Rogue Trader Name(s) ___________________________
Accounting information systems ____________________________

I understand that this exam is to be completed by myself or in a team of two and that any assistance received from other students or any unauthorized source is cheating and subject to the appropriate disciplinary action as deemed by the Office of the Dean of Albers School of Business and Economics. I (we) am aware of the exam policies / rules provided and agree to abide by them.

_____________________________________
Student's Signature – Date

_____________________________________
Student's Signature – Date

Important: Make sure you read all the way through this assignment. Information regarding grading is included in the assignment instructions.

“ROGUE TRADER” You are a new graduate, and you just got the job of a lifetime at the New York office of one of the big accounting firms. Yesterday, the managing partner, Connie Rise, set up an appointment for you to meet with her today. “Good morning,” she says, as you wonder what you have done to be summoned to her office at 8 a.m. You are still reeling from relocating to New York and working in this fast-paced environment. Here you are, plucked from a small city located among wine farms and rolling hills on the central coast of California and plunged right into the thick of things in New York City. But you love your new environment. You earn a great salary, pay exorbitant rent for a tiny apartment, and are on the audit team for one of the leading banks in the U.S. You couldn’t sleep because of the traffic noise last night, so you stayed up far too late reading the Committee of Sponsoring Organizations’ (COSO) Internal Control-Integrated Framework and tried to figure out how it relates to your first real audit. “Please sit down,” Ms. Rise continues. “How has your first month here been? Are you enjoying your first auditing assignment at such a large bank?” “Oh, Ms. Rise, I love it here and I am really enjoying this audit.” Maybe you should have stopped there, but you carry on, trying your best to impress her. “In fact, I was studying the COSO framework only last night, to see how I could improve this audit.” “I’m impressed. In fact, that gives me an idea. Have you read about the Barings Bank case?” “Yes, I have. It sure is shaking up the financial world.” “Well, I don’t want that to happen to any of our clients. I wonder how Leeson managed to avoid detection, considering the magnitude of his losses. Apparently, the external auditors, internal auditors, management, and the regulators were all caught unaware. As you know, our office is involved in the audits of many financial institutions and stock traders. Hmmm, I have the perfect assignment for you. I scheduled a meeting for all the partners next Friday, to discuss the Barings situation. Why don’t you attend and assist me? You can prepare a report discussing each COSO component in relation to the Barings Bank case, and present your findings to the partners.” “Yes, Ms. Rise.” Why did I mention my late-night reading to her? I could kick myself… Ms. Rise continues. “To prepare your report, you should probably conduct additional research on the COSO framework, Barings Bank, the Singapore International Monetary Exchange, and whatever you can find on Nick Leeson.”
The COSO Framework From the work you did the night before, you know that the 1992 Committee on Sponsoring Organizations’ (COSO) Internal Control – Integrated Framework outlines five essential components of any internal control system: (1) control environment, (2) risk assessment, (3) control activities, (4) information and communication, and (5) monitoring. You start summarizing each COSO component during your lunch break as a first attempt to relate the Framework to what you know about the Barings Bank failure. You label your work “Summary of COSO and Barings” (see Exhibit 1). You know you do not have to answer all of these questions in your report, but you thought this summary would help structure your thinking. You also remember there is a web site that explains the COSO framework and make a note to yourself to explore this resource tonight (http://www.coso.org/). In addition, you know that most large CPA firms have published information for their clients on the implementation of the COSO framework that is available on their respective websites. You only have one week to get ready for the meeting. Besides not eating at lunchtime, you probably won’t be going anywhere this weekend.

EXHIBIT 1
Summary of COSO and Barings Bank

1. The “Control Environment” establishes the tone of a company and influences the control awareness of the employees. It is the foundation for all the other internal control components and provides discipline and structure for the entire business operation (Bagranoff, Simkin, and Strand 2005, 110).

2. The purpose of “Risk Assessment” is to identify organizational risks, analyze their potential in terms of costs and likelihood of occurrence, and install those controls whose projected benefits outweigh their costs (Bagranoff, Simkin, and Strand 2005, 111).

3. “Control Activities” are the policies and procedures that an organization develops to help protect the assets of the firm (Bagranoff, Simkin, and Strand 2005, 111).

