Corporate Governance and Ethics: Case Analysis - Barings Bank

INTRODUCTION
Barings Bank
Founded in London in 1763, Barings Bank was Britain’s oldest Merchant Bank and had
established itself as a leading Merchant Bank. In 1989, Barings established its trading
operations across the world and enjoyed a steady growth. However, in February 1995, it was
found that a rogue trader, one of the Bank’s outperforming employees, Nick Leeson, was
responsible for bringing the bank down by incurring losses of £830mn.
The story of Nick Leeson
Nick Leeson started as a settlement clerk for clearing the huge futures and options deals.
After completing two years at Morgan Stanley, in 1989, he joined Baring Securities Ltd
(BSL) to work primarily in the settlements department.
He applied to become a dealer with the Securities and Futures Authority (SFA) in London
early 1992. However, it was found that he had an outstanding County Court judgment, and
therefore, Barings Bank withdrew its application. The surprising thing is that they ignored the
issue and did not consider it as an ethical issue which needs to be questioned.
This issue had no impact on Leeson’s career, and Leeson moved to Baring Futures Singapore
Ltd (BFS). Leeson was appointed the manager of the new operations on SIMEX (Singapore
Monetary Exchange), and he dealt with the futures market working for both the front and the
back office. He rose to become a very successful trader because he hid all his losses in the
secret 88888 error account.
The first time he used the error account was to cover the loss of £20,000 which happened due
to an inexperienced team member. He was able to cover £6mn of losses by trading futures.
However, even when he recovered all losses from the mistakes of his team members, he
continued to operate the error account, this time for his trading. Every time the error account
was ignored, and his profits cheered upon, his guts to challenge the system grew stronger, and
his desire to gain more success grew deeper.
Leeson’s apparent success led Barings’ management to give a lot of freedom to Leeson in the
derivative trading. They did not want to upset an outstanding employee by limiting his
responsibilities. It is suspected that Barings might have also been trying to save the cost of
hiring more employees by giving him more responsibilities than he could handle. His
requests to expand the team in lieu of increasing work were ignored by senior management.
In the hope of extricating himself from the mess of his losses, Leeson would request extra
funds to continue trading. When the market showed signs of falling, he bought contracts
worth about $180,000 in an attempt to hold the market. Nick Leeson had run up $1.3 billion
dollars of liabilities, which were more than the entire capital and reserves of the Barings
bank, eventually leading to the downfall of the bank.

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 Corporate Governance and Ethics: Case Analysis - Barings Bank

CASE QUESTIONS

Q1. Who could be held responsible for the failure to detect the problems (including fraud) in the
Barings bank? Give your reasons.
A. The different stakeholders responsible for the failure to detect fraud in Barings Bank are:
 Top-management of Barings Bank including people such as:

1) Peter Norris, Chief Executive Officer of Barings Investment Bank

2) Geoffrey B, Finance Director of Barings Investment Bank
3) Ron Baker, Head of Financial Product Group
The internal auditor of Barings Bank had identified the weaknesses in internal controls in Barings
Bank and had recommended that the General Manager, Nick Leeson should not be responsible for
both the back office and the front office at the same time as this would lead to conflict of interest.
However, these recommendations to improve separation of roles in Barings Bank, Singapore for Nick
Leeson were ignored and never implemented. They failed to realize their fiduciary duties for the
benefits of shareholders and company. They were primarily concerned with increasing the profits and
growing the brokerage business of Barings and thus, ignored segregating the dual responsibilities of
Nick Leeson. This led him to take advantage of the situation and commit the fraud easily.
 Simon Jones - The Finance Director of Barings Future Singapore (BFS):

The Finance Director of BFS, Simon Jones, was concerned primarily with the affairs of Barings
Securities Singapore (BSS) and devoted little attention to Barings Future Singapore (BFS). Thus, BFS
was operated almost entirely by Nick Leeson. This lack of internal checks and balances in the
organization by the senior management allowed Leeson to simply cover his actions using loophole in
the Barings Bank’s internal controls.
 External Auditors:

The external auditors ‘Deloitte and Touche’ and ‘Coopers and Lybrand’ were also negligent in
utilizing their professional skills effectively and performing their responsibilities of auditing Barings
Future Singapore as well as the consolidated financial reports in London Barings Bank. Their inability
to catch the inaccuracies in financial transactions early on in one way enticed Leeson to commit fraud
more brazenly.

