Anybody who finds financial matters dull should look away now.


This weeks unlucky numbers are €50 billion (£37 billion), £100,000 and £3,000.

It will happen again and again

I was returning from Poland on the day that the Nick Leeson affair broke back in 1995. There was an old Colonel type sitting at the front of the coach from Heathrow to Bournemouth telling everybody within earshot how this disgraceful behaviour wouldn't have happened in his time and how banks were employing the 'wrong sort' of chap.

The 'Colonel' on the coach was wrong of course. Fraud, theft, teeming and lading, misappropriation of fund - call it what you want, has been going on for years and will continue to do so for a variety of reasons. Most frauds etc come to light eventually, although some may take some time. I know of one particular 'scam' that ran unnoticed for more than thirty years. Obviously I can't name names here suffice to say if the theft were to be discovered today the current owner of the business would blame Prince Philip, MI5 and the Daily Mail.

Six has already posted about the scale of the Societe Generale's losses but I want to put my own perspective on the affair from a professionals point of view.

I have personally been involved in the discovery of three frauds, although fortunately none have been on the scale of that perpetrated by Jerome Kerviel against the Societe Generale. To bet the equivalent of Slovakia's GDP takes some doing and you have to think that giving such power to somebody so far down the food chain and on such a small salary for such responsibility, he was on £50,000 a year, Societe Generale were negligent for not ensuring proper controls and compliance procedures were in place. I suppose we can only wonder at what would have happened in he had lost the whole of the €50 billion (£37 billion) rather than 'just' the €4.9 billion (£3.6 billion) that he did. The fact that he now faces a maximum of five years in prison and a fine of €75,000 seems largely irrelevant.

In the last two cases of fraud I have been involved with, I was the manager of the audit and by coincidence the person who uncovered the thefts. One case resulted in a court case where I was the chief witness for the prosecution (sounds dramatic but you know what I mean), in the other one the employer refused to accept that any theft had occurred, the reasons for this I will come to later, and the case never proceeded to court. In each case the employee in question followed the classic means of achieving their aim, they started the week after the auditors completed their audit and ended with the employee handing in their notice shortly before the auditors arrived to begin the following years audit. We auditors are creatures of habit this meant that they had a year in which to run their scam before they would get caught. In each situation the path followed was exactly the same one as Nick Leeson and Jerome Kerviel took. The individuals concerned had specific jobs that were all their own domain, they had been trained for a purpose, they worked alone, they were responsible for their own little empire, they understood how the structure of the employer worked and they all worked (Leeson and Kerviel included) in areas that were outside the normal areas of compliance and fraud detection. Leeson and Kerviel were both described by colleagues as loners and lacking the usual flamboyance associated with traders, proving again the old adage that the quiet ones are the most dangerous!

Fraud detection is something that until recently you were trained not to look for. The standard audit report these days though makes a clear reference to it (I never thought I'd see the day when I quoted part of an audit report on my blog!)

We conducted our audit in accordance with International Standards on Auditing (United Kingdom and Ireland) issued by the Auditing Practices Board. An audit includes examination, on a test basis, of evidence relevant to the amounts and disclosures in the financial statements. It also includes an assessment of the significant estimates and judgements made by the shareholders in the preparation of the financial statements, and of whether the accounting policies are appropriate to the group’s circumstances, consistently applied and adequately disclosed.

We planned and performed our audit so as to obtain all the information and explanations which we considered necessary in order to provide us with sufficient evidence to give reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or other irregularity or error. In forming our opinion we also evaluated the overall adequacy of the presentation of information in the financial statements.

