MyCIMA

Common sense, millions and a quadrillion

Tanya Barman's picture

When Nick Leeson, the Singapore based trader who brought down Barings Bank in 1995, realised the losses he was hiding were hours away from being discovered, he left a simple note on his desk.  And fled.  "I'm sorry" read the note and in a radio show last week, the Reunion, the BBC brought together Nick with his ex-boss for the first time when he apologised face to face.  In the show a former colleague, decribed Nick as "struck by a mixture of greed and fear for a number of years" and pointed out the cost in relation to "people's livelihoods, pensions and family fortunes"  

rogue traderThe deceipt came to light when there was a discrepancy of US$140 million in the accounts, Nick fled and his "desk was cracked open"  The "rogue trader" didn't get too far, arrested  at Frankfurt airport, he went on to be sentenced to six and a half years in a Singapore jail.  As a "star" derivatives trader he was recognised for reporting huge profits.   Meanwhile he was hiding even greater losses in a secret account, potentially, by his reckoning up to hundreds of millions on some days. The so called actions of one man brought down Britain's oldest merchant bank, established in 1762, with losses of £827million.  Barings was ultimately sold on to ING for £1.

How could this possibly have happened?  Where were the checks and balances and could it happen again? It seemed that management had "trust" in their professionals, albeit in a young trader fresh from the London floor who seemed to be having extraordinary success, that noone questioned.  Critically, Mr Leeson was able to manage the risk on his own transactions, keeping control of the back office where trading accounts were reconciled.



Nick Leeson interview with Evan Davis for BBC2 series The City Uncovered, 2009

The fact that one man could bring a bank down, implicates the lacking in the responsiblity of others.  A subsequent government investigation was the source of great mirth in the House of Lords with such obvious findings as:


  • "Management teams have a duty to understand fully the businesses they manage".
  • "Responsibility for each business activity has to be clearly established and communicated"
  • "Relevant internal controls, including independent risk management, have to be established for all business activities".
  • "Clear segregation of duties is fundamental to any effective control system".

As Lord Bruce of Donington, during the House of Lords debate ironically commented: "Hooray for that! These are matters of plain, ordinary common sense. One does not need to be an accountant or a management consultant to be aware of that"

CIMA's recent work around independence and business partnering based on roundtables held in London and Singapore, has a focus on such fundamentals of management practice. The findings highlight the critical role of the management accountant not only in understanding the business - they also emphasise that by acting with objectivity and independence you can contribute to the safeguarding of the wider interests of the business.

So fast forward from the Barings collapse and reflect on how well all companies - in the financial services in particular - have applied common sense. The credit crisis has shown us that greed and believing "all is well" if the big profits keep returning continue to override common sense, as other iconic banks and related companies fell...

At the end of the radio show there was reference to the value of the global derivatives market now estimated to be at a staggering $1.4 quadrillion. That's 16 zeros or a thousand milion million.  No I can't picture it either. So how well do you think the management teams involved understand their business?

As management accountants you should ask yourself how well you understand the wider business you operate in and how you help others to do so.  Critically, how far do you try to understand what is going well and why, as well as what is not working.  These are key questions in relation to true ongoing business success, and reflect basic common sense.  So how does your company measure up?

Quadrillion?

This is a really interesting read Tanya although I did have some trouble grasping the concept of a quadrillion of anything. This helped put it into perspective

http://www.ignisfatuus.com/2010/08/27/a-quadrillion-to-scale/