Q2. Identify the 6 sources of risk in a trading operation (from the case) and suggest suitable
control mechanism for the same.
A. The risks involved in trading operations can be enumerated as follows:

Market Risk
Market risk arises from an instrument's exposure to the possibility of financial loss due to unfavorable
movements in interest and currency rates, or equity and commodity prices. For instance, Leeson
thought Japanese interest rates would go down, but instead they went up. As a result, adverse
unanticipated market movements caused Barings' loss. A hedge insulates the participant from market
risk. Leeson, however, was behaving speculatively. Because his transactions left Barings with an

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"open" or unhedged position, Barings was left subject to the full range of market risk inherent in the
financial instruments he purchased.

Legal Risk
Legal risk results from exposure to the possibility that a court, a regulatory body, or a legislative body
will invalidate a derivatives contract and cause a financial loss. For example, Deutsche Bank, A.G.
sued Barings for entering a $49.7 million swap after Barings knew that it was insolvent. Additionally,
there are many legal risks that arise in international derivatives transactions from bankruptcies, and
often a mere technical default can bring into effect legal rules that entirely change the responsibilities
of the parties.

Credit Risk
Credit risk is exposure to the chance of financial loss as a result of a counterparty's failure to meet its
financial obligations. Corporate financial managers say that their greatest concern in using derivatives
is credit risk. Though the reasons for counterparty default vary, the primary consideration is a party's
ability to assess and plan for the risk of default. The credit risk in Barings' fateful transactions turned
out to be minimal because its margin deposits apparently covered many of its losses.

Operations Risk
Exposure to the possibility of financial loss resulting from inadequate systems, operations risk.
Barings' collapse was a classic case of operational failure. Operations risk arises from the inherent
inefficiency of bureaucracies. Finally, derivatives transactions may create unique operations risks.
Even for a sophisticated financial institution, a system of internal controls and oversight mechanisms
that would be adequate for non-derivatives transactions may not suffice to control the many complex
facets of derivatives transactions.

The 6 sources of risk in a trading operation that were identified from the case and suitable control
mechanisms for the same are given below:

1) Conflict of interest:

Leeson held a dual role:

Floor manager for Barings’ trading on the SIMEX (front-office).
Head of settlement operations (back-office).
Allowing a trader to settle his own deals i-e maintaining both the front office and the back office
makes it simpler for him to hide the risks he is taking, or the amounts of money he is losing.
Surprisingly, the bank did not require him to give up his job as head of settlements when he became
head of trading.

Control mechanism:
Segregation of front and back-office:
The two offices should be separated so that there are checks and balances. A separate derivatives
department should have been setup and a risk manager be hired to oversee the checks.

2) Neglecting the Individual attributes including integrity, ethical values of people in the
organization:

Baring Securities had submitted Leeson’s application for a license to the SFA. Leeson had answered
‘no’ to a question that asked whether he had any County Court judgments outstanding against him?
Following a routine check by the SFA, it was found that Leeson indeed did have an outstanding
judgment. In fact, in May 1992 Watford County Court, on behalf of National Westminster Bank, made
a judgment of £2,426 against him. The SFA returned the application to Baring Securities, who simply
withdrew the application. It seems that no more was said about the misinformation and there was no
negative impact on Leeson’s career.

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 Corporate Governance and Ethics: Case Analysis - Barings Bank

Control mechanism:
Action should have been taken against Leeson immediately for concealing information. The
management, directors and employees should be committed to the code of conduct and strict penalties
should be enforced for violation of the code. Management must convey the message that integrity and
ethical values cannot be compromised, and employees must receive and understand that message.
Management must continually demonstrate, through words and actions, a commitment to high ethical
standards

3) Ignoring warning signals:

Tony Hawes, Treasurer of Baring Investment Bank, and Tony Railton, Futures and Options Settlement
Clerk at Baring Securities, were concerned at the increasingly large requirements Leeson was making
to London in respect of margin calls. Once again, staff at Barings were ignoring warning signals
which could have been detected from the extreme demands for cash emanating from the Singapore
operation. Also, nobody investigated in depth how abnormally high profits generated by Leeson were
achieved.

