BankIt Financial Institution - Assignment Example

BankIt Financial Institution Introduction: This paper aims to identify the loopholes present in the management of the BankIt financial Institution. The primary obligation for prevention and detections of errors and frauds rests with the management (Anthony, 1970, p. 14-17). The management has to meet this responsibility by putting in place an internal control system that is aimed at detecting and preventing such errors and frauds (Hightower, 2008, p. 28). Under the management of Smith, the company was able to face its collapse due to embezzlement of funds by Smith and corruption. The weak internal controls contributed to the embezzlement of funds by Smith. Smith experienced a huge loss after trading in the Futures market. He had thought he would benefit from the price differences in the Nikkei futures contracts which had been listed in Osaka Securities Exchange and Shanghai International Monetary Exchange. Smith also by the end of 1995 took two roles as the floor manager and the head of settlement operations. This shows that there was no clear segregation of roles and functions by the management. Smith was able to operate without any supervision from the mother company in London. This shows that supervision and authorization was absent in the BankIt company in Shanghai. The lack Authorization and supervision also led him to report losses as profits to the mother company in London. This paper will try to identify the various management control failures that the BankIt management failed to put in place. Main Body: Management Internal Controls: BankIt management failed to install internal controls within the company, which Smith blamed for the collapse of the company. According to Biegelman and Bartow (Biegelman & Bartow, 2012, p. 5) management internal controls refers to the measures and policies that a management adopts to be able to assist in the achievement of management’s aims and objectives in ensuring that all errors are eliminated and prevented. The internal controls also help in ensuring that all set policies are adhered to in order to avoid mistakes. The report from the Board of Banking supervision showed that there was lack of authorization and approval of most of the activities that were carried out by Smith. This made him do all his activities undetected. According to Harrer (Harrer, 2008, p. 25) authorization and approval refers to the act of conferring legality, sanction or formal warrant. In any organization or company, the different levels of management should be issued with authority limits as to what they can commit or authorize the company’s resources. This depends on the position, integrity, competence and qualifications (Tseng & University of Maryland, 2007, p. 39). BankIt management should have put measures on the authorization of most of the activities that were carried out by Smith since the Shangai branch was still under the management of the BankIt in London. The authorization in BankIt should have been under a responsible person. The Board of Banking supervision also established that there was no segregation of duties in the BankIt Company under Smith. Segregation of duties according to Spencer and Pickett (Spencer Pickett & Pickett, 2001, p. 20) refers to the separation of the various roles and responsibilities, such that an individual cannot process and record complete transactions from the start to finish without being checked by someone else. It is stated that Smith held two positions, the head of settlement operations and Floor manager. These positions were supposed to be held by different people but the weak internal controls of the company allowed it. The two positions held by Smith allowed him to be able to hide his losses that the company had incurred because of his doings. Segregation of duties is always complimentary to the activities of another individual and that the doings of an individual should be subjected to independent inspection. The BankIt management failed to install the arithmetic and accounting controls within the accounting department. This procedure ensures that all the transactions are accurately and correctly recorded and therefore accuracy and correctness of the accounting records (Leitch, 2008, p. 40). Smith would report to BankIt in London that he had incurred profits while the truth was that he had incurred losses. If this measure had been in place, he would not have been able to hide the losses that he had caused the company. Due to the absence of the accounting and arithmetic measures Smith was able to make gambles in the futures markets at BankIt Futures Shanghai and would hide his shortages by reporting them as profits. The management of BankIt failed to install monitoring and supervision measures within its entity. The day today activities of any business entity need to be subjected to supervision by qualified and responsible individuals (Chenhall, 2003, p. 129-135). The constant review of activities will make any one of the personnel shun away from fraud or errors. Due to the lack of supervision Smith carried out the small gambles in the futures markets where he was able to report his losses as gains to the head office in London. The BankIt management should have devised and installed policies and procedures to control the daily activities of BankIt Company in Shanghai to limit the many activities that Smith transacted. The BankIt management failed to install the routine and automatic checks. This refers to the checks that are carried out by the management on routine operations and duties of the personnel to ensure that they are operating and functioning appropriately and efficiently. According to Biegelman and Bartow (Biegelman & Bartow, 2012, p. 35) these checks are always supposed to be conducted on surprise basis to minimize any errors and frauds that could be taking place in the company. This could have involved physical inspection of assets and surprise cash counts. These checks always boost the awareness that work will be reviewed continuously and that it increases accountability by reducing possibilities of successful deception and also boosts the need for honesty within the business (Harrer, 2008, p. 89). These measures could have helped curb the outrageous actions of Smith. They would have discouraged Smith from taking part of the funds to futures contract markets to trade with it. From the report by the Board of Banking supervision, the internal audit was weak and could not identify the fraud that was taking place right beneath their noses. An internal audit is a control function that is set up by the management to review the accounting and internal control system. The internal audit of any entity carries out continuous evaluation of the business operation and the effectiveness of such operations (Otley, 1994, p.29). The deficient internal audits and risk management allowed Smith to take up two positions in the company as a floor manager and as a settlement operations head. Under normal circumstances, this should not occur as the two positions should be held by two different individuals (March & Simon, 1958, p. 9-11). BankIt management also failed to put up measures on rotation of duties and personnel. This works best to ensure a sense of responsibility among the personnel to be rotated. According to Mockler (Mockler, 1970, p. 108) the individuals rotated will also be able to check and supervise each other as no individual can want to take up positions where the previous personnel had carried frauds and errors (Johnson, 1976, p. 56). BankIt management would have tried to rotate the different managers in the company to uphold integrity and responsibility among the staff members. This would have reduced the fraudulent activities of Smith and would have exposed him early in advance before the matter had gotten out of hand. Conclusion: Since the main responsibility of management in prevention and detection of errors and frauds is setting up measures and policies (Anthony, 1970, p. 14-17), BankIt management failed to put up these measures. The weak internal audit facilitated the continuation of the fraudulent activities by Smith which later led to the dissolution of the company. References Anthony, R. N. 1970. The management control function. . (pp. 14-17). Harvard Business School Press. Biegelman, M. T., & Bartow, J. T. 2012. Executive Roadmap to Fraud Prevention and Internal Control: Craeting a Culture of Compliance. John Willey & Sons. Chenhall, R. (2003). Management control system design within its organizational context: Findings from contingency-based research and directions for the future. Accounting, Organizations and Society, 28(2-3), 127-168. Harrer, J. (2008). Internal Control Strategies: A Mid to small Business Guide. John Willey & Sons. Hightower, R. 2008. Internal Controls Policies and Procedures. John Willey and Sons. Johnson , R. A. 1976. Management, systems, and society : an introduction. Leitch, M. 2008. Intelligent Internal Control and Risk Management: Designing High-performance Risk Control System. Gosher Publishing. March, J. G., & Simon, H. A. (1958). Organizations. (pp. 9-11). Wiley. Mockler, R. J. 1970. Readings in Management Control. Century-Crofts. Otley, D. 1994. Management control in contemporary organizations: towards a wider framework. Management Accounting Research, 5. Spencer Pickett, K. H., & Pickett, J. M. 2001. Internal Control: A Manager's Journey. John Willey & Sons. Tseng, C., & University of Maryland .2007. Internal Control, Enterprise Risk Management, and Firm Performance. ProQuest. Read More