Corporate Governance

A lesson on the importance of internal controls from across the pond

By Josh Silverman

Ever since Sarbanes-Oxley was enacted, corporate lobbyists have derided its internal control provisions as unnecessary red tape that threatens American competitiveness.  According to these critics, implementing strong financial controls, and having auditors review their efficacy, was simply not worth the expense.

The French might disagree.  Last week, it was reported that Jerome Kerviel, a lone trader at French bank Societe Generale, lost $7.2 billion of the bank's money in unauthorized trades betting on European equity index futures.  The unwinding of these trades has imperiled the future of Societe Generale, which only weeks earlier was named Risk Magazine's "Equity Derivative House of the Year." 

Could all this have been avoided if the bank had effective controls enforcing the bank's position limits, requiring risk managers to sign off on large positions, or requiring that hedged trades be stress-tested for counterparty risk?   It sure seems so.  As European Central Bank President Jean-Claude Trichet told  television reporters last Friday, "the lesson to be drawn, as in the case of previous frauds of this magnitude (is the) ... absolute necessity of substantially reinforcing internal controls and internal risk controls in all establishments."  We couldn't agree more.

Full post as published by PomTalk on January 28, 2008 (boomark / email).