Identification of the underlying problems confronting the bank
ABC Bank plc is a large bank offering a full range of banking services, domestically and internationally. It is a member of the London Stock Exchange and is owned mainly by institutional investors. In addition to offering retail banking services at home through its branch network and its state-of-the-art online platform, ABC Bank plc has investment offices
in several major financial centres, including New York, Frankfurt, Singapore and Tokyo.
In the past eighteen months, ABC Bank plc has been the centre of two scandals, both of which have generated intense publicity and affected the reputation of the bank. One of these scandals arose in Frankfurt and the other concerned the bank’s financial reporting.
The bank’s problems in Frankfurt occurred due to the actions of a ‘rogue trader’. The trader was responsible for accumulating losses arising from trades carried out beyond his authorised limits, some of them in unauthorised products. In common with most major banks, traders were incentivised through bonuses based on profitability, and in this case the trader had pursued greater profits, which exposed the bank to higher risks. This led to a serious loss-making situation. The trader was suspended, then dismissed and later convicted of criminal offences.
The bank’s internal enquiry reported that the trader had been a star performer, and that his line manager has been prepared to ‘turn a blind eye’ to his breaches of the bank’s rules as long as things were going well. The compliance department, based in London, occasionally queried the actions of the Frankfurt office, but were assured that any exposure would be temporary. It was found that some information had been withheld by the branch, and some reports materially altered.
The report uncovered a culture of recklessness in the Frankfurt office. The back office staff were somewhat in awe of the more successful traders, as they had generated impressive profits, resulting in bigger bonuses for all. The trader concerned had made no secret that he did not have much respect for the rules, which were ‘there to be broken’. He saw nothing ethically wrong in this, as while results were good everybody benefited, including the bank.
The second scandal arose from concerns about ABC Bank’s financial statements. The board of directors had been advised by the auditors that the provisions for bad debts were understated. On advice from senior executives, the board had been convinced that the bank’s collections and arrears management functions were sufficiently efficient to deal with the demands of a growing book of delinquent loans. However, the auditors were insistent that provisions be increased, and fearing that the auditors might refuse to sign off the financial statements, the board agreed to revise the figures. This issue was exposed to the press by a whistle blower, resulting in much embarrassment to the bank, and profound disquiet among in the institutional investors.
The whistle blower, who had been a senior general manager of ABC Bank, further revealed that certain members of the credit team had come under intense pressure to produce forecasts and reports presenting an ‘optimistic’ view of the bank, and that internal communications warning of the unrealistic nature of the reports on which the financial statements would be prepared were deliberately suppressed.
Required:
Acting as an independent consultant, you have been engaged by the chairman of ABC Bank plc to produce a report covering the following areas:
Identification of the underlying problems confronting the bank, with particular attention to governance, internal control and ethical issues.
Policies that should be introduced, and actions that should be taken, in order to:bring about organisational and cultural change necessary to avoid a repetition of serious threats to reputational damage;address the ethical deficiencies exposed by these scandals.
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