The high trading volumes generated by Leeson emanated rumours and doubts in the market over
Barings’’ financial position. It seems to have been assumed that Barings was not trading on its own
account (proprietary trading), but must have been acting on behalf of a wealthy client.
However, Barings ignored the rumours and assured the whistle blowers that there was no such
exposure.

Control mechanism:
Traders have limited amount of capital they can deal with and are subject to closely supervised
“position limits”. Exposure should be limited and appropriate authority limits should be established to
contain entity exposure. Senior management must also be entrusted with the responsibility to overlook
large & important transactions, and most importantly be responsible for their employees &
subordinates.

4) Excessive emphasis on short term results and high performance dependent rewards

The management was excessively focussed on maximizing the profits and growing the brokerage
business. As lesson managed to hide his losses, it appeared to the management that he was a
particularly successful trader. As a result, his superiors were reluctant to annoy Lesson by requesting
him to curtail his trading activities which might have led their start trader to resign and move to
another brokerage firm. High bonuses were paid to Leeson which incentivised him to hide the losses
from the London office for fear of loss of reputation.

Control mechanism:
The organization should focus more on ingraining a culture of positive and ethical work culture rather
than focusing on profit maximizing. It should also strictly deal with the offenders to prevent any
unethical actions from arising.

5) No proper delegation of authority with accountability and Organization structure that allows
planning, implementation and control of business

James Bax, who was Regional Manager of Barings South Asia, had sent a memo to Andrew Fraser,
Managing Director of Baring Securities in London: suggesting that it was critical to keep clear
reporting lines, and if this office is involved in SIMEX at all, then Nick Leeson should report to
Simon Jones and then be responsible for the operations side. Ron Baker was head of derivatives
trading at Baring Brothers and Mary Walz was head of equity derivatives trading. Their focus was on

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the profit-and-loss account and growing the brokerage business and, according to Leeson, they were
keen to ensure that their bonuses at the year-end would be maximized. As the capital markets became
bigger and more complex during the 1970s and 1980s, Barings responded by setting up Baring
Securities to take advantage of new and profitable opportunities in the increasingly sophisticated
financial markets. However, the separation of the traditional merchant banking from the new, more
glamorous, brokerage activities seems to have led to tensions and conflicts in the Barings group. It
seems that for some time Leeson was able to hide his deception by exploiting differences among his
seniors in London.
Many people at Barings simply did not understand the potentially huge losses that could
result from poorly controlled derivatives trading. As a result, Leeson could easily hide
information or his explanations were taken at face value by his immediate supervisors at
Singapore.

Control mechanism:
The organization should have a clear command structure and identify the hierarchy of the company so
that everyone is clear who they have to report to. They should be clear who they are in charge of. This
creates an environment of responsibility and accountability.

6) Ineffective audit system:

The audit system was not effective enough as it failed to detect that Leeson had forged his documents
to confirm a deal of high value transaction of 50 M pounds. Also, the huge in discrepancies in 88888
account remained undetected which prompted Lesson to continue with his unscrupulous trading. In
Singapore, Baring Futures’ books had been audited by the local firm of Deloitte and Touche. In
London, Coopers and Lybrand audited the London books of Baring Futures. The earlier report of C&L
and its sister concern in Singapore expressed that internal controls were satisfactory.

Control mechanism:
The Audit committee should hold frequent meetings with internal and external auditors and act on
their recommendations to ensure effective internal control. Sensitive information, investigation and
improper acts should be dealt with at timely intervals.

Q3. Assume you are an Audit committee member of the Barings bank. What would you have
ensured done, to pre-empt such happenings in the bank
A. An effective and active Audit committee provides an important oversight function and ensures
effective internal controls. Their role is to check integrity, accountability and transparency of
management towards all stakeholders in general and shareholders in particular. They should provide
assurance that the enterprise will comply with relevant laws and regulations, conduct its affairs fairly
and will maintain effective controls against employee conflict of interest and fraud. This could be
safeguarded if majority of the members of Audit committee are independent or non-executive
directors. Also, it is very important that the Audit committee has good understanding of business and
industry as well as the associated risks. The Audit committee thus will be in a better position to
support auditors rather than the management if any audit differences arises, which will ultimately
secure the interest of shareholders.
Regular communication with auditors and follow up and review of any internal investigations where
any irregularity is suspected is imperative for implementing effective controls. The audit committee
should regularly discuss various matters with the auditors with regards to their independence and what
the committee expects from them. The following events shows the complete lack of above measures.
At the end of 1993, the Barings Future Singapore’s balance sheet showed that the deposit of margins
with the SIMEX were more than what Barings had received from its customers. This was clearly an
indication of unauthorized trading and hence Deloitte & Touche (external auditors) should have

