Enterprise Risk Management

Table of Contents
Part 1................................................................................................................................................3
Risk Matrix (Probability vs. Impact)...........................................................................................3
Risk Exposures............................................................................................................................3
Risk Rating..................................................................................................................................3
Risk Strategies.............................................................................................................................3
Part B...............................................................................................................................................3
Operational Risks Failures...........................................................................................................3
Failure Responsibility..................................................................................................................3
Responsibility of Barings BoDs..................................................................................................3
88888 Account.............................................................................................................................3
Potential Risk Mitigation Strategies............................................................................................4
References........................................................................................................................................4
Part 1
Risk Matrix (Probability vs. Impact)
Very High Operational Loss of
loss human
capital
Impact High Public Loss of
Liability physical assets

Medium Technology/
Equipment
failure

Low Loss of supply

Very Low

Very Low Medium High Very

Low High

Probability

Very high risk High risk Medium risk Low risk Very low risk
Risk Exposures
Risk Rating
Risk Strategies

Number Risk Loss Risk Rating Risk Strategy

Exposure

1 Loss of physical assets Natural Probability is medium but the Share

disasters like impact is high due to injury
floods to physical assets or staff can
happen

2 Loss of human capital Staff turnover Probability and impact both Control
due to are very high
leaving for
more career
prospects,
due to
demotivation
etc.

3 Technology/ equipment Machine Probability is low but the Mitigate

failure breakdowns impact is medium due to
important information in
Lose of backups or futile production
backups of time due to backups
data

4 Operational loss Dissatisfies Probability is medium since Mitigate

customers the business always tries not
to have such customers and
Dissatisfied employees but the impact if
employees happened is very high since
both can spread harmful
insights about the company to
the public

5 Loss of supply Shortage of Medium probability with

labour budgeting and planning
within a business but impact
Shortage of is high
raw materials
 Shortage of
capital

Part B
Operational Risks Failures
 Weak Finance Division

The Financial Control Department believed that its role was to provide the Management with
daily reports and profit and loss statements (Adeusi, et al., 2014). Instead of determining whether
the report accurately represents the actual and fair worth of the operations that were conducted
by the Baring bank, the Financial Control Department believed that its role was to provide those
things. It was used to set up a large number of transactions using the error account 88888.
However, an error account should have a small number of transactions and should have been
closed on a daily basis due to the fact that the financial control department should have
recognized that it is not an error account. Lesson gave the order to the office personnel to make
changes to the software in order to exclude the transactions that occurred on the 88888 account
from both the system and the market activity statements. These transactions were excluded
because they were considered to be irrelevant to the purpose of the statements.

 The management should make sure that the incentive systems they use do not encourage
any risks that are not appropriate.

Incentive systems have the potential to play an important part in lowering the risks associated
with proprietary trading. These risks include the possible loss of money. One of the many
suggestions that came out of the Ludwig study was that pay agreements with traders should be
more in line with market norms. In addition, the study advised that management be allowed
discretion about yearly remuneration, so that it could take into consideration how well the
company was doing commercially. This was one of the recommendations made by the report.
More recently, the Institute of International Finance, which is an organization for banks all over
the world, came up with the concept of a code of good behaviour that would, among other things,
prevent banks from pressuring traders to accept bets that are excessively risky. This idea was
presented by the Institute of International Finance. Others have suggested postponing the
distribution of rewards until after the full impact of a trader's strategy has been evaluated.
Because of this, speculators would not be able to benefit from high-risk bets in the short future,
which would protect their investments from being lost (Hoyt & Liebenberg, 2011).

 An absence of division between those who work in the front office and those who work
in the back office
The management of Barings allowed for a lack of separation between the main office and the
back office, which is a clear violation of basic control in any organization but is particularly
common in the banking business. This breakdown of control is especially frequent in the banking
industry. After Lesson was promoted to the position of Chief Executive Officer at Barings,
management granted him license to transact business with the firm as well as control over the
administrative staff.

 There are issues with the way that the bank manages its internal controls.