4. “Information and Communication” include the methods that management uses to record, process, and exchange information within the firm so that employees understand their roles and responsibilities pertaining to internal control (Bagranoff, Simkin, and Strand 2005, 111).

5. The “Monitoring” process is a management responsibility that assesses the quality of internal control performance over time (Bagranoff, Simkin, and Strand 2005, 112).

Note: the list above does not cover all aspects of COSO that are applicable to Barings Bank. It is only a starting point for your analysis. Your grade will be partially based on your research using other sources to analyze Rogue Trader. Use your text, lecture notes, and other resources to critically evaluate Barings Bank for adherence to COSO framework. I expect references to outside sources in your paper.

Barings Bank The bank was founded in 1763 in London, England, by Sir Francis Baring. Its long and impressive list of accomplishments includes: first merchant bank in the world, financial advisor and banker for governments, financier for the 1803 purchase of the territory of Louisiana from France by the fledgling United States of America, and banker to the British royal family. Members of the Baring family had received five hereditary peerages for their services to banking (Leeson and Whitley 1996, 23-24). Nick Leeson (the Rogue Trader) soon observed that: “…people in Barings were more interested in the bottom line than they were in how it had been reached. They just looked at the balance sheet to satisfy themselves that they were in control of the operation and left it at that. They focused rather more on the profit and loss account, since this spelled out the profits which drove their salaries and bonuses…” (Leeson and Whitley 1996, 60).
Singapore International Monetary Exchange This exchange is commonly known as SIMEX. Barings activated its seat on SIMEX in 1992. According to Nick: “…not only did the powers-that-be really want me [in Singapore], but they probably wouldn’t go ahead without me. They wanted me to set up the operation and run it…I would recruit traders and back office staff and make money.” (Leeson and Whitley 1996, 29). More information from Nick: “We had just set up shop in SIMEX, and I had no authority to trade myself…I was there just to fill Fernando’s orders from Tokyo . I would take his orders over the phone, signal them to George, and tell Fernando whether we’d completed them.” (Leeson and Whitley 1996, 34). According to Leeson, the deals were very simple. They were doing something called arbitraging. Fernando would watch the futures contract in Osaka, the center for Nikkei futures trading, and Leeson would tell him every two seconds what was going on in Singapore. Sometimes a local trader would be buying in one market without the ability to trade in the other, and he might have an order that pushed up the whole market price in SIMEX. For a few seconds a difference would open up between the Osaka and Singapore prices, and that’s when Fernando and Leeson went into action. Leeson claimed that arbitraging futures and options was, technically speaking, a low-risk business. The only real risk was the split second it took for Fernando to tell Leeson what he wanted to do, and for Leeson to tell George (Nick’s trader on the floor of SIMEX), and for George to do it (Leeson and Whitley 1996, 34, 36).
Cast of Characters • Nick Leeson is the son of a British plasterer. He rose from the position of bank clerk to General Manager (June 1992 to February 1995) of Barings Futures Singapore. About his chosen career, Nick said: “I was told I could either work Foreign Exchange…or in the Futures and Options Division…I opted for Futures and Options, thereby sealing my own future.” (Leeson and Whitley 1996, 18). Also: “Since I hadn’t taken the exams at that time, I had no authority to trade on the SIMEX floor itself. But I was in charge of the entire team…” (Leeson and Whitley 1996, 37). • Lisa was Nick’s wife. Of his wife, Nick wrote: “…she knew nothing. Not even the first thing. Not even the first tiny, tiny error of ₤20,000 that…Kim had made back in 1992, starting it all off.” (Leeson and Whitley 1996, 7). • Peter Baring was the Chairman of Barings Bank. According to the minutes of a meeting on September 13, 1993, with the director of the Bank of England, he said: “The recovery in profitability has been amazing… leaving Barings to conclude that it was not actually terribly difficult to make money in the securities business.” (Leeson and Whitley 1996, 56). • Peter Norris was the CEO of Barings Securities Limited in London. • Simon Jones was Regional Operations Manager of Barings South Asia, the Chief Operating Officer of Barings Securities Singapore, and Director of Barings Futures Singapore. He was Nick’s immediate supervisor until the beginning of 1994. Of Jones, Nick said: “… he wasn’t interested in the futures and options side of the business… I’d go up to see him in the afternoon, but we mainly talked about football…. As for business, we scarcely talked about it.” (Leeson and Whitley 1996, 65). • Ron Baker was Head of the Barings Financial Products Group in London. Nick said of Baker, who became Nick’s direct boss at the beginning of 1994: “In due course Baker began to be excited by the size of the profits I was reporting, and he took direct responsibility for me.” (Leeson and Whitley 1996, 65). • Brenda Granger was in the Settlements department in London. Nick directly made requests for cash to her, and she transferred funds on a daily basis to Singapore to meet SIMEX margin payments. • Tony Railton was the Senior Settlement Clerk from the London office. He was sent to Singapore in January 1995. Two days before the Barings scandal hit the headlines, Nick said of Tony: “He was a big, bulky man, running a little too fat, and always anxious to please. I’d see if I could fob him off with another useless chore … He was no nearer finding my account than he was a week ago, and he’d been ferreting around the office for a month now. It was pathetic.” (Leeson and Whitley 1996, 4). • Ash Lewis was the formidable internal auditor from Barings London who never did get to do the audit of the Singapore operation. • George Seow was the first trader that Nick recruited. • Risselle Sng handled the settlements in the back office in Singapore. • Kim Wong was a novice trader that Nick recruited. According to Nick: “I couldn’t work it out: there was one slip – a sale note for twenty contracts – and I couldn’t see the balancing purchase…I looked at the initials on the slip: it was Kim Wong.” (Leeson and Whitley 1996, 40). • Mui Mui was the external auditor from Coopers & Lybrand who questioned Nick about the 7.78 billion yen (50 million pounds) receivable from SIMEX.

