Management: Barring Bank

Introduction and Case Highlights

The collapse of Barring bank of London is a case revolving around poor operations risks controls that offered a platform for fraud by one of its employees. Leeson took advantage of deficient internal controls and risk management practices to execute his plan. Nick Leeson falsified the banks trading records and managed to use money meant for margin payments on another trading through the bank’s computer systems. The approach left the bank with massive losses to deal with owing to Leeson’s decision to misuse its derivatives trading operations. Leeson managed to hide his losses for sometimes in the eyes of other top managers through a fictitious account he labeled “88888” while posting profits on different trading accounts (Bair, 2015).  In any case, the Barring bank failure is a case in point that highlights the need to strengthen internal control systems in any institution.

The case is worth studying since it offers vital insights on how lack of sound technological base can land an organization into serious problems. Technology plays a critical role in the operations of any organization in the sense that, it offers a framework from where internal controls sail safely. Therefore, organizations should have in place technology that serves it needs optimally. The lack of sound technological base at Barring bank gave Leeson an opportunity to get away with his unethical behavior. Technology affords institutions an automated detection mechanism that facilitates internal controls. For instance, technology allows different transaction in firms finances to undergo different stages of authentication before they go through. Therefore, the approach will limit the possibility of a single employee carrying out transactions involving company funds alone (Rubino & Vitolla, 2014). Further, technology will ensure any suspicious activities on the system are arrested before they get out of hand.

Leeson actions led to depletion of the banks financial capital over and above its capabilities. The Simex clearing house had no mechanism to determine the banks market losses surpassed the bank’s capital.   This led to the transfer of $ 835 M by Barring’s Tokyo London to compensate Simex over Barring Singapore woes. Barring bank capital was a $ 635 M and as such the bank as reported bankrupt.

The today’s institution and player in the financial cannot wait for a worse scenario than the Barring bank case to understand the importance of technology in strengthening internal controls. It is instructing to note that, the technological aspect should evolve to meet the needs of the institution depending on any gaps that may exist and current market trends. As much as technology may not manage to eliminate all loopholes, it would play a critical role in reducing extreme vulnerabilities. Had the management of Barring bank put in place sound technological framework, Leeson would not have managed to pull down the institution.

Organizational Functions, Structures, and Administrative Processes

The Barring bank was a financial institution and the oldest merchant bank in London before it was brought to its knees by one Nick Leeson in 1995. Leeson engaged in speculative derivative trading using the bank’s finances. The bank was incorporated in Singapore in 1986. The Barring bank was part of Barings group.

There was no separation between front and back office the operations of Barings group. Nick Leeson was the bank’s general manager and was in control of both front and back office operations. His position gave him a platform to carry out unauthorized trading, and in the event managing to manipulate the details and numbers detailing his actions, the Barings management would not discover such indulges. Barring bank made use of the matrix-based reporting system which allowed Leeson to report through separate management facets. The approach created a loophole in the role of management oversight rendering it ineffective.

The bank’s management would not question the high revenues generated from the authorized and low-risk activities advanced by Leeson. The management at no point did it place any limitations to take control of Barring Futures Singapore funding as facilitated by the parent company. At some point before the bank collapse, the funding was cited to be twice the capital base of Baring. Barings management failed to act on a recommendation advanced by internal audit report in1994. The report was quick to highlight the many weaknesses in the management structure and internal controls that placed the institution at risks.

The Barring case points out that the management teams did not fully understand the business environment in which they were operating. There was lack of a clear line to which every business activity was to be communicated. There was no segregation of duties and as such the control system could not be cited as functional. The management failed to put in place independent risk management for all business activities (Reserve Bank of Australia, 2018). The Audit Committee and the top executives were reluctant to act on gaps identified in the system.

The bank was operating under the supervision of the board of directors and top executives. However, the existing internal controls were not effective to define their mandate of control of the CEO. In any case, the matrix reporting system made Leeson answerable to anybody but himself since he could use the system’s vulnerability to have his way without anyone noticing.

The Barring back operated on the principle of ethical behavior that was expected to take shape through the employee’s integrity. However, as much as the board and other executives expected best practices from its employees, the deficient internal control systems made the made the institution vulnerable. Leeson did not live to these expectations, and in the event, he engaged in speculative trade that left the bank bankrupt. This highlights the need to for the management at Baring to have identified a more stringent mechanism that would boost their control prowess. The vision and mission of the bank which was to offer the best financial services to its clients would only have succeeded with the right internal governance guided by an effective risk management strategy. The need for safeguarding the institution’s ethical code, values, principles, and mission would not gain traction without internal sound control.

Human and Natural Systems

The organization structure at Barring allowed for employees to form lower cadre to report to their senior. The bank had higher trust in its senior management, and as such, it had entrusted them with decisions to run the organization efficiently. In any case, it would not have been possible for the institution to entrust Leeson with so many powers that he would be responsible for both front and back-office operations. The approach points out to the fact that, power was centralized at the core of the banks top management. The board and owners of Barring believed the general manager was capable of managing the institution soundly and advise them accordingly without the need for too much control.

The matrix operating system was the only framework that would define the relationship between Leeson as a top manager and other executives. The system made it possible for a Leeson to report to different quarters and as such, disfranchising the entire operative mechanism. He would work around the system loopholes to advance his unauthorized activities. The failure by the Barring management to act on the internal auditor’s report was indication that they trusted Leeson as their top man more than anybody else.

There was no clear path to define roles and responsibilities of the employees. This led to lack of segregation in duties. Therefore, the management failed to put down the best tools of operation to guide the employees to serve the objectives of the bank. Setting the banks goals is one thing and helping the employees to advance towards that direction is another (Tsai, 2011). Entrusting too much power to a single individual proved to be risky.

The barring bank failure to set a clear path to guide its employees on the best practices was to blame. The institution of such magnitude would have done better in cultivating a well-structured framework that would help employees to master their limits, and in the event, ensure high standards. Shaping the integrity of employees is no mean feat, and it starts with how well the management puts down controls in its system to govern the activities of each employee. The aspect of technology would have gone a long way in protecting the interests of the bank from employee malpractices. Internal controls would minimize risks that are associated with human capital. The organizational culture did not help much to advance its interests since it offered loopholes that led to the collapse. If a culture were built on sound control systems, it would be difficult for Leeson to exploit the bank out of his selfish behavior.

References

Bair, S. (2015). Lessons from the Barings Collapse. Retrieved from Fordham Law Review: https://ir.lawnet.fordham.edu/cgi/viewcontent.cgi?article=3195&context=flr

Reserve Bank of Australia. (2018). Implications of the Barings Collapse for Bank Supervisors. Retrieved from https://www.rba.gov.au/publications/bulletin/1995/nov/1.html

Rubino, M., & Vitolla, F. (2014). Internal control over financial reporting: opportunities using the COBIT framework. Managerial Auditing Journal, 29(8), 736-771. doi:https://doi.org/10.1108/MAJ-03-2014-1016

Tsai, Y. (2011). Relationship between Organizational Culture, Leadership Behavior and Job Satisfaction. Health services Research, 11, 98. doi: 10.1186/1472-6963-11-98