Why internal controls? See: Leeson, Nick

September 19, 2016

Sometimes, much like the legendary Phoenix, names arise from the ashes of the past. In the world of compliance, they do come up from time-to-time as there are plenty of former felons who wish to talk about their experiences. This has led to what Thomas Hale, writing in the Financial Times, called “confessional insider”. The person Hale is referring to is convicted trader Nick Leeson, whose losses for Barings Bank more than two decades ago totaled £827 million (US$1.08 billion).

According to Hale: “In the mid-1990s, while working in Singapore, Leeson almost single-handedly brought down Barings Bank, a venerable icon of the British financial establishment for more than two centuries.” The bank is no longer in existence.

Leeson’s conduct certainly foreshadowed much that has been seen over the past 10 years or so. His actions in hiding his trading losses in an ‘error account’, which was not detected until Barings had sustained its massive losses, are no longer unique or even result in the largest of such losses. However, he was one of the first to sustain such large losses individually.

Revisiting Leeson drives home one of the key components for any effective compliance programme: internal controls. These act as a ‘second set of eyes’ on transactions by requiring that a business make and keep accurate books and records, as well as devising and maintaining an adequate system of internal accounting controls. There should also be sufficient controls in place to prohibit individuals and businesses from knowingly falsifying books and records or knowingly circumventing. Of course, none of this works if a company completely and utterly fails to implement a system of internal controls.

Aaron Murphy, in his book ‘Foreign Corrupt Practices Act’, said: “Internal controls are policies, procedures, monitoring and training that are designed to ensure that company assets are used properly, with proper approval and that transactions are properly recorded in the books and records. While it is theoretically possible to have good controls but bad books and records (and vice versa), the two generally go hand in hand – where there are record-keeping violations, an internal controls failure is almost presumed because the records would have been accurate had the controls been adequate.”

Nick Leeson teaching trading courses is a reminder of the need for robust internal controls.

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