Lisa Weaver, author of accountingcpd.net's Corporate Governance course, brings you her thoughts on the recent UBS scandal and how good corporate governance could have prevented the situation.
by Lisa Weaver
Swiss bank UBS were in the limelight for all the wrong reasons at the end of October. In a scandal reminiscent of, but exceeding in scale the Barings fiasco of 1995, a "rogue trader" has been found responsible for huge losses. The UBS trader Kweku Adoboli has been arrested and is being held accountable for losses of $2.3 billion – making Nick Leeson's losses of $1.4 billion look like small fry. Clearly such cases are examples of fraudulent activity on a grand scale, but the question is whether UBS have been complacent in their attitude to risk assessment.
Good corporate governance demands adherence to a strong internal control framework - a key component of this being the risk assessment process. After Barings, and more recently for companies with US operations since the introduction of Sarbanes-Oxley legislation, risk assessment has become a necessary part of the overall management structure, and one which has to be monitored and reported on. However, reviewing and reporting on risk assessment and internal controls is not enough - measures must be in place to ensure that remedial action is taken where necessary.
UBS has in the past few years commissioned several reviews of its risk assessment and other management control functions. The company has reported that risk assessment is a "top priority" but the numerous investigations curiously may have encouraged an attitude of complacency, whereby management assume that just because someone is looking into risk assessment and reporting on it, then it will no longer be a problem. According to a UBS commissioned report after the sub-prime crisis, "top management was too complacent, wrongly believing that everything was under control, given that numerous risk reports, internal audits and external reviews almost always ended in a positive conclusion. The bank did not lack risk consciousness; it lacked healthy mistrust, independent judgment and strength of leadership."
In a recent SEC filing, the company reported, as required by Sarbanes-Oxley, on the effectiveness of its internal controls. Two control deficiencies were highlighted relating to trading activities, the area in which Kweku Adoboli is accused of fraud and false accounting. The point of the disclosure is to highlight potential control problems for users of financial statements, and also to introduce an element of accountability mane to encourage an improvement in the controls, as when reading the next filing, the users will not want to see the same two deficiencies disclosed again.
It would seem that UBS is very good at investigating and reporting on its weaknesses, but that more effort is needed to implement remedial action.
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