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01b004.000 00Segregation of front and back-office02br
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00Management did not segregate Leeson' duties;00 00he successfully ran both front and back offices.02br
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00There were plenty of warnings re the dangers of non-segregation of duties, however management ignored the situation assuming their recommendations would be followed. 02br
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00Why was it allowed to happen??00 Leesons superiors allowed him to be in charge of both front00 00and back office operations for they were more than pleased with his stellar performance. Leeson managed all transactions; payments, ingoings and outgoings, confirmations and contracts, reconciliation statements, accounting entries and position reports. 00There was a major role conflict.02br
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00Effect02br
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00This weakness in the control gives the Leeson a chance to override the authority which he should not have and delay his fault to be found in the end.02br
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00Using his position of authority, he created a secretary account which was designated for00 00the unauthorised transactions he undertook 00in Japanese Government Bonds, 00Euroyen00 00futures and Nikkei 225 options.00 00Because of the infamous account existed, reconciliation of accounts did not disclose the huge losses in P&L. When the senior management received the error information about the performance of BFS, They can’t detect the severe problem in the BFS.02br
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01i00Recommendation02i00:00 02br
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00Management should have a total regard and understand the conception of00 00allocation of resources following with the risk posed by the business. They should separate Leeson’s duties: in charge of the back office, cheque signing, signing off SIMEX reconciliations. back office should have recorded,comfirmed and settled trades transacted by the front office and make sure every transaction is authorised legally and reduce the risk of error or fraud.02br
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01b00Issue:00 00Senior management involvement02b02br
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00ngs senior management should be more positive for oversee the operation in the 00 branch. And discovered the big issue in the major report to help the company avoid the risk, make the strategy to archieve the company’s perspective.02br
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01i00Cause:00 02i02br
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00However, they failed to do so. Due to they were such enjoying the 00pleasantly 00surprising that they could not be aware any questions behind the great success. contrastly Leeson passed the test to become a registered trader with SIMEX, he created an account 88888 which was different from error account 99002 for 00ngs Bank. And then started trading Futures on Nikkei 225. By Oct. 1992, he has made loss of around 4.5 million in the error account. All of these happened with senior management’s 00 00very superficial knowledge of derivatives. They did not notice that it was a low-risk for Arbitraging the price differences between two futures contracts and then did not question why the low-risk can generate such high profits.02br
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00Because of lack of understanding of the business in senior management, they were still praising him and Bank wired 00 00hundreds of millions of dollar to 00 without any proper investigation.02br
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01i00Recommodation02i02br
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00The senior management should realised that it was impossible for Leeson to be making the profits that he was reporting without taking on undue risk, and they might question where the money was coming from. Give the arbitrage should be cash-rich, they should give an alarm when the huge capital requirement was called.02br
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