Because Barings was unable to stop its own collapse, it was clear that the company's internal
controls were tragically insufficient to detect what was going on with Leeson's derivative
transactions. He was responsible for the failure of the whole bank because he lost so much
money speculating in yen. The management of the bank did not even notice what was occurring
until after the bank had already failed. Although the initial accounts focused on the activities of
Leeson, and the evidence suggests that Leeson was in fact engaged in highly speculative
transactions and deliberately tried to deceive his superiors, his actions were not the only reason
why the bank failed. Although the initial accounts focused on Leeson's activities, the evidence
suggests that Leeson was in fact engaged in highly speculative transactions and deliberately tried
to deceive his superiors. In spite of the fact that the early descriptions concentrated on Leeson's
activities, the evidence indicates that Leeson was, in reality, involved in extremely speculative
transactions. It has come to light that there was inadequate regulatory monitoring, internal
communications, controls, and accountability mechanisms, as well as a lack of coordination
between regulators in the United States, the United Kingdom, Japan, and Singapore. This
information was uncovered as a result of recent events (Raz, et al., 2002).

 Management that is not up to par and is deficient in both experience in a number of

industries and understanding of the procedure outlined in the mission statement.

Due to a lack of resources, the Barings bank did not have a standard operating system, job cards,
or a mechanism for the verification and authorization of transactions in the system. It was
brought to light that Bearings' senior management was informed by the internal audit team that
supervising both the front and back office was an unacceptable concentration of responsibility
since the controls were in risk of being overturned. The report contains this material as part of its
entirety. Nevertheless, management was unable to live up to this vow, despite its prior
assurances that the practice would be promptly terminated upon being brought to their
knowledge. The fact that they chose not to take remedial action did nothing except make the
issues that were already apparent much more serious. Despite the fact that Leeson had disguised
considerable losses and he had forged papers, both of which should have brought management's
notice, statutory auditors did not discover anything else wrong with Leeson's actions (Gambrill
& Shlonsky, 2000). Despite this, there was no more information uncovered. This reveals that the
management systems of the company were completely useless throughout the whole firm.
Failure Responsibility
Nick Leeson is the person to blame for the collapse that occurred at Barings Bank. Because Nick
Leeson is a former derivatives trader who became famous for causing the bankruptcy of Barings
Bank in 1995, which was the oldest investment bank in the United Kingdom. Leeson becomes a
rogue trader shortly after launching a Future and Options office in Singapore, which eventually
results in a loss of over one billion dollars in Baring's money. Leeson was the head of operations
on the Singapore Stock Exchange at the time (SGX). Leeson started engaging in activities that
were not approved. At initially, these high-risk positions brought in significant profits for the
bank. In 1992, they contributed up to £10 million, which was equivalent to 10% of Barings' total
yearly profit. Futures contracts on the Nikkei 225 Stock Average, which is Tokyo's primary
index, were the majority of the instruments that Leeson traded on his customers' behalf. Leeson
ought to have operated his company in a cashless manner. The management of an investment
portfolio without the addition of new cash is the focus of this tactic (Agustina & Baroroh, 2016).
In the instance of Leeson, any money that was gained or lost as a result of the transactions would
have been the property of the respective clients. The only kind of payment that should have been
received by Barings for its work on transactions was a commission, and only a limited part of the
transactions were supposed to be proprietary or done on behalf of the bank itself. In point of fact,
Leeson was really utilizing the money from the bank to put wagers on the market in an effort to
make up for the losses he had incurred in trading.

Leeson was able to conceal the losses he incurred as a result of his poor trading decisions in a
separate account since Barings had given him the task of confirming his own deals rather than
requiring him to disclose them to a supervisor. Leeson started taking more risky bets as he
worked harder and harder to get the money back he had lost. At the end of 1993, the amount of
money that was lost in the secret account that Leeson kept was over 23 million pounds. This sum
had increased to £ 208 million by the time the year 1994 came to a close. On January 16, 1995,
Leeson speculated on the Singapore and Tokyo stock markets by purchasing a short straddle. He
did so with the expectation that the stock market would stay relatively unchanged over the course
of the next day, neither significantly increasing nor decreasing. In the normal course of events,
taking such position would have been considered conservative, particularly for Leeson.
However, on January 17, 1995, an earthquake that had its epicentre in Kobe, Japan resulted in a
significant decline throughout Asian markets (Bessis , 2011). When Leeson was confronted with
enormous losses, he sought to compensate for the losses by engaging in a series of more riskier
bets that were predicated on the Nikkei's pace of recovery. In the end, Leeson made his escape
from Singapore on February 23, 1995. In the end, his losses were 827 million pounds, which is
equivalent to $1.4 billion and represents twice the amount of company capital that was accessible
to Barings.

