Societe Generale is a French bank established in 1864 because of the Industrial Revolution. Since the Industrial Revolution, French steel organizations and railways required assets and this was the principle explanation behind the dispatch of the Societe Generale. From the earliest starting point, the bank developed quickly. In the 1920s, Societe Generale turned into the main bank in France. From the beginning, the bank has developed to wind up an organization speaking to in excess of 75 nations around the globe. With 33 million clients and 160,000 workers, it is the eighth biggest bank in Europe.
The current case is about a fraud in the derivatives division of the company that saw company losing billions of dollars, 7.2 billion to be precise. This is because of the management being risked taker and was ready to compromise for sake of more money to the company. As a result, Kerviel, a trader at the Delta One, conducted the fictitious transaction and carried above limit transactions to provide company high liquidity and ensure a high bonus.
Analysis and Discussion
- Assessment of business model and risk management practices on January 1, 2008
As things stand on January 1, 2008, before the Kerviel’s trades became known, a thorough analysis of the business model and risk management practices at the Societe Generale reveals several weaknesses. The attitude of risk management and control environment is set by the tone at the top regarding management’s leadership and approach towards integrity, honesty, ethical behavior,and openness.
The culture at the Societe Generale was of risk-taking. Apparently, the managers and supervisors do not care much about the earnings and positions of the traders. As a result, the traders use to pass their limits, take huge risks and can lie about the positions. There were numerous alert signals, both internally and externally but the managers and supervisors never considered them seriously. So the management practices at Societe Generale were inefficient to prevent and detect any fraud. As a matter of fact, they provide an opportunity for fraud and deception.
- Internal Control Systems In Place To Address Traders And Trading Risk
There does not seem any monitoring at Delta One as there was no manager available for two and a half months. Moreover, there were several other flaws in the system. There was poor segregation of duties and thus Kerviel was able to record the fictitious transaction. The IT system was also faulty as it was unable to detect any fictitious transaction, a weakness that Kerviel utilized later on.
Another problem with the IT system is that it allows the traders to enter transactions temporarily and even revise previous transactions, something that provides a huge opportunity for fraud. Also, there was no restricted access to the traders who can use this option to record fictitious transactions. Moreover, the system was unable to monitor and capture the alerts that are being received from outside and inside.
Then, the external auditors were also failed to detect control weaknesses which may be due to their too much familiarity with the Societe Generale. Although there was some detective control operating there is no evidence that the company has any preventive control in the trading areas.
- Fraud triangle in the Kerviel affair
The fraud triangle is a framework that is used to evaluate the reasoning behind a fraud. The three elements that made up the fraud triangle are Pressures, Opportunity,and Rationalization afterward. In the case of Kerviel, these elements are as follows,
- Incentives and Pressures of Jerome Kerviel
The pressures are the first element of the Fraud Triangle. There were several kinds of pressures that motivate Kerviel for this fraud. He has the desire to be appreciated and acknowledge but the management practices at Societe Generale were not acknowledging his achievements as much as they should.
He was never provided an opportunity by the company to show what he can and the management, supervisors, his co-workers seemed to look down upon him. One of the reasons for all this is that he did not go to top universities in France as other traders did. So he wanted to prove to everyone within the company that he can also make money, even more than those who studied in the top university.
There were simply too many opportunities in the company to fraud. The internal controls were weekly designed and can easily be circumvented. Then, the controls which were operating were also simple and weak enough that Kerviel exactly knows when they will be operating and thus easily circumvented them. Moreover, he has already spent several years at the back office so he knew very well how the controls operate and how the management responds. Then there were weak restrictive excess controls and there was also poor segregation of duty.
Kerviel convinced himself that he is a very capable trader by conducting fictitious transactions. He thought that his risky trades will not only earn him money but also to the bank, his employer. He believes that the management must have known his trading strategy and so he is justified in following his trading strategy as without exceeding limits he cannot earn so much money for the bank and this should be in the knowledge of the management
- Who is to blame?
In the case of this fraud, it is management that is to be blamed. This is because their tone at the top regarding controls and risk management was faulty and they were more concerned with growth then managing organizational risks and controls. As a result, weaker controls were built in the system and they were also poorly monitored and both internal and external signals were continuously ignored.
In spite of the fact that the management must know the weaknesses of the system (through multiple signals), but they gave preference to the profits and thus encouraged traders for risky bets provided that they are profitable. The immediate supervisor of Kerviel allowed him to correct the errors found instead of evaluating and investigating them. Moreover, the management left Delta One without a manager for too long and thus there was no monitoring for two and a half months. The external audit firms that evaluated the controls are also to be blamed as they must know the obvious control weaknesses like poor segregation of duties or lack of it.
- Is Kerviel a victim or a villain?
From reading the case study, it appears that Kerviel was first a victim and later on become a villain when his due right was not given to him by the company. He was a very talented guy who becomes a trader due to his sheer hard work and genius. However, as he did not study from the top universities of France and so other traders and management does not give much importance to his achievement. Even his bonus was quite low as compared to other senior traders.
He was facing some sort of discrimination in the company and thus decided to prove everyone wrong. Now he became a villain. He defrauded management who trusted him, his nation and the shareholders of the bank as well as the customers.
- How to Prevent Such Frauds in Future?
From the analysis of the case, it is obvious that it happened due to management not setting appropriate tone at the top and then faulty and weak controls and even weak monitoring of the controls. Moreover, the management was also not being fair to the employees.
The management practices actually completed the fraud triangle and provided an opportunity for Kerviel to defraud the bank. These types of frauds can be prevented in the future through the right management tone regarding the control environment, setting up proper and effective internal controls and investigating any instance of the alert signal or unusual actions.
The fraud at Societe Generale in 2008 due to which the bank lost over 7 billion dollars was because of the negligence of the management. The management’s attitude was of risk takers and it encourages traders to conduct risky activities to earn a higher profit. The controls at the company were weak and were also not properly operating. As a matter of fact, when those weak controls sent signals of something controversial, the management and the immediate supervisor tend to ignore them. As a result, there was an opportunity of fraud which Kerviel exploited and conducted the fraud to prove his worth in the eyes of the colleagues. So we can say that Kerviel was a villain at the end but he was forced to be like that. The Real villain is thus management and the external auditors as well who could not find weaknesses in the current internal controls.