SocGen And PwC – They Still Don’t Know Jack…

As those of you who follow my Twitters know, last Wednesday I had the good fortune to have dinner with our Governor and a few other State of Illinois executives and local entrepreneurs. Most were in the technology arena, as is my client, who I was there to support, cajole, nudge and share a rib eye with.

I met some wonderful people, including the Governor, and a good time was had by all. One of the folks was the only other woman, Amanda Lannert, President of the local company Jellyvision. This company created some famous interactive games, such as the CD version of Who Wants To Be A Millionaire and another popular one. It’s always great to meet other local women who are both smart and shrewd, in the good way. She’s also a book person. Yea!

Seemed apropos to borrow her catch phrase when describing the hype over the release of the latest reports from Société Générale and Pricewaterhouse regarding the $7 billion scandal created by trader Jérôme Kerviel. But as Robert Teitelman over at The says:

…The conclusions, amazingly enough at this point, still appear to be tentative: Jerome did what he did (well, he confessed), he may have had an accomplice (his trusty assistant who input false data, but claims he didn’t know what he was doing), and his two immediate supervisors shoulder the blame for inadequate supervision. No kidding.

Still, mysteries remain, as they have since the beginning. What did the top guys know?

Read what I’ve written before and you’ll know more about how this trading scandal and others like it could have and did happen and why Jérôme Kerviel, is just a guy trying to make a bonus in a corrupt environment that told him,”That’s the way we roll here.”

Here’s another great description of the psychology of the “front office” and the “back office.”

The PwC report is limited from the start. With a criminal investigation pending, they were only charged with looking at weaknesses in internal control and whether the bank was beginning the process of correcting any that were known.

…Our work has been limited to: (i) an examination of the weaknesses in the internal control system, based on the causes of the Fraud and the circumstances in which it arose as identified by the General Inspection department; and (ii) an analysis of the remediation measures put in place by Société Générale. Furthermore, we did not, at any stage, carry out any procedures designed to attribute responsibility.

And where are Société Générale’s auditors? Per the annual report, and as per French law, the two statutory auditors are Ernst & Young and Deloitte. But we have not heard from them or seen them mentioned in any reports.

In fact some of the reports issued yesterday confused the role the non-independent PwC is playing in this issue with the role of the auditors:

From UPI:
Auditors from PricewaterhouseCoopers are expected to approve of steps the bank has taken to improve internal controls, the source said.

It’s not the role of PwC to approve of anything. It was the role of the statutory auditors to review and opine on internal controls and to make sure that there was never a:

“…damning picture of the French bank’s management competency and slipshod risk controls…

It pinpoints five points of failure. First, Kerviel was able to start building his positions because he had no direct supervisor. The old one had resigned and no replacement yet appointed. Then, once a new manager was appointed, he was inexperienced, and his superiors didn’t give him the necessary support to offset that.

Third, Kerviel was allowed to take unauthorized intraday positions, albeit small ones. Fourth, red flags were repeatedly ignored by higher management at France’s second-largest banks. The report reckons there were 39 occasions when Kerviel’s actions should have raised suspicion. It also says 1,071 bogus trades were missed.

Fifth, Kerviel was able to use his previous experience in the middle office to circumnavigate controls. Both the back and middle office lacked the resources and the seniority to hold traders in check, the report found. Their priority was ensuring that trades were properly executed rather than within the rules.

Audit firm PriceWaterhouseCoopers, which was commissioned to evaluate the bank’s control procedures, drawing on the internal findings, concluded that the fast-growing and highly profitable Delta One team of traders, of which Kerviel was a part, flouted the bank’s rules and colluded with each other to cover up their tracks…

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2 replies
  1. Krupo
    Krupo says:

    It’s almost depressing to have to say that, somehow, none of those five findings surprise me.

    I mean, in spite of my limited experience dealing something like SG, I can nevertheless picture the entire scenario and how easy it is for something like that to happen.


  2. Anonymous
    Anonymous says:

    I have always thought the phrase “rogue trader” was disingenuous. He either had an accomplice which no longer made him a “rogue” employee or the internal controls were so poor that he simply became a scapegoat for management’s idiocy. Yes, a $7b fraud because of poor controls is a mark of idiocy.

    Also, since when do auditors approve anything. Certainly, they opine on things. Internal auditors can provide a recommendation. An auditor should never approve anything for management.

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