Responsibility of Barings Board of Directors

The failure of Baring's bank is ultimately the responsibility of the board of directors. Nick
Leeson participated in illegal trading of stocks and options on the Osaka Securities Exchange and
the Singapore International Monetary Exchange. To cover up his financial misfortune, he created
a secret account using the number 88888. As a means of reducing expenses, Leeson was working
both in the front office as a merchant and in the back office as a payment manager, which made
it feasible for him to commit this protracted fraud. The General Manager was cautioned by the
Internal Auditor, James Baker, not to take on the responsibilities of the prior office; yet, the
responsibilities were not divided. Senior managers are unable to provide adequate guidance and
recommendations for activities performed by Nick Leeson because they are unaware of the risks
that are a result of the deficiencies in Barings' internal control, and they do not participate in
training or courses to enhance their understanding of top management products. In the case of
Barings, the absence of adequate monitoring from top management, as well as inadequate
internal controls and risk management inside the business, led to operational risk, which
ultimately resulted in the collapse of Barings.

The board's biggest error was that they placed all of their faith in one individual just due to the
reputation that he had earned. Just though Nick Leeson was reporting enormous gains, he had
almost free run, and no one knew about his firm, but a trader in arbitrage tactics should not
record such profits if they are engaging in that strategy (Al‐Tamimi & Al‐Mazrooei, 2007). The
fact that Nick Leeson was reporting such high earnings ought to have sounded an alarm bell for
the board of directors of the company, but they failed to do so. Nick Leeson's ever-increasing
demand for the cash he required to support his trading positions was similarly disregarded by the
board of directors.

88888 Account
For the purpose of bringing the records of the bank into a state of harmony and correcting the
imbalances that occurred as a result of delays in both payment and receipt, Account 88888 was
used. At first, he said that he had formed an erroneous account with the number 88888 in order to
compensate for a loss of 20,000 pounds that had been caused by a mistake in the accounting, but
this was before he was able to discern through the transaction. Despite this, he kept recording
different losses in the mistake account of 88888, which served as a holding area for any bonuses
or losses, and he also increased the amount of risk he took on when trading and the number of his
trades. In point of fact, the financial statements of the bank would be the only place where this
account would be mentioned, not the merchant control reports. Therefore, he transferred his
losses to this account and also made speculative positions using this account, and his bosses were
baffled as to why he was doing any of these things. Because his superiors trusted him and were
aware of the depth of his understanding of this story, they gave him free reign to utilize it
anyway he saw fit (Bessis , 2011).

One of his many flaws was that he opened bogus accounts for people who did not exist in order
to conceal the fact that his obligations were growing. After that, he made an effort to recoup this
loss by submitting expectations and option contracts on Simex, taking into consideration the
previous transactions 88888. His first venture into company was successful, as he was able to
effectively transform operational losses into trading gains. Nevertheless, he was confronted with
the challenge of disclosing illicit economic activity to his management. In order to solve this
issue, he gave the directive to the BFS system consultant Edmund Wong to take out the mistake
account 88888 from the daily reports that were sent digitally to London. This took place on the
8th of July, 1992, and continued until the 27th of February, 1995, when the bearings failed. The
margin needs report for Simex that was provided to London did not contain the amount of 88888
on account, despite the fact that the status report did not offer any information about the real
transaction that Lisson was doing. Therefore, the presence of the erroneous account is one of the
key problems, since the whole scam might have been prevented if the error account 88888 had
been discovered at an earlier stage.

