Risk Management and Internal Controls: Barings
The management of Barings, a substantial and well respected organization, committed an almost criminal blunder when it failed to ensure that there was adequate segregation between various functions of the Singapore operations thereby undermining the effectiveness of any controls that would have been put in place. Leeson was in charge of -the dealing desk and also had control over the back office operations. This provided him with ample opportunity to falsify the reporting aspect of the business and bypass critical regulatory and compliance requirements.
Any useful internal control system must recognize and acknowledge the potential for fraud or errors should there be inadequate segregation of duties. Segregation of duties is also critical to ensuring the accuracy and integrity of information. The utility of an effectively designed system of controls and implemented control activities is significantly lessen where incompatible duties are vested in the same individual. While the controls within Barings systems may have been appropriately designed their operational effectiveness was always going to be defective. The lack of segregation actually amplified the exact risks that management would have intended to mitigate in the first place by creating the facility for significant override.
The lesson here is that in the development of a risk management and internal control system one should always respect the time tested fundamentals necessary for effective internal controls. Failure to do so will put any institution at a heighten risk for irregularities. The implications are very profound especially in the case of financial institutions..
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