Question

A large international bank is experiencing bad publicity surrounding huge fraud losses in its foreign currency department. Accusations are being made in the press that a rogue trader blamed for the losses was operating outside the official bank guidelines, with the tacit approval of senior management in the department because of the large profits made by this trader in previous years. The press claims it was common knowledge in the foreign currency department that strict policies and procedures surrounding the size of trades and the processes for balancing out trades at the end of each day were not to be followed if the trader had verbally informed his supervisor of the trade. The press is also suggesting that the problems are not confined to the foreign currency transaction.

Required:

Discuss the control environment at this large international bank assuming the press reports are correct. Which parts appear to be most deficient?

Answer 1

the problems at the international bank appear to begin at senior level of the foreign currency department rather than an individual trader , because the foreign currency transactions need a series of approval which one person cannot divulge without involvement of bank officials and employees.
this shows that the internal control department/enviornment lacked integrity and ethical values or were neglected by the company official even the most senior officials who are the decision makers in the company

Questions must be asked from the senior members of the department and those who are charged with governance as the press reports further blames that the poor ethical attitudes are not confined to foreign currecy department furhter deteoirating the image of the bank and exposing its poor ethical standards and internal controls

the organisation structure at IB could be deficient if there was not effective
supervision of the foreign currency department.overall the problem was with the communication and enforcement of integrity and ethical values

the risk assessment processes at IB appear to not have considered the potential problems in the foreign currency department.
there should be a proper reporting mechanism where heirarchy is fixed that eho should report to whom in case of irreregularities or simply there should be a whustleblower mechanism in place.
control activities should have detected the common coccurence of this type of risky trading behaviour or alerted the senior management.
interenal audit department also needs to be strengthen and act more independently so that it should report these type of information to those who are charged with governance
finally a multi level authorisation needs to be established so that the transaction level conteols are in place