Accounting Scandal - Barings

Significant case, most leading case in lack of corporate governance

• Holding royal’s bank account (not merely responsibility toward the stakeholder but the society)
• Oldest merchant bank
• A single handed activity by Nick Leeson caused the bank bankrupted

Although Leeson is the one responsible for Barings’s bankrupt, however it’s not possible if other parties in the bank do their duties.

Leeson only took advantage since others in the organisation not carrying out their tasks and lack of knowledge.

Leeson used this to boost his ego.

If each of the people in organisation do their jobs without compromising or lacking in somewhere, Leeson wont have chance to take advantage.

Corporate Player

Staff

Internal monitor, internal auditor

Gatekeepers like external auditor

External bodies

Shareholders

How each of these people compromised their duties?        

Leaders:

• Lack of knowledge, they did not know anything about the activities
• They didn’t not change the management for the new business
• Blindly depend on external people without proper test
• Profit gained shared among management as bonuses, lead to further greed, monetary benefits
• Hire Leeson who is only a bookkeeper
• Employee incompetent people for the job
• No monitoring, lessen is left independent to handle the stock market
• No proper check when he asked for money, no due diligence test was done

Internal auditor

External auditor

• Blindly follow the document given by Barings Bank, without checking

Security exchange commission

• They failed to conduct investigation
• Receive alert but negligence of external goalkeeper

Although is a one-man-show, everyone has compromised their duties

Q1

• Lack of Internal Control
• Lack of supervision
• Lack of proper communication
• Lack of accountability
• Lack of transparency
• Greed of management, deviation from original goal of organisation
• Irresponsibility of internal auditor
• Poor monitoring posed by the gate keeper
• Lack of cooperation by the staff member
• Incompetent people in the organisation

Lack of objectivity

Irresponsible board

Not having the right person at appropriate seat

Lack of monitoring

Negligence of external auditor

Layman and Brothers (good examples to discuss), WorldCom (where the director has no voice in the decision making of the organization)

Appropriate theory to be discussed: Agency Theory (high agency cost)

How auditor could have help?

• (split into internal and external auditors)
• Describe roles of the internal and external auditors (links to case study, how could they mitigate the lose)

(General roles of them)

• Internal: part of the organisation, their major role is to interpret accounts, standards; ensure that efficiency and operations internal control system of the company; provide advices to management when the f/s is not transparency (ensuring true and fair of F/S); should have communicate with the top management and external auditors; could act as whistleblower when they have strong ground to believe they are right; should ensure the book of account is complete

two roles for internal audit:

• to provide an independent assurance service to the board, audit committee and management, focusing on reviewing the effectiveness of the governance, risk management and control processes that management has put into place.
• to provide advice to management on governance risks and controls, for example, the controls that will be needed when undertaking new business ventures.

• External: ensure F/S is showing a true and fair view, by collecting necessary evidences; instead of collecting, they only rely on documentation provided by the bank; should have b more independent; lack of professional ethics; in key area, when know that gearing is high, should have due diligence; lack of professional skepticism

To ensure the financial report has no material mistake

They should have been skeptical

Not just purely believe the justification or classification by a staff

(Conclusion by telling that the company is a family with few members, each of them have roles to execute, so that company running in healthy manner.)

• Introduce the bank, talk about the bank itself (characteristic of the bank)
• Roles of internal + external in general
• What’s the things internal auditors didn’t do but they could have done it? (should have look into the efficiency of internal control)
• [same to external auditors]
• Conclusion

Q2

• Start of with what’s inherent risk, control risk, detection risk (and their relationship)?

Inherent Risk: The nature of business

(who seasonal, or undergo regulatory changes, or when management keep changing very frequently; because management change, policy change, difficult to continue the way they perform audit like same manner they did in the previous years; businesses which are subject to external regulations; the regulation is changing, obviously the regulation will affect the business)