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investigated further, which they didn’t. In August 1994, the internal auditor of Barings Bank had
investigated the suspicious profits made by Nick Leeson and identified the weaknesses in the internal
controls in Barings Bank and recommended that the General Manager should not be responsible for
the both back and front office in order to avoid the conflict of interest, but these recommendations
were never implemented. Infact, those who received the internal audit report claimed that it is the
responsibility of Singapore Office to implement the recommendations. In January 1995, when internal
auditors, Coopers and Lybrand, detected the £50 million error in accounts they informed this to the
company’s Finance Director Geoffrey B who also informed the CEO Peter Norris. But on meeting,
they termed it as an “operational error” on account of the forged documents submitted by Leeson.
Also, the Barings Bank auditors and top management did not fully understand the derivate trading
business. Had they understood the business they could have asked more questions where and how the
money was coming from. No one in London office asked questioned why Nick Leeson had such a
huge position for margin requirement. To overcome this, the top management could have taken or
attended the courses to enhance their knowledge about future markets and thus increase their
competency in supervising the operations. But the management focus was on profit & loss account
and growing the brokerage business and were only keen to maximize their year-end bonuses.
Further, to strengthen the internal controls the audit committee could have pressed the need for
establishing a risk management unit and a permanently stationed internal auditor at each branch, who
could look into the accounts and positions on daily basis.
As a member of Barings Audit committee one should have ensured that the above-mentioned points
are implemented in Barings both in letter and spirit.

Q4. Identify the elements of COSO framework that were inadequately covered.

A. The COSO framework helps improve the management oversight on organizations through effective
internal controls. All the key components of the internal control system (as in COSO framework)
never functioned in tandem at Barings, thus leaving loopholes in the overall functioning of the
organization which were easily manipulated for long before it was too late to save the firm from its
demise. We would not be doing this case if proper controls were developed and exercised at Barings,
if management would not have only focused on profits ignoring any risks and controls, and if Nick
Leeson was not forced to meet unrealistic targets. The management and the board of directors were
mainly responsible for Barings’ failure because of their greed for profit.

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 Corporate Governance and Ethics: Case Analysis - Barings Bank

The COSO framework in detail is depicted by the figure below:

The key principles for each of the five components is shown in the figure below 1:

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Control Environment
The management and the board of directors or equivalent body that oversees the firm is responsible
for establishing the mechanisms and standards for the organization to understand and follow to do
what is right and defining processes, standards of conduct and resources to interpret possible
deviations. The management clearly failed in its main responsibility here. They should have set the
tone at the top, but there was lack of commitment from the management of Barings bank towards
integrity and ethical values of conducting business, and most of them worked towards meeting their
own selfish interest of raking huge incentives.
The bank also had a history of crisis in 1890s when due to recession it faced bankruptcy mainly due to
excessive risk-taking on poor investments in Argentina. This was for sure not a great legacy to have.
However, the management did not learn much from this failure and did not develop any controls to
avoid falling in the pothole again.
The management was lured towards regaining its lost glory at any cost. There was an instance when
they got to know about Nick’s unethical behavior while applying for a trading license, when he gave
wrong information in his application regarding his court sentence, but this misinformation was
ignored by the Barings management. Regarding the issue of Nick Leeson’s conflict of interest,
possibility of bankruptcy/fraud were raised to the management, they just ignored suggestions. This
showed that the management was more interested in profits than anything else. Moreover, with little
understanding of the future markets and derivatives there was limited oversight by the management
over the Singapore office. The reporting structures were not clear and often held not much value as
Nick knew more about derivatives and the market to come up with deceiving stories that his
supervisors kept on believing. Nick was empowered way too much. Even if management found about
any losses from Nick, they just asked for an explanation, and no further action was taken. In all his
explanations, Nick was able to manipulate his supervisors into believing his reasons.
The management considered Nick as a star performer responsible for bringing huge profits for the
bank and never confronted any out of the way suspicious practices that Nick was following. They
feared that any confrontation could lead to Nick leaving the bank because of dissatisfaction. There

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was also no accountability on supervisors at the UK office or the Singapore office to enforce, exercise
control mechanisms or address deviations in a timely manner, which if had been exercised
appropriately could have prevented escalation of the fraud committed by Nick. Management should
have evaluated reportings against Nick and should have taken immediate action when there was
deviation.

