Dr Robert Jupe, Reader In Accounting, Kent Business School, University of Kent comments on the following BBC news item:
‘UBS trader Kweku Adoboli ‘gambled away’ £1.4bn’
The latest example of a bank trader ‘gambling’ with funds raises vital issues about the importance of internal controls in organisations, and highlights what can go wrong when such controls are weak or absent. There are general issues for all organisations, and particular issues for banks.
It is essential for organisations to have a robust system of internal controls in place in order to safeguard assets, prevent and detect fraud and error, and ensure that accurate and complete accounts are prepared at the year end. These controls should include the effective supervision of staff, and separation of duties eg, one person should not be allowed to take on two roles where they may lead to a conflict of interest.
These controls are of particular importance in banking, where a ‘rogue trader’ may run up losses which, as in the case of Barings Bank in the 1990s, can bankrupt a bank. In the Barings case, the ‘rogue trader’ was allowed to combine a management role with his role as a trader in the Singapore branch. This breach of the separation of duties principle allowed the trader to fake records and hide significant losses for some time. Although the trader in this case did not manage to bankrupt UBS, the reports of ‘faked bookings’ and ‘false accounts’ indicate weak internal controls. A further complexity in banking has been the development of trading in complex financial instruments over the past three decades. If supervisory staff lack adequate knowledge of the instruments being traded, then supervision may be left to ‘trust’.