic goals provoked Leeson to manipulate incentive compensation plan results by hiding losses in an account 88888 to make various transactions look profitable. Since Nick Leeson was able to hide the reality of his actions for a while, an assumption can be made that fraudulent financial reporting wasnt controlled at any level. When Mui Mui was conducting an audit she had noticed that 7.78 million were not on any Receivables. Leeson was able to forge the confirmation and the side from Bank Statement to make it look like this amount was indeed received. Those forged documents bought him some more time, which clearly shows that there was no control at any level of the financial documents accompanying transactions. Also, the funding Nick requested kept coming even after company realized that Singapore law had funding restrictions.

Another huge component violation demonstrated in Rogue Trader is risk assesment. Nick Leeson was running the trading floor as well as managing the back office. There was no check and balances. The risk of Leeson manipulating the books wasn't taken

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01/28/13

into consideration. When auditor Ash Lewis came in and observed it, she took no further action, neither did the management. Other auditors came only because of government regulations. Another example is when Lesson's boss took no action after receiving a letter from SIMEX regarding the suspicious sub account 88888. He gave the letter to Leeson and asked him to present a report regarding that account instead of checking the records and account himself. This allowed Nick to cover up his manipulations.

Rogue Trader movie demonstrates how one employee causes the greatest financial fall of the Barings bank. It would not have happened if proper controls were in place, if management was not so concerned about profit ignoring risks and controls, and if Nick Leeson was not forced to meet unrealistic targets. Management and board of directors sunk Barings because of their greed for profit.