Potential Risk Mitigation Strategies

This inquiry accepted Leeson's requests for many reasons. Barings' disparate computer systems
and reliance on humans made risk assessment unfeasible. Leeson was never asked about what
was going on since nobody was able to gather all the facts. The Singapore office's lack of
supervision, the supervisors' disinterest in checking transaction records and internal auditor
reports, the high number of customers who performed huge quantities of transactions, and
Leeson's positive profitability all made transfer instructions easy to approve (Adeusi, et al.,
2014). Lack of controls helped this scenario. Leeson's direct supervisors were the South Asia
regional manager, the Tokyo-based global futures and options manager, and two London-based
Barings Securities Limited officials. A trader generating abnormally big gains from a relatively
insignificant sector of the bank was not restricted by the bank management.

The following preventative actions may have been taken, which would have prevented the need
of the shutdown.

 Should do an analysis of the intricacies of the items that the company sells

It's possible that prospective operational and market risks are more significant than potential
market gains (Bessis , 2011). As a manager, you need to grasp the tactics, quantitative models,
and product math used by traders in order to keep these risks in mind. ‘ Regular conversations on
fair policies should take place between traders and trading management. In order to conduct an
accurate risk reduction evaluation, the director has to have sufficient knowledge of derivatives as
well as risk management.

 Always double examine the trader's values before entering a deal.

Regardless of whether or not the trader is successful, the risk managers who are responsible for
validating traders' positions should be encouraged to challenge such values when they look
strange.

Setting trading restrictions, such as value at risk and stop loss limits, among other possible
constraints.
Put someone in charge of keeping an eye out for any and all policy violations that may occur in
the firm.

After an internal or external audit has been completed, it is imperative that the recommendations
of the audit be implemented (Hoyt & Liebenberg, 2011).

Appoint a different person to check each and every one of the papers.

 Establishing the appropriate precedent from the beginning

Cultures of compliance and taking risks need to be cultivated by senior management and boards
of directors. Integrity should be emphasized by senior management and the board, and concerns
about compliance should be addressed, investigated, and reported via independent measures
taken inside the company (Gambrill & Shlonsky, 2000). In addition to placing an emphasis on
management and compliance, the policy need to be conveyed to each and every worker, and top
management as well as the board ought to take an active part in assuming responsibility and
minimizing the risk.

 Utilization of technology and advanced analytical

There is a steady emergence of new technologies to deal with technological hazards, and these
technologies help risk management teams to make better risk judgments at a reduced cost. The
potential consequences of big data, machine learning, and crowd sourcing are reflected in these
terms.

 Robust controls for supervision in the relevant business line

The regulators are the first line of defense in protecting consumers from fraudulent or hazardous
business practices. As a result, the following preventative and corrective actions have to be
carried out on a consistent basis. Review of the various dealers on a daily basis by recognized
and trained management (Sadgrove, 2016). Examining the exception reports that reveal
transactions of an extremely big size. Enforcement of position and trade limitations, as well as
monitoring of new accounts created.

References
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banks in Nigeria. Risk Management.

Agustina, L. & Baroroh, N., 2016. The relationship between Enterprise Risk Management
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Al‐Tamimi, H. & Al‐Mazrooei, F., 2007. Banks' risk management: a comparison study of UAE
national and foreign banks. The Journal of Risk Finance.

Bessis , J., 2011. Risk management in banking. s.l.:s.n.

Chapman, C., 2003. Project risk management. s.l.:s.n.

Gambrill, E. & Shlonsky, A., 2000. Risk assessment in context. . Children and Youth Services
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Hoyt, R. & Liebenberg, A., 2011. The value of enterprise risk management. Journal of risk and
insurance.

Raschke, R., 2017. Enterprise content risk management: a conceptual framework for digital asset
risk management. Journal of Emerging Technologies.

Raz, T. & Michael, E., 2001. Use and benefits of tools for project risk management.
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Raz, T., Shenhar, A. & Dvir, D., 2002. Risk management, project success, and technological
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Sadgrove, K., 2016. The complete guide to business risk management. s.l.:s.n.