AIB's management and risk control units demonstrated a startling level of incompetence. The most egregious was the back office's failure to confirm all trades. Auditors could have caught this, but the spot audits used far too small a sample.
Original Description:
Original Title
Financial Risk Management a Prket and Credit Risk- 2 Edition 88
AIB's management and risk control units demonstrated a startling level of incompetence. The most egregious was the back office's failure to confirm all trades. Auditors could have caught this, but the spot audits used far too small a sample.
AIB's management and risk control units demonstrated a startling level of incompetence. The most egregious was the back office's failure to confirm all trades. Auditors could have caught this, but the spot audits used far too small a sample.
Like Barings, AIBs management and risk control units demonstrated a
fairly startling level of incompetence in failing to figure out that something was amiss. AIB at least has the excuse that Rusnaks business continued to look small and insignificant, so it never drew much management attention. However, the scope and length of time over which Rusnaks deception continued provided ample opportunity for even the most minimal level of controls to catch up with him. The most egregious was the back offices failure to confirm all trades. Rusnak succeeded in convincing backoffice personnel that not all of these trades needed to be confirmed. He relied partly on an argument that trades whose initial payments offset one another didnt really need to be checked since they did not give rise to net immediate cash flow, ignoring the fact that the purported trades had different terms and hence significant impact on future cash flows. He relied partly on booking imaginary trades with counterparties in the Asian time zone, making confirmation for U.S.based backoffice staff a potentially unpleasant task involving middleofthenight phone calls, perhaps making it easier to persuade them that this work was not really necessary. He also relied on arguments that costs should be cut by weakening or eliminating key controls. Once this outside control was missing, the way was opened for the ongoing manipulation of trading records. Auditors could have caught this, but the spot audits performed used far too small a sample. Suspicious movements in cash balances, daily trading profit and loss (P&L), sizes of gross positions, and levels of daily turnover were all ignored by Rusnaks managers through a combination of inexperience in FX options and overreliance on trust in Rusnaks supposedly excellent character as a substitute for vigilant supervision. His management was too willing to withhold information from control functions and too compliant with Rusnaks bullying of operations personnel as part of a general culture of hostility toward control staff. This is precisely the sort of frontoffice pressure that reduces support staff independence, which was referred to in Section 3.1.1. 4.1.4.5 How the Unauthorized Positions Were Eventually Detected In December 2001, a backoffice supervisor noticed trade tickets that did not have confirmations attached. When informed that the backoffice personnel did not believe all trades required confirmations, he insisted that confirmation be sought for existing unconfirmed trades. Although it took some time for the instructions to be carried out, when they finally were carried out in early February 2002, despite some efforts by Rusnak to forge written confirmations and bully the back office into not seeking verbal confirmations, his fraud was brought to light within a few days.