Part 1 After watching the “Rogue Trader”, we can say that the main reason for the collapse of Baring Banks is the lack and inadequate internal controls under COSO combine with Nick’s fraudulent activities. The biggest deviation arises from the control activities, particularly the segregation of duties. When Nick Leeson got the job opportunity in Singapore, he was hired as the general manager of the trading floor and also was the person responsible for the settlement which means that he was making the trading transactions and at the same time recording and reporting them into the accounting system. It is a big problem because the positions assumed by Nick are related to generating revenue and doing the record keeping which are 2 areas that can create a conflict of interest, in retrospect those functions should have been held by two different persons and the communications process between them should be monitor to reduce the possibility of collusion or fraud.

Another lack in control activities was the total absence of an authorization system. As we saw in the movie, when BeauMarchais asked him to buy 4000 contracts, even though the market average trade was 20000, he did not need any authorization nor anybody review the transaction to be sure that it was in accordance with the company objective. In another instance, he was able to transfer 7.8 billion yen between accounts. To avoid questionable situations and be able to make people accountable for their actions, they could program in the system a limit that when reached, asked two supervisors to record and co-sign the transaction, or implement a trading limit which unable the trader to continue his activities, unless a superior gives his authorization, if he gets to a certain volume of trades.

In the movie, it was highlighted that the books were reviewed for balance only at the end of the month; also when Nick reported the error of one of his subordinates to Simon, one of his supervisors, Simon did not insure that proper actions were taken, all he cared about was if the situation was resolved without a big loss (did not demand any proof). Nick was also able to start trading on behalf of the bank (used the error account for that) despite the fact that it was forbidden, and to use funds sent for financing client’s position to pay for other options. All those events demonstrate insufficient monitoring activities on Nick actions, which is confirm by the letter they received from SIMEX when Nick was absent, and the fact that throughout the film the only person able to explain what Nick is doing is Nick himself. If, for example, Simon was reviewing the different positions bought by Nick during a week with the corresponding journal entries and documents(trade confirmation for example) , it would have been harder to deviate from the enterprise’s guidelines and hide the fact that Nick was committing fraud by forging documents. They also could engage an independent person who would have to do reconciliation (one of Nick’s responsibility as general manager) and look trough the daily settlements and margin payments.

The others points that the film raised have to do with management understanding of the risk associated with Nick’s operations (a simple example is the face of Peter when Nick explain his strategies and Ron’s response when Nick said nobody understand what he is doing) and the control environment (reaction to Nick’s trial for indecent exposure, alarm raise regarding the funding/capital ratio, accent put on profit)

Part 2 The possible GAAS violations by Miu Miu have to do with the examination performance of the audit, she did not exercise a complete due care in her compilation work. It seems that the risk assessment of the company have not been done thoroughly which means that they did not assess the quality of the internal controls, the corporate governance process, the risk of manipulation of data (Nick is responsible for the back office and the trading), and the context of the business environment (why did nobody ask question about the big profits resulting from a low risk position). Given this information, the quality of evidence (selection and evaluation) is compromised and she should have review the nature, frequency and size of the items recorded in the account 88888 after looking at the amount involved (almost 8 billion yens), the different reasons given (computer error, receivable from a client), and not just relied on fax documents with the header “from NICK & LISA”.
If I was in Miu Miu position, I would have contacted the regulatory market (SIMEX) to get a duplicate of the message sent by Nick, I would have also reached the Bank to receive a confirmation of the balance, and Ron Baker to get a direct confirmation (by doing that I make sure my working papers are in order because I also have external confirmation). I would have also asked Nick to send me the original document by mail along with the documentation that explains how the account got to that amount.