Societe Generale - Kerviels Trade free essay sample

The control environment includes the actions, policies and procedures and the way of implementation its strategies and overall attitude. For better understanding and assessing the control environment the following subcomponents should be taken into consideration (text book page no. 275): 1. Active integrity and promotion of ethical values 2. Commitment and competence 3. The Board of Directors or Audit Committee participation 4. Management philosophy and operating style 5. Organization structure 6. Human resource policies and practices 7. Methods of assigning authority and responsibility 8. Management control methods 9. System development methodology 10. Management reaction to external influences 11. Internal audit b. Segregation of duties: Segregation of duties is the vital part of the control activities in individual transaction cycle. Segregation of duties is an effective part of internal control as it reduces the risk of misstatement and inappropriate of actions and it also protect and discourage the fraud. Under segregation of duties the following functions should be done by different employees: i. Authorization/Approval ii. Record keeping iii. Assets custody. The basic concept of segregation of duties is to distribution of the following works among different employees like initiate transaction, approve transaction, record transaction, handle assets and review monitor reports. c. Restricted Access: Restricted Access refers to the control of physical and logical access control of data and documents so that accountability and specific responsibility can be established. Restricted access reflects the organization attitude towards segregation of duties. An effective access policies and practices can make restricted access rights and can also select the authorized individual with designation who is authorized to approve access right. Restricted access can prevent or minimize the unauthorized interference to programs or data based documents. Restricted access also reduces the opportunity to gather undue information to communicate others or otherwise make use of any information. d. Preventative and Detective controls: The preventative and detective control works as means of tools of reduction the risk of fraud of an organization. An effective combination of preventative and detective measures discourage the employees to commit fraud and reduce the risk of fraud as well. Preventative control focuses on preventing errors through implementing standard policy and procedures by the management of an organization. Segregation of duties, proper authorization/approval system act as a preventative controls against fraud. Detective controls are designed to identify an errors or frauds after it has been occurred. Analyzing and reviewing of various reports helps in detecting errors. Reconciliation and periodic audits also act as an effective detective controls. An effective and preventative program and controls discourage employees to commit fraud because there is possibility of detection fraud and penalty. e. Design and Operating Effectiveness: Design effectiveness refers to the control designed by the management of an organization covering the identified risk of an organization. Before designing an effective control, management take into consideration the nature of the business and the control environment to cover up the specified and identified risks. If the designed control is separated effectively, it can measure the results of the designed effort and check the identified risks. Operating effectiveness: Operating effectiveness refers to the working worthiness of designed control. It measures the effectiveness of designed control whether it is operating consistently. Design effectiveness depends on the outcome of operating effectiveness and how far it serves the purpose of reduction the control risks persistently and effectively. Question 2 The term â€Å"Tone at the top† in typically associated with a firm’s control environment. How would you characterize Societe Generale’s tone at the top and what effect do you believe that had an oversight at the trading- desk level? Answer: Tone at the top refers to the ethical behavior that is set by the management in the organization. Honesty and integrity by management reinforces honesty and integrity in employees throughout the organization. Whatever tone set by management to upholds ethics and integrity within the organization, employee tends to uphold those same values. Jerome Kerviel was assigned to the â€Å"Delta One† desk which was in low risk and low return trades. Kerviel, during his first five years at the bank worked in the back office and gathered experience on all sorts of trading and internal control system. Based on that he made fake trades into the system to offset his real trades but, the management had no mechanism to detect factitious entries. One high official admitted that they never thought that they might have any problem with delta one. In the case it was also seen that Kerviel increased his fraudulent positions after the resignation of his direct manager. The manager was replaced after two and half months, so there was little control over the risk. According to internal inspection report, throughout the period when Kerviel concealed fake trades, there was absent of certain controls that might have identified the fraud. The back office staff did not inform superior because they thought that this was not a part of their job description. On the other hand bank controllers were instructed to monitor only the net rather than gross, risk exposures of the Delta One trader’s activities. â€Å"Kerviel was accused of stealing computer passwords, sending fake email message and illegally accessing the bank computer system to exceed trading limits and cover up his actions.