Peter Hayes
8/8/15
EBF 301
Lesson 12
Baring Case Study Responses
1. What controls were lacking in the Singapore office?
o A clear lack of oversight is the glaring control that the Singapore office was
missing. The London office practically gave Nick Leeson free reign to do
whatever he pleased with control of floor operations and the accounting and
settlement functions both things gave him the ability to manipulate the accounting
statements to his advantage. In addition the office was lacking a mark-to-market
comparison of the financial books and market closing prices, that way Leeson
would have had to try harder to bury his fake account and evidence of writing his
own options and setting prices.
2. What were Nick Gleeson's biggest mistakes?
o His first mistake and the biggest was deciding to play the role of a rogue trader
and fix the trades he made to resemble a profit. So with that in view I would say
his biggest mistake was making the dummy account to funnel losing trades.
Writing his own options, setting prices within the accounting system to ‘cross-
trade’ with internal accounts, and recording trades that never even occurred were
all foolish decisions of his. From there every trade he would make essentially put
him and the solvency of Barings PLC at a higher level of risk each time, so in the
event the market were to fail the bank would be sucked dry which happened
unsurprisingly as a result of Leeson’s greedy and stupid behavior.
3. What should London have done to prevent this?
o London should have sent an oversight committee to keep tabs on Leeson to make
him feel slightly out of control of everything. They should have paid closer
attention to what the books were telling and what the actual behavior of, and
prices on, the market because they would have been able to see a trend that would
not be entirely sustainable without a large amount of hedging put in place.
4. What controls/guidelines do you think should've been in place?
o I think the plans for the new office should have exercised the necessity of an
oversight committee to be present at the office. Also they should have
implemented a system where the committee reviewed mark-to-market
comparisons with Value at risk representations created by employees.
5. Using the "Recommendations" I have presented, which of these would you recommend in
this instance?
o I would definitely recommend the deal sheet and daily checkout system as a
primary security measure. Then I would make sure to suggest putting a Risk
Oversight Committee in charge to review sheets and books to pick out any
discrepancies. With those two in place I would definitely recommend a trading
policy with harsh penalties enforced by a zero-tolerance rule. If caught automatic
termination of employment would be the punishment, then the Committee and
Board of Directors decide whether to press criminal charges. To add security I
would definitely recommend implementing Sarbanes Oxley accounting principles
be followed and then hire external/internal auditors to review employee books. I
think if these were put in place ahead of the time Leeson had earned his traders
license it would have discouraged him from attempting this sham all together and
maybe then Baring would still be a familiar entity.