Instructions for your report:
1. Type your report using Times New Roman, 12point font, 1-inch margins, double-spacing.
2. In all organizations, senior executives and managers are very busy and will not spend time reading a report that is of no interest to them. If your title and the opening paragraphs of your report do not quickly capture their interest, they will most likely move to the next project. With this in mind, make up a “catchy” title for your report and a compelling introduction that will intrigue the partners and capture their attention. Your Introduction section should be succinct and informative (no more than half a page), and should motivate the partners to read further.
3. Your report must have the following sections (in bold font): Introduction, Control Environment, Risk Assessment, Control Activities, Information and Communication, Monitoring, Conclusion and references.
4. In the Control Activities section, consider the controls for corporate governance that you would expect to be in place at the Barings U.K. head office. After dealing with the head office control activities, drill down to the Barings Singapore operation and discuss the control activities of the Singapore trading operations and information process. Review Exhibit 1 and then conduct the appropriate amount of research to identify appropriate controls at various levels.
5. Your Conclusion should clearly indicate what your firm can learn from the Barings Bank case. Structure this section around the three key elements of the fraud triangle.
6. Your bibliography should cite all references used throughout your paper.
7. Grammatical or spelling errors will not impress the partners. Furthermore, they are very busy so your report should not include redundant or unclear prose. Once you finish your first draft, proof-read your report and revise it as necessary.

Scoring
|Section |Item |Possible |Number of well-articulated|
| | |points |items to get full credit |
|1 |Title/introduction |3 |N/A |
|2 |Control Environment |8 |8 |
|3 |Risk Assessment |8 |8 |
|4 |Control Activities |10 |10 |
|5 |Information and Communication |4 |4 |
|6 |Monitoring |4 |4 |
|7 |Conclusion |3 |N/A |
|8 |Bibliography |3 |N/A |
| |GRAMMAR* |7 |N/A |
| |Total points possible |50 | |

A poorly written grammatically incorrect paper will be returned to you for a re-write and you will lose 7 points. In addition, if it is not corrected when resubmitted, you will lose additional points.

Please format sections 2 through 6 in numbered list format. For example, introduce an item for control environment, then elaborate on why it is a control weakness. Example (from fictitious Energy Company ENCO): Control Environment 1. Fraudulent financial reporting: ENCO overstated their revenues by posting 100% of the dollars received on behalf of their clients. The full revenue should not have been reported, only the commissions earned by ENCO. The accountants were pressured into overstating revenues with threats of job loss. 2. Human resource policies: ENCO did no background checks on prospective employees. Former criminal activity of employees was never discovered.

Don’t forget to print out and sign the honor statement.