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Case Analysis

The COLLAPSE OF BARING BANK

(Individual Assignment)

BU 041
Why Corporate Social Responsibility Matters

Name: Ou Yang Ning Xiao

Term: January 2012
Lecturer: Mr. Issac Leung
Due Date: 29th February 2012
Words count: 2133 words

TABLE OF CONTENT

Executive Summary-----------------------------------------------------Page 3

Introduction-------------------------------------------------------------- Page 4

CSR Problem within the Barings Bank----------------------------- Page 5

FIVE Acts to Prevented Leeson from Destroying the Bank---- Page 7

Why SOX not Prevent the Fraud------------------------------------ Page 9

How monitor the ethical standard----------------------------------- Page 10

Conclusion---------------------------------------------------------------- Page 11

Reference----------------------------------------------------------------- Page 12

Executive Summary

This report is through the case analysis about the collapse of Baring Bank, to talk about how the corporate social responsibility influences a company. Through the related CSR problems in Baring bank and trying to find what matters that the organization lack of. In addition to know more about how CSR effect the global business environment, depends on the Sarbanes-Oxley Act, the report talk about the five acts can possibly prevented Leeson to destroy the company. And also discuss why the SOX act is not effective which lead to the Madoff investment scandal and could not prevent the 2008-2009 financial melt down using the ethical decision making process.

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Introduction

Barings Bank was the oldest merchant bank in London until its collapse in 1995 after one of the bank's employees, Nick Leeson, lost £827 million ($1.3 billion) due to speculative investing, primarily in futures contracts, at the bank's Singapore office.
(http://en.wikipedia.org)
The collapse of Barings Bank was brought about by a trader named Nick Leeson. In the mid-1990s, Nick Leeson lost Baring Bank over ￡800 million in his futures market derivatives tradings. He attempted to recoup his losses by doubling, then redoubling, his stake. He covered up his mounting losses in a secret account for three years. (Heijden, 2002)

In Singapore, Leeson is both futures trading manager and settlement manager. That make Leeson to use this opportunity to cover-up the loss resulting.

On the surface, the reason of Barings bank failures is the individual act in excess of authority; in fact this reflects the modern multinational bank management and internal control system flaw. Barings bank's management in each level and each steps have breach of duty phenomenon, external auditors and regulators also have an unshirkable responsibility.

CSR Problem in Barings Bank

The financial industry as a special industry, taking more social responsibility related to many aspects. In internal aspect, the main responsibility is related to the stockholders, employees and customers. For external it related to the business partners and public. Barings Bank against the responsibility that they should take.

Specially, it include to make sure the Shareholder Value Maximization, Nick Leeson misuse of authority to unreflective the interests of the shareholders, not responsible for the capital safety and the reasonable profits of the shareholders. As an investor's agent, the bank should respect the basic right of shareholders, to give shareholders with legitimate income for business premise, and not waste any of the capital contribution, also cannot use it to the illegal deal.

Banks have a responsibility to create a perfect company structure, to provide true investment information to the shareholders, Barings bank make Leeson to have to duty include trading and settlement that make him has the opportunity to use the money that not legal. Bahrain bank has many chances to correct the mistake, but because of disregarded led to the last collapse.

This is a kind of institutional defects. But as early as March 1992, Barings bank has a internal fax put forward the warning: "we are in a may cause disaster risk. We will cause the system defect or lose financial losses for the trust of our customers, or both." Unfortunately, the report was not taken seriously. Bank in August a internal audit report said that although the practice of Leeson take a risk, his department accelerated erosion Barings futures profitability, Barings's futures business will lacks a comprehensive ability with appropriate the traders, namely has experience, relations, trading skill and familiar with local conditions and quality.

An important cause Barings banks failed because the position within the bank is not clear. No matter the bank branch with any organization form, structure, it must establish clear responsibility mechanism. Make sure every staff can supervise each other.

The other reason for Leeson goes well beyond the deal is lack of special Barings bank internal risk management mechanism, Leeson requirements for the London headquarters to provide the large sums of money to the Singapore branch every day .Baring bank headquarters officials did not make examination, just depends on the subjective impression that is at the request of customer payment, but in fact these funds are used to block Leeson’s funding gap, the preventable disaster finally happened.

In addition, the bank also did not protect the employees’ legitimate rights and interests. The social public, whether large or small and medium-sized enterprise, whether rich or poor, all need to rely on financial production for life, bank in the configuration of social resources plays a key role, if the bank can not do very well to shoulder this social responsibility, then the overall social welfare can effectively improve, the bank is not only in order to earn a profit, but also have benign long-term strategy, only in this way, the social value of the bank can obtain the effective improve and to maximize profit.

FIVE Acts to Prevented Leeson from Destroying the Bank

● Public Company Accounting Oversight Board
This act can help the company must to after rigorous review, make sure the shareholder’s profit, the PCAOB has the right of punishment and investigation the accounting firm or individual who violation of law, the relevant securities regulations and professional standards, prevent the event like Nick Leeson misuse of authority. Government makes the professional ensure that they keep the due vocational ethics, in a certain degree to eliminate the occurrence of an illegal business transaction.

● Auditor Independence

Audit partner and re-check partner every five years to the rotated, stipulated the certified public accountants to the company's audit committee report to the matters. If the chief executive officer, chief financial officer, chief accounting officer and other senior managers in the previous years in office was certified public accountants, the firm has been banned for the company to provide legal audit services.
The acts make sure the independent work for the audit that prevents the corrupt practice in the whole process. This act also can supervise the management of the company to follow the professional ethics.