Risk Assessment
Stakeholders of a derivatives transaction, such as Barings, face four different kinds of risks – Legal
risk, market risk, credit risk, and operations risk. The parties who enter the derivatives transactions
must recognize and deal with these risks. However, these risks were not properly assessed and
managed by the Barings management. The bank which had a legacy of merchant banking was not
very experienced in this market, and was dependent on a few traders who understood the market. For
example, while the objective for the Barings Singapore office was clear which was to invest on behalf
of customers in the futures market.
However, risks of possible fraud, risks arising from conflict of interest from Nick’s roles as a
trader(front-office) and book-keeper (back-office) were not seriously considered by the management.
Indeed, it felt like all was left on chance, and until profits were being reported by Nick and the
Singapore office, the management turned a blind eye towards every complaint or suspicion against
them. There were no checks and balances to ensure the conflict of interest did not lead to a fraud.
Auditors seemed to be conducting audits only to meet regulations and not seriously towards ensuring
stakeholders were complying to their fiduciary duties.
The organization had exposure to the possibility of financial loss resulting from inadequate control
systems, failure of BOD and management, faulty reporting structure & controls, fraud, or human error
which all created operational risks. Bureaucratic structure which was carried over from banking
business further led to operational failure. Barings did not understand the nuances of the derivatives
business and felt that this business could also be run similar to its banking business, which was a
seriously wrong assumption.

Control Activities
There was an internal control deficiency at Barings securities. Controls were not properly created or
deployed. Control activities related to assessing or mitigating risks, monitoring, or towards
communication and information sharing were either not developed or not implemented to save costs
and effort. The back-office work of settlement which is considered important to any broking company
was not deployed properly, otherwise after every broking transaction the control would have ensured
that the right amounts were passing between the buyer and seller of the derivatives and to any other
intermediaries.
Furthermore, the organization structure at Barings promoted product oversight from anywhere in the
world while administrative oversight which typically occurred at the location of the particular activity.
It was precisely this joint and conflicting responsibility for overseeing Leeson that allowed him to
hide his activities for such a long period of time. In March-1992, James Bax, who was the Head of
Barings Singapore office, also wrote a letter to Andrew Fraser, Head of Barings' brokerage and
trading group in London, suggesting that Leeson should instead of reporting directly to London
should report to Simon Jones, who was the director of Barings' Singapore office, as this would make
oversight more efficient. However, this suggestion also not immediately implemented. 4

On the front of the information technology(IT) systems, the use of multiple error account numbers
was ambiguous and not properly controlled. Initially Nick was told to use the account number 99905
which had been created to record relevant transactions until they had been resolved or else written off
in the profit and loss account. However, the London office of bearings asked Nick to create another
error account number 88888 to handle trivial account numbers arising in Singapore. Furthermore,

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Barings had imposed no limits on Leeson’s trading operations. This was a very unusual practice in the
industry and concentrated too much power in the hands of a single trader.

This seemed to have been done mainly because of IT capacity constraints at Barings. Nevertheless,
within a few weeks Nick was asked to switch back to account number 99905 as it was understood that
the Baring’s computer systems could cope with the number of errors being recorded. At this juncture,
the account number 88888 was left dormant. It should have been deleted after moving all of its data to
account number 99905. The sole existence of a dormant account paved the way to a possible fraud.
The fraudulent financial reports were not controlled at any level.

