CONCLUSION: LEESON’S LESSONSThe Bar

CONCLUSION: LEESON’S LESSONSThe Barings-Nick Leeson story is a spectacular anomaly that provides somevaluable lessons. Effective risk management requires a clear line of demarcationbetween the back office (i.e., the individuals responsible for recording,confirming, settling, reconciling, and reporting transactions) and thefront office (i.e., the traders). Otherwise, there will always be temptation tofix the books to enhance performance. Without this separation, control systemsthat monitor risks, such as trading limits, credit, liquidity, and cashflows, lose most of their significance. Barings allowed Nick Leeson to settlehis own trades, by giving him authority over both the front and back office,and as a result he could manipulate accounts at the Singapore branch,while reporting fraudulent totals that appeared accurate. Giving Leeson authorityover both functions was equivalent to a farmer giving the fox responsibilityfor counting the chickens in the chicken coop.Perhaps the most embarrassing aspect of the Barings-Leeson catastrophewas the role played by senior management (i.e., Leeson’s direct supervisors,the bank’s management committee, and the board of directors), whose errorswere ones of omission rather than commission. Simply put, there was agaping lack of management control that gave too much autonomy toLeeson, who was, in more ways than one, far beyond the scrutiny of his supervisors.The directors in London thought Leeson was arbitraging, when,in reality, he was taking outright positions and selling naked (i.e., unhedged)puts and calls—both of which were clear violations of Barings’rules. No one in the bank seems to have fully understood the risks thatLeeson was taking, and because he was reporting such large profits, no oneposed the hard questions that should have been asked. Leeson’s supervisorsshould have had direct and immediate knowledge of his activities. Baringsmanagement committee should have set up reporting systems to ensurethat important information on operational risks reached them

CONCLUSION: LEESON 'S LESSONS
The Barings-Nick Leeson story is a spectacular anomaly that provides some
valuable, lessons. Effective risk management requires a clear line of demarcation
between the back office (i.e, the individuals responsible. For recording
confirming,,,, settling reconciling and reporting transactions) and the
Front Office (i.e, the traders).? Otherwise.There will always be temptation to
fix the books to enhance performance. Without, this separation control systems
that. Monitor risks such as, trading limits credit liquidity,,,, and cash
flows lose most of their significance. Barings allowed. Nick Leeson to settle
his own trades by giving, him authority over both the front and, back office
.And as a result he could manipulate accounts at the Singapore branch
while, reporting fraudulent totals that appeared, accurate. Giving Leeson authority
over both functions was equivalent to a farmer giving the fox responsibility
for counting the chickens. In the chicken coop.
Perhaps the most embarrassing aspect of the Barings-Leeson catastrophe
was the role played by senior. Management (, i.e.Leeson ', s direct supervisors
the bank', s Management Committee and the board of directors), whose errors
were ones of omission. Rather than Commission. Simply put there was, a
gaping lack of management control that gave too much autonomy to
Leeson,, Who was in more, ways than one far beyond, the scrutiny of his supervisors.
The directors in London thought Leeson, was arbitraging. When
in reality,,He was taking outright positions and selling naked (i.e, unhedged)
puts and calls - both of which were clear violations. Of Barings'
rules. No one in the bank seems to have fully understood the risks that
Leeson was taking and because, he was. Reporting such, large profits no one
posed the hard questions that should have been asked. Leeson 's supervisors
.Should have had direct and immediate knowledge of his activities. Barings
Management Committee should have set up reporting. Systems to ensure
that important information on operational risks reached them.