Question

In: Accounting

The Barings Bank was one of the world's oldest merchant bank and had problems with rogue...

The Barings Bank was one of the world's oldest merchant bank and had problems with rogue trading in the middle of the 1990s. Nick Leeson was floor manager for trades in Singapore as well as head of settlement operations, thus he was able to settle his own trades, bypassing the bank’s own internal controls. Whilst trading, Nick Leeson supposedly made $10 million profit in the first week of February 1995 for the bank. This humongous profit caught the attention of other staff members in the bank. For instance, Mike Killian, who was the head of Global Futures and Options Sales, knew that the whole of Barings bank was making about GBP 200 million a year. If Nick Leeson carried on making such a profit throughout the year it would be half a billion dollars a year profit! Accordingly, to some sources, Mike said that if Nick is doing that amount of business for that amount of profit, then they should shut down the rest of the bank because they were just overheads.4 Due to Nick's rogue trading, the bank went bankrupt in 1995.5

a) Mike Killian was cynical that one person alone was making more money than all the rest of Barings Bank staff. Questioning the reliability of information and being alert to conditions that may indicate possible fraud is an attitude expected from auditors. What is the name of this professional attitude and what is its use of it in the role of auditors?

b) Nick Leeson was floor manager for trades as well as head of settlement operations. This means that he was able to settle his own trades, bypassing the bank’s own internal controls. Considering the Code of Ethics for Professional Accountants, which kind of threat to independence does this relate to? Describe this threat and suggest one safeguard Barings bank could have implemented to eliminate or reduce this threat.

c) Before going bankrupt in 1995 Barings bank had an unqualified audit report. What does that mean regarding audit expectation-performance gap? How does an unqualified audit report relate to the bank going bankrupt?

Solutions

Expert Solution

A. The attitude which the auditor has to keep while auditing is an "Attitude of Professional Skepiticism". Professional scepticism is an attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.

It facilitates the appropriate exercise of professional judgment, particularly regarding decisions about:

  • the nature, timing and extent of audit procedures to be performed to reduce the risk to an appropriate level;
  • whether sufficient appropriate audit evidence has been obtained and whether more needs to be done to achieve the objectives of the relevant assurance standards;
  • the evaluation of management’s judgments (particularly regarding the application of the entity’s applicable financial reporting framework in the context of an annual audit);
  • the drawing of conclusions based on the audit evidence obtained.

b) This threat is related to Self-interest. This threat could have been safeguard if the bank would not have given multiple role to the same person. There should have been proper segregation of activities. Here only one person is settling the trade as well as the settlement operations. Two different persons should have been appointed for each activity.

c) An unqualified audit report means audit report in auditor's opinion conforms to GAAP and the financial statements are fairly stated. It is not that once an unqualified opinion is given, the company cannot go on bankrupcy. When there is going concern issue for any organisation, auditor gives an unqualified opinion with an Emphasis of Matter paragraph. Going concern issue does not force an auditor to give a qualified opinion.


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