On January 24, 2008, Socit Gnrale, Frances second largest bank announced the largest trading loss in history,

On January 24, 2008, Société Générale, France’s second largest bank announced the largest trading loss in history, a staggering 4.9 billion Euro ($7.2 billion U.S.), which it blamed on a single rogue trader. The trader, Jérôme Kerviel, worked at what Société Générale considered a low-level, low-risk trading desk. The announcement sent a shock wave through the global financial services community and immediately triggered memories of a another rogue trader, Nick Leeson, who, 13 years earlier, single-handedly bankrupted the 233-year old Barings Bank of London.

REQUIRED 

[1] The term “tone at the top” is typically associated with a firm’s control environment. How would you characterize Société Générale’s tone at the top and what effect do you believe that had on oversight at the trading-desk level? 

[2] Using auditing standards or your textbook, define the following control-related terms: 

[a] Control environment 

[b] Segregation of duties 

[c] Restricted access 

[d] Preventative and detective controls 

[e] Design and operating effectiveness 

[3] In an independent audit of the financial statements of a large bank, why do auditors typically follow a controls reliance strategy (i.e., obtaining some audit assurance via controls testing)? In the case of Société Générale, do you believe the external auditors gathered much controls-related evidence regarding the Delta One trading desk? Why or why not? 

[4] Fraud research indicates three conditions must exist before a fraud occurs: Pressure/Incentive, Rationalization, and Opportunity. 

[a] What do you think were Jérôme Kerviel’s incentives and rationalizations for committing fraud? 

[b] What created the opportunity for fraud? 

[5]  What are the advantages and disadvantages of promoting personnel across functional areas within a company (e.g., from risk and controls to operations)? 

[6] The loss from Kerviel’s rogue trading resulted in a loss many times greater than audit materiality. The external auditor did not discover the misstatement. Was this an audit failure? Conduct internet research to determine if the external auditors, Ernst & Young Audit and Deloitte & Associés, were named in lawsuits associated with the loss due to the trading fraud.