A Story of neglected Internal

Control System

Presented By: Group 3

Chitrang Jain (1914027)

Shashank Awasthi (1914006)
Satyarth Udayan (1914070)
Debsmita Mitra (1914048)
Sankalp Nandanwar (1914053)
Case
Introduction
• In February 1995, Nick Leeson, caused the financial
collapse of a Barings bank.
• Leeson dealt in risky financial derivatives in the Singapore
office of Barings.
• He was betting heavily on options for SIPEX and Nikkei
exchange indexes.
• He used the company’s dormant error account 88888 to
hide his trading losses.
• London office of Barings rarely questioned his request for
funds to cover his margin calls.
• He forged documents to prove his claims and manage to
get a satisfactory Internal Control audit report.
• By late February, he had lost $1.4 billion USD and
resigned from the position.
• Barings, eventually became insolvent and was taken over
by Dutch Bank ING.
 Andrew Fraser and James Bax
for not making sure that ‘front
office’ and ‘back office’ were
kept separate.

Generous bonus system. Simon Jones for not keeping

8 2 regular check on Leeson
during the initial stage.

Failure to detect the red flag

for increasing cash for risk
cover for marginal calls.
7 Loopholes 3
Barings handling of 88888
error account.

Failure of External Auditors. Failure to take action against

6 4 Leeson for providing wrong
information in SFA form.

Failure of internal auditors.

 COSO Framework
Control Risk Control Information & Monitoring
Environment Assessment Activities Communication

• Use of relevant • Conducting

• Commitment to • Suitable • Developing Control information ongoing and
Integrity and Objectives Activities • Internal separate
Ethical Values • Risk • Developing general Communication evaluations
• Exercise Identification control over • External • Evaluation and
Oversight and Analysis technology Communication communication
Responsibilities • Assessing • Deploying policies of deficiencies
• Organization Fraud Risks and procedures
structure, • Managing
authority and Change
Responsibility
• Commitment to
Competency
• Accountability
 Liquidity Risks

• Market Risks: Leeson consistently 2

brought contacts despite falling Nikkei
Index Market Risks Transactional
1 3 Risk/Operational Risks

• Liquidity Risks: OTC transactions

• Transactional/Operational Risks: Conflict

of interest
Sources of
• Legal Risks: Forgery of documents
Risks
• Agency Risks: Principle agent problem
(Selling Straddles without hedging) Leverage Risks Legal Risks
6 4
• Leverage Risks: Increasing cash demand
for high margin calls 5

Agency Risks
 Good Governance Practice
Control Control Monitoring
Environment Activities

• Strong internal
• Define clear • Developing control audit and
reporting hierarchy activities in daily monitoring
operations
Risk Information &
• Define clear roles Communication
and responsibilities Assessment • Developing control
activities in
• Develop and retain Technology
talent
• Strong internal
• Fixing accountability communication
• Consideration of
possible risks
 Past Approach Suggested Future Approach

Rear view RACI

mirror Matrix
Approach
Thank you