● Enhanced Financial Disclosures

The financial report must reflect the accounting firm made all the significant adjustment, annual report and quarterly reports to disclose important off-balance-sheet trading and with unconsolidated entities happened between the current or in the future of financial condition is great impact on the other relations. Compulsory for public company annual report should include internal control reports and the evaluation, and ask the public accounting firm to the management of the company to make evaluation report issued by verification.
The public information of the company’s decision making and finance situation can help the shareholders know the truth of the company.

● Commission Resources and Authority

The audit agency authorized to accounting firm compulsory rotation system for research. The audit agency requirements since 1989 the merger of the accounting firm, to assess the impact of the present and future, and for the problems found proposed solutions. U.S. general accounting research lead to request accounting firm competition limited factors, such as high cost and low service quality, independence, lack of choice and so on. And survey federal or state regulatory policies interfere with the accounting firm as whether there are competition factors.
The more strictly monitor of the government is going to help to make the fair environment for the companies.

● White Collar Crime Penalty Enhancement

Increased illegal behavior of the punishment of the measures, this acts deepen the professionals for the professional moral to a more profound scrutiny. Give illegal staff warning. If Nick Leeson can know that his behavior could take a big responsibility may be he will stop earlier that could stop him to destroy the bank.

(http://en.wikipedia.org)

Why SOX not Prevent the Fraud

Although the SOX set up many provisions for the financial industry, restricted the many illegal fraud, but the law is not the perfect guarantee for no crime.

Madoff investment fraud event, is the typical Ponzi Scheme, design with astonishing scam, a lot of people be taken in.

Want to be Madoff's customers, somewhat similar to join a threshold high club, only have money does not have introduced into this club, in many eyes, putting money to Madoff has become a symbol of status. Even after accession and no one knows his investment strategy is exactly what, Madoff never explain, and if you ask too much, he will kick you out.

It is reported, Madoff's customers including Volvo, hedge funds, large institutional investors and even some Banks in Europe. In many investment veteran opinion, his company to Madoff investment, they worry about are not losing money, but the loss of the opportunity to make money.

According to the ethical decision making process, the SOX how effect on the person or the organization, depends on they how to define the facts in the situation. In the whole process about measure of the seriousness of this thing, it depends on how they analysis and make decision. In the Madoff’s case and some other issues in these several years, include the economic crisis in 2008, the root cause is in the process they desired results as the maximum profit, is the money. In order to get more benefit, all of people join in to the case without the rational decision making, against the ethical and moral principles. Although they are taking risks and play with the whole industry, but in their ethical decision making process, they already reduce the weight of the moral. That is why the acts can not stop them from the fraud.
(www.engr.psu.edu)
Monitor and Enforce Ethical Standard

● Management clearly supervise

Baring bank because the internal control loose and external unable supervision to lead to failure.

Management should not only see the profit on the paper, and ignore the risk behind profit therefore, the management should be awareness of the business there is risk or not, which requires Banks to ensure that to do the objective analysis of risk and profit in each internal business to reduce errors and the possibility of fraud.

● Clearly Position
The bank must set up a clear responsibility mechanism, all managers and employees must be aware of the responsibility, mutual supervision. Each department to accept the information should build a fully communication. And make sure that does not happened omissions. Also avoid fragmented and abuse of power

● Segment the staff with the conflict of interest
The different business division to have regulatory responsibilities and trading to separate work shouldn’t confuse the relationship between the two parts. Trading business is face to the customers; the settlement should be face to the internal finance situation. The clear segment can make sure that will not happen like Leeson’s behavior.

● Risk Management system established
Risk management departments are responsible for the company's business scope risk set, for each business department is to withstand risk clearly defined, and should be responsible for the supervision department is strictly abide by the limited risks related policy, review of earnings and the loss of accounts consistent with the fact, according to the different risk relations to a different risk strategy, in order to realize effective prevention and control.

● Internal Audit Independence
Company's internal business is various, in addition to basic department audit ，there still should set an independent auditing system to ensure that the audit work of the fair and independent. Independent audit department is good for senior management to provide effective advice and information.

Conclusion
Though this case study, we found that if lack of social responsibility, that will cost to a huge mistake even to collapse to an empire company. The society each part is complements each other, especially the big company and corporate, they have the duty to make sure the resource rational allocation. And a good management structure and clearly position will help the company to recognition direction. In a company, the internal audit and external audit equally important. Audit and management also supplement each other. The company only ensures internal strict management system, to guarantee in the correct orbit.

Reference

Kees Van Der Heijden, (2002), The Sixth Sense: Enhancing Organizational Learning with Scenarios, John Wiley & Sons, 2002

Wan Honglin, (2011), The Social Responsibility of Financial Ethics and Commercial Bank, Economy of China http://www.economyofchina.com/cms/html/zazhi/dangqi/2011nian7yuekan/zhongguoshidian/2011/0816/1070_3.html Sarbanes–Oxley Act http://en.wikipedia.org/wiki/Sarbanes%E2%80%93Oxley_Act Reviewed: 20th February

Ethical Decision Making Process www.engr.psu.edu/ethics/processes.htm Reviewed: 23rd February

Madoff Fraud Event http://www.hudong.com/wiki/%E9%BA%A6%E9%81%93%E5%A4%AB%E8%AF%88%E9%AA%97%E6%A1%88 Reviewed: 23rd February

Baring Bank http://wiki.mbalib.com/zh-tw/%E5%B7%B4%E6%9E%97%E9%93%B6%E8%A1%8C Reviewed: 26th February

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