Accounting Assignment Help online study guide Review:: Control weaknesses at SocGen
Question??
What concepts in this chapter are illustrated in this case?
This case study talks about a live example of how an organization can be reduced to dearth by not following proper security measures. In this case we can see that how the most respected investment banking institution can suffer huge losses because of some loopholes in the systems. The organizations these days have become much more complex and they operate on large scale. A small mistake or a snag in the system can lead to losses worth billions of dollars as depicted in this case. A lot of concepts from this chapter can be used to understand the problems persistent in the company like there were some problems with authentication as Kerviel could access the systems from other employees ID. Sometimes employees unknowingly tell their passwords to their colleagues without considering as to how they can be misused by them (Laudon & Laudon 2011). This case shows that most often Security threats originate from inside the organization when people who possess knowledge about the security mechanisms take undue advantage of the loopholes in the system. Security issues start from inside the organization only because outsiders cannot crash the security systems easily, most of the times it is some insider who is involved with security issues because he is the one who knows all the secrets of the company. Security measure were very sloppy because Kerviel could easily predict the exact timing of the security check and he was able close the fictitious positions minutes before the security check, this would leave the bank amass to positions much more than Kerviel was authorized to take but it was okay to do so for a few minutes and after the check he again used to create that fictitious portfolio.
Ques: Describe the control weaknesses at SocGen. What management, organisation, and technology factors contributed to those weaknesses?
Control mechanisms are policies, procedures and methods adopted by an organization to ensure that the organisation’s assets are safe; the accounting records are reliable and accurate; and that the standards set by the management are adhered to while operating (Laudon & Laudon 2011). SocGen’s control systems displayed some major weaknesses which led to the possibility and occurrence of a fraud of such magnitude. The organization evidently lacked proper risk management mechanisms as Kerviel could trade beyond limits without being noticed by the risk management team or his superiors. The transfer of Kerviel from risk department to trading created the problem of inside knowledge that enabled Kerviel to make use of the loopholes in SocGen’s systems. The case depicts the lack of control of risk auditors who did not audit the trades in detail. A proper audit of all trades would have prevented such an incident. There were no cross verification mechanisms that would have looked into the authenticity of transactions made by him. The bank did not follow the control mechanisms set by it effectively because normally employee’s portfolio is checked by other employee when he goes on a leave but Kerviel rarely took a leave disabling the control mechanism. The bank and Kerviel’s supervisors should have been alarmed on the less leaves taken by him and should have used other control methods for such a case. The management factors contributing to the control weaknesses are the lack of caution and proper management by superiors as they should actually be cautious about the acts of each of their subordinate in order to avoid such frauds. The organisation followed a fixed routine of check by the risk department enabling Kerviel to adjust his trades according to that routine; a random check system would have been a better approach. The transfer of an employee from one department to the other passes on the information along with him which may lead to the misuse of such information by the employee. Audits done do not check the past trades by the trader leaving some trades unaudited; this turns out to be a major weakness Kerviel’s case. Technological glitches enabled Kerviel to enter into trades beyond his limits; the system should have prevented trades beyond the specified limit and should have been such that unauthorised access should have been avoided.
Ques: Who should be held responsible for Kerviel’s trading losses? What role did SocGen’s systems play? What role did management play?
Kerviel alone cannot be held responsible for the trading losses incurred by SocGen. Incident of such rogue trading indicates a flaw in the organisation’s risk management culture, governance, technology and processes (Hurley 2012). SocGen’s systems had loopholes which were used by Kerviel to conduct such a fraud. The management should have taken preventive measures to avoid such a huge loss. The SocGen’s system, management and Kerviel together were responsible for the losses Kerviel’s trades had incurred. The lack of proper control mechanisms in the SocGen’s systems gave Kerviel the ability to do trades beyond the specified limits. The management did not notice the unethical ways of Kerviel when he made gains that were impossible if he had used proper hedging tools. The fixed schedule of system checks enabled Kerviel to hide his misconduct which ultimately led to these losses. Thus, an organisation must make sure that there are no loopholes in the system that can be used by employees having inside knowledge. Also, the management team should be cautious and should investigate any instance of unusual nature.
Ques: What are some ways SocGen could have prevented Kerviel’s fraud?
The SocGen bank could have prevented a fraud of such a big magnitude by putting in place security and control systems to check such unwanted transactions. There are certain measures which could have been taken to prevent such a big loss. The company should have put in place Biometrics to log into the system so that no unauthorized person can access the system. In organizations it is a very common practice that employees tell their passwords to their colleagues which can be used to commit such a big fraud. Biometrics doesn’t allow anyone to login to the system without thumb impression, if this was used then the entire scandal couldn’t have happened. There should have been routine inspection of the accounts where every suspicious transaction should be brought in front of the management however profitable the transaction may be. The inspection should have been instant and no prior information should be given regarding the inspection schedule, the employees should have been sent to the vacation, a practice which is very common in investment banks so that the entire portfolio could be reviewed by other employees. There should have been proper authentication like whenever a trader is entering into any trade beyond his limits then his senior must authenticate such transaction (Deloitte 2011). Such cross checking of transaction would prevent the organization from getting overexposed to the trading risk. There was some serious flaw in the audit system of the bank because Kerviel could enter into transactions worth $73 billion when the entire market capitalization was of $53 billion, had there been proper auditing, the trading losses would have been caught in its initial phase (WilmerHale 2008).
Ques: If you were responsible for redesigning SocGen’s systems, what would you do to address their control problems?
From this incident we can learn that some measures can be taken to control such problems from happening in future. Some of the measures can be:
v Senior management must incorporate a culture of compliance and the employees should be given lessons about corporate governance so that the employees are aware of the parameters on which their performance would be judged and what is expected out of them. They would become ethical in their conduct and behaviour and would understand as to how a small trade can ultimately lead to huge losses which were never expected.
v Management should make an effort to incorporate KYT (Know Your Trader), so that they know the abilities of the trader. This may also enable them to foresee possible actions of the trader (Gill & Purushottam 2009).
v The trades that are entered into should be checked by the superiors on the daily basis and proper explanation should be demanded in case of any discrepancy. This would ensure that the supervisors are aware about their exposures to the risk on daily basis.
v Management should ensure that bonus system should not lead to excessive risk taken by traders as was evident from this case that Kerviel was making these huge transactions primarily to get the bonus incentives from the bank. The bonus system should be designed in such a manner that it doesn’t invite excessive risk on the part of the traders.
v Mandatory vacations should be given to the traders so that their books can be reviewed by other traders and all the profit and loss should be matched. From this case we can see that Kerviel took only 4 vacations in 2007 because he did not want to hand over his portfolio to some other person. He had admitted that he was able to avoid detection because he did not take vacations and never allowed anybody else to touch his book.
v Strong back office procedures should be promoted so that the flaws can be caught right in the bud, when the back office prepares all the reports on daily basis like profit and loss account, daily positions then they can be cross checked from the front office transactions and any discrepancies can be found.
v Biometrics should be used to login the computers where human thumb impression is used to allow access so that no employee can login the system on someone else’s ID (WilmerHale 2008).
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