Slightly off-topic, here is a movie on YouTube called Rogue Trader. The movie is about an infamous trader who worked for a well known and well regarded private bank called Baring Bank.
“Founded in 1762, Barings Bank was a United Kingdom institution with worldwide reach. Even the Queen of England had an account there. In 1989, Nick Leeson was hired at Barings, where he prospered. He was quickly promoted to the trading floor and appointed a manager in Singapore where he traded on the Singapore International Monetary Exchange (SIMEX). Leeson was an aggressive trader, making large profits in speculative trading. In 1993, his profits constituted almost 10% of Barings’ total profits. He had developed a reputation for expertise, for near-infallibility, and his superiors in London gave him little supervision.
In July 1992, a new Barings employee suffered a small loss on Leeson’s watch. Leeson did not wish to lose his reputation for infallibility, or his job, so he hid the loss in an error account. Leeson attempted to make back the loss through speculative trading, but this led to even bigger losses, which again were hidden in this account. He kept doubling up his bets in an attempt to get out from under the losses. Leeson later said: “[I] wanted to shout from the rooftops…this is what the situation is, there are massive losses, I want to stop. But for some reason, you’re unable to do it. … I had this catastrophic secret which was burning up inside me—yet…I simply couldn’t open my mouth and say, ‘I’ve lost millions and millions of pounds.’”
Leeson took out a short-term, highly leveraged bet on the Nikkei index in Japan. At the same time, a severe earthquake in Kobe, Japan sent the index plummeting, and his loss was so huge that he could no longer hide it. Barings, a 233-year old bank, collapsed overnight and was bought by ING for £1. Leeson fled to Malaysia, Thailand, and finally to Germany, where he was arrested and extradited to Singapore. He pleaded guilty to two counts of deceiving bank auditors (including forging documents) and cheating the SIMEX. Leeson was sentenced to six and a half years of prison in Singapore but only served four years due to a diagnosis of colon cancer, which he ultimately survived.” McCombs School of Business.
Why Does This Matter?
There are a lot of lessons to be learned here from the obvious breakdowns of internal control, the failure of management to catch what is going on. And lastly, the steps that the auditors seemed to have failed to take to further investigate what seemed to be a highly irregular situation.
Accounting matters, internally as well as externally. The failure of the Barings Bank did significant, but contained, damage to the financial system when the Bank went into bankruptcy. Lessons to be learned? But errors repeated at a different time and a different place.