The key area in auditing is the planning stage, determining who has governance, what systems are in place. On one of my firms risk assessment forms Jerome Kerivel would set-off all sorts of alarms. His actual modus operandi (the only Latin phrases I know are in some way connected with crime or culpability) was similar to the first fraud case I was involved with. Kerivel invented fictional clients with the aim of concealing his huge losses in the hope that the market would recover before his mistakes were noticed and that his losses would appear quite small - we are talking about somebody who was only supposedly allowed total exposure of €20 million (£15 million). Kerivel was caught out when one of his fictional clients told the bosses at Societe Generale that he didn't know anything about the movements on his account. In the first case I was on, the accountant, a woman called Sandra, had been responsible for writing cheques to holiday companies on behalf of holidaymakers, unfortunately the cheques had been going into her own bank account and she had bought a bungalow at Sandbanks on the proceeds. Sandra was a very clever and very duplicitous woman, she turned heads wherever she went with her clothes, make-up and exceptional good looks, the clothes and make-up were apparently courtesy of a significant other half. I think that being caught was something of a relief to her to be honest as when she was initially approached about the discrepancies instead of shaking her head and denying there was anything wrong she said simply, "I'm glad it's over, you'd better call the police." The surprises didn't end there however, when it came to her court appearance the glamorous woman we had known for a number of years was gone replaced by a sedative dependent, no make-up, badly dressed, anonymous office clerk. With a clever defence lawyer and a ineffective old buffer for a judge she was given a two year sentence reduced to six months on the grounds that she had suffered enough and allowed to walk free from Holloway on good behaviour less than three months later.

The key point about the cases I have mentioned above is that each client had a system in place but the people concerned with maintaining the management of those systems relied on the auditors to make sure they were working okay. Auditors only normally visit once a year, they rely on the clients internal accountants to ensure that everything is working okay on a day to day basis which is reasonable I think. In the case where the client decided not to prosecute this was because he couldn't believe that somebody could actually carry out the theft they had and as far as he was concerned his pride was hurt more than his bank balance.

In the case of both Leeson and Kerviel it would appear that they operated in a culture where risk taking was encouraged, where playing the numbers gain had become ingrained in the day to day operations of the business but most importantly they worked in an environment where short term gains were held to be more important than long term stability. It's not just the French bank who are going to have to tighten their belts now, the fall-out from the US sub-prime will continue to rain down on the world's banks and money markets, not because the city boys with their sharp suits, coloured socks and Krug drinking habits bought into no-sell investment packages but because traders around the world got greedy and bet everything on one big hurrah. We also now know that the Swiss bank UBS has lost billions through this culture of big bets and short term high risk taking and whilst talking up a recession is a dangerous game to play at some point or another these losses will have to be recovered.

What Exactly Do You Expect For £25,000?




Apparently lost among all the excitement over the departure of Peter Hain has been the question of why should Willie Nagel, an 82 year old diamond broker and previously a friend of the Conservative party, loan or donate £25,000 to the deputy leadership campaign. Nagel had previously giving the Labour party £5,000 and some might say that he was rewarded for doing so by being honoured for his work in diamond brokering.

So was the £25,000 a loan or a down payment on something bigger? Peter Hain hasn't had a lot of sympathy from those on the right of the political family in this country but his popularity abroad has produced donations from a supporter of Apartheid (oh the irony) and a former friend of John Major. As Napoleon said, on this blog a couple of weeks ago, "Keep your friends close and your enemies closer'.

I'll See Your Martin Amis and Raise You A Wayne Rooney

I love the approach of the Times yesterday in reacting to the news that Martin Amis is earning £3,000 per hour to teach creative writing at the University of Manchester. Amis earning potential and hourly rate was compared with that of Wayne Rooney and whilst the boy Rooney does in fact earn more than the author in real terms, Alexi Mostrous almost wet himself with delight when revealing that the writers £80,000 a year salary is for a mere 28 hours work a year whilst the Roonster's £50,000 a week is for 1,248 hours work a year.

The article itself was a number fest, which I won't bore you with in view of the fact that you are probably half asleep from the previous postings, but the crucial numbers were left until last. The article concluded by stating that since Martin Amis's appointment the numbers of students applying for the £3,000 a year course had risen from 100 to 150. Which, by my reckoning is about 74,850 less than turn up every other week to see Wayne Rooney pull faces and kick a ball at Old Trafford.