Auditing and Assurance Principles

Subject Code: ACCO 30043

Professor Julius Edward Mac, CPA

Financial Scandal Report:

CREDIT SUISSE
Background of the Company
Credit Suisse Group is a holding company that manages global wealth, operate as an
investment bank and offers financial services. The firm was founded and based in Zürich,
Switzerland and maintains offices in all major financial centers around the world. It is known for its
strict bank–client confidentiality and banking secrecy practices and also included in nine global "Bulge
Bracket" banks that provides services in investment banking, private banking, asset management, and
shared services. In 2020, it was recognized by The Banker as the overall Investment Bank of the
Year showing excellence performance in equity derivatives and securitization.
The history of Credit Suisse dates back to July 5, 1856, when a reputable politician and business
leader Alfred Escher, together with Allgemeine Deutsche Credit-Anstalt founded the Credit Suisse,
once known as "Schweizerische Kreditanstalt” or Swiss Credit Institution. The primary purpose of
its establishment was to finance the expansion of the Swiss railroad network to avoid French banks
that wanted to exert influence over the railway system of the Swiss. Aside from its original objective,
Credit Suisse also helped fund the effort to disarm and imprison French troops that crossed into Swiss
borders in the 1870 Franco-Prussian War. Credit Suisse is also one of the key players in the creation
of Switzerland's electrical grid and helped develop the Swiss monetary system. By the end of the war
in 1871, the Credit Suisse had become the largest bank in Switzerland.
Credit Suisse continue to expand and widely known in the banking industry through merger and
acquisition. In 1876, Credit Suisse’ opened its first branch in Basel, Switzerland. Thirty-seven years
later, it opened its first foreign representative office in New York. And in 1978, the Credit Suisse began
its partnership with the First Boston Corporation of the United States in which it later acquires after it
experienced financial stress in 1988.
From 1990 to 2000, the company acquires Winterthur Group- one of the biggest Swiss-based
insurance companies, Swiss Volksbank- Switzerland's fourth largest bank, Swiss American Securities
Inc. (SASI), and Swiss Private Bank Leu, among others, that made Credit Suisse enter into the top ten
financial services companies in the world. At the same time, Credit Suisse began to provide banking
services by telephone and opened its own Internet banking service called “Direct Net” which was the
first Internet banking in Switzerland.
In the present, Credit Suisse operates in more than 50 countries across the globe. It serves its
clients in three regionally focused divisions: Swiss Universal Bank, International Wealth
Management and Asia Pacific. These regional businesses are supported by two investment banking
divisions: Global Markets, Investment Banking and Capital Markets.
Credit Suisse is governed by Board of Directors, Executive Boards and shareholders. Board of
Directors has five standing committees; Governance and Nominations Committee, Compensation
Committee, Audit Committee, Risk Committee, and Conduct and Financial Crime Control Committee,
members of each committee are appointed for a one-year term.

Financial Scandal: The Issue

Kareem Serageldin a former senior trader at Credit Suisse Group:
1. fraudulently inflated the value of subprime mortgage-related bonds; and
2. falsified books and records and misstated the value of mortgage securities on their
books.
With the help of his accomplices, David Higgs and Salmaan Siddiqui; they mismarked their positions
to avoid losses in their investment portfolio at the end of 2007. Therefore, they became one of the
highest-ranking Wall Street executives to admit to crimes related to the 2008 financial crisis.
The assets overvalued by the three former Credit Suisse traders were mortgage-backed securities.
The traders inflated the value of the bonds to increase their 2007 year-end bonuses. Mr. Serageldin
secured a cash bonus of more than $1.7 million and a stock award of more than $5.2 million. While the
real estate market was imploding and the financial crisis emerging, Kareem Serageldin and his co-
conspirators concealed significant subprime mortgage-related losses in order to secure multimillion-
dollar paydays.
These complex bonds that caused hundreds of billions of dollars in losses across the banking system
and brought global markets to its knees and caused the residential housing market to free fall/collapse,
and shock waves were reverberating throughout the economy so, many people were losing their homes
and their jobs.

Financial Scandal: What Went Wrong?

In order to understand what happened, the following terms are to be considered:
Leverage is use of borrowed funds to increase one’s trading position beyond what would be available
from their cash balance alone.
Synthetic CDOs is a variation of a CDO (collateralized debt obligation) that generally means a
derivative of a derivative.
A derivative is a type of an investment whose value is based on another investment.
Mortgage backed securities is a debt security that is collateralized by a mortgage or a collection of
mortgages that is traded on the secondary market, and that enables investors to profit from the
mortgage business without the need to directly buy or sell home loans.
Lewis Ranieri was considered as the “father of MBS” since he pioneered it and was named as "one of
the greatest innovators of the past 75 years” on 2004, but eventually strongly criticized for his role in
the subprime mortgage crisis of 2007-2009.
“Subprime” refers to the credit score of the individual taking out the mortgage.
S&P is an American publicly traded corporation. An S&P credit rating is a letter grade. The best is
"AAA." This rating means it is highly likely that the borrower will repay its debt. The worst is "D," which
means the issuer has already defaulted.
 Fair Isaac Corporation, or FICO, creates a variety of credit scores for use by lenders, credit card issuers
and other creditors. Your FICO scores — which typically range from 300(low) to 850(high) — could
affect whether your credit application gets accepted, and the terms and rates you’re offered. The higher
the FICO score, the better.
What went wrong?
Credit Suisse invested or capitalized in MBS from other banks, repackaged it and sold it to the
public at a profit. They used leverage to do this too. However, the credit-rating of MBS was misleading.
Sub-prime MBS with FICO scores of 110 put together was rated A & AA and considered diversified.
The one who discovered that MBS are becoming subprime (low credit rated) investments was Michael
Burry. As Burry investigated the files of MBS, which was highly rated using S&P scale, he found out
there are several mortgages rated as 110 by the American FICO score.
Generally, MBS caused hundreds of billions of dollars in losses across the banking system and
brought global markets to its knees and caused the residential housing market to free fall/collapse.
This happened because companies including Credit Suisse were misled by credit ratings of MBS and
invested in this security with leverages and many synthetic CDOs were made. Which is why when
MBS fell the whole economy fell thus creating the 2008 financial crisis.

Recommendations: What Should Have Been Done?

The identified mismarks and pricing errors by the small group of traders occurred as Credit
Suisse is exposed to a risk from potential non-compliance with policies, employee misconduct or
negligence and fraud, which result to serious reputational or financial harm. It is not always possible to
deter employee misconduct and the precautions taken to prevent and detect this activity may not always
be effective.
In light with the foregoing events faced by Credit Suisse, it is recommended that the employee
misconduct be exposed by implementing a whistleblowing policy where employees, regardless of
their level of seniority, can report any alleged incidents of financial or professional misconduct without
fear of reprisal. Employers should not also be hesitant to report incidents of financial
misconduct and theft to the authorities.
It is also recommended that enhanced internal control system be implemented to establish
safeguards to an organization's assets and minimize the opportunities of committing fraud and allowing
errors to go undetected in an organization's daily operations. Firms should also implement effective
management strategies to minimize development of actual conflicts of interest and ensure
impartiality in internal audit and accounting practices.
Group 4: BSA 3-1
Balmes, Christine Nathalie M.
Delfin, Hanah Grace R.
Gargarita, Ma. Jeslyn G.
Pernia, Aila Marie L.
Villalobos, Allyson F.