Information & Communication

Information and communication mechanisms were one of the biggest failures at Barings. Financial
reporting and interpretation was a complete failure which led to inadequacies found at a much later
stage when it was too late for timely addressable. Nick never shared information about his losses, the
London office never timely inquired about the missing margin payments, which Nick’s so called
customers should have paid to Barings.
Nick demanded large sums of margin amounts from the London office without sharing much
information about the customers he was going to buy futures for and the office also seemed not to
care much as long as Nick was reporting profits. At one instance Nick in one of his interviews
mentions that he had taken almost 300 Million pounds from the London office as margin payments
but only 30 Million pounds was returned to the bank from customers. So, information about the
remaining 270Million pounds was unknown and should have raised an alarm at the London office,
however that did not happen, encouraging Nick to further try his luck.
Furthermore, with Nick playing the role of a trader and book-keeper was also going to hinder the flow
of real information from the trading floor to the books, and this is what exactly happened where Nick
mentioned his profits but not his losses, thus keeping the whole firm in dark about the real state of his
investments. Internal control information was never appropriately communicated by Nick to his own
management or audit teams. Also, internal control information was never communicated to external
stakeholders like the external auditors (Deloitte or Coopers). The internal and external stakeholders
also ignored any signal of fraud they would have received. In January 1995, there were market
rumours that Barings bank will not be able to meet its margin funding commitments, Bank for
International Settlements in Basle was also concerned. Salomon brothers who was previously head of
Barings securities Hong Kong contacted Barings in February 1995 and informed about his concern
that Barings or one of his clients was going to be bankrupted, however Barings ignored his comment
suggesting they did not have exposure. So, if information was present it was not processed in a timely
and actionable manner which led to escalation of the size of the fraud.

Monitoring
Poor internal supervision and monitoring are also considered as the biggest factors leading to the
fallout of Barings Monitoring was exercised through frequent reporting(financial) and further through
internal and external audits. Leeson hid his losses from his supervisors for the fear of losing his job
and reputation. The fraud case escaped the internal management at Barings, and it was here that the
external regulator to monitor and enforce mechanisms of risk control management. However, Nick’s
actions as a trader and book-keeper were not carefully monitored or any of his futures investments
questioned.

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This can mainly be attributed to the ‘Halo Effect’ and ‘recency effect’ which occur when the most
recent information given to us greatly influences our decision making and judgements. Nick had
earned this reputation during his stay in the Jakarta branch office. The management biased by his
good performance at Jakarta assumed that he will also do well for the Singapore office. Nick’s
financial investments, Margin payments, customer information, customer payments etc. were not
correctly monitored. If it was monitored, the fraud especially based on non-existent customers would
not have lasted long. The difference between the margin payments by the London office to Nick and
the actual payments by Nick’s customers never matched, so appropriate monitoring would have raise
a red-flag here itself. But failure of the monitoring mechanism meant that the fraud just went on. Even
the forged documents that Nick shared for fraudulent transfers with Citibank were not timely caught
by the internal or external auditors.
Deloitte & Touche were the auditors for Barings securities during the period 1992-1993 and Coopers
& Lybrand for the period from then leading up to the firm's collapse in February 1995.They were later
sued by the liquidators of the Barings Futures operation in Singapore, for negligence in their audits of
Barings securities.

Q5. Any other aspects of good governance practices that should have been in place.

A. Some of the aspects of good governance that should have been in place are:
 Failure of Barings Bank in implementing effective corporate governance practices within the
organization led to the collapse of Barings Bank. This event has created awareness and sensitivity
among people related to the issue of corporate misdeeds. Due to the lack of segregation of duties only,
Nick Leeson could exploit the Barings Banks derivatives activities and totally wiped out the Barings
Bank’s capital of about $1.4 billion within almost four years.

 The absence of effective and efficient hierarchical structure in the organization and lack of
communication of clear objectives by the top management revealed the corporate governance failure
of Baring Bank’s management. Consequently, the shareholders and stakeholders of Baring Bank were
adversely affected because of failure of good governance practices by the management.

 A very important aspect of corporate governance for any organization is the establishment of an
ethical culture at the organization. Barings fell behind in this aspect. When it was found that Nick
Leeson had a pending County court judgement, which he denied in his application for the dealer
license at the SFA, no action was taken. The ethical aspect should have been reinforced time and
again in the bank’s culture, where any minor ethical behavior from any employee should have been
dealt with, either by counselling or by termination or legal action depending on the context and
severity of the action.

 Another aspect is the enforcement of transparency in all matters, which was clearly lacking in the
bank. If an employee makes a mistake, and the bank is open to be fair and transparent, employees
would not cater to such actions of secrecy and folding issues under the carpet. The constant push to
achieve profits was far stronger than the push to be ethical.

Conclusion
The demise of Barings was largely because of the failure of its management to monitor its own
activities and the activities of its key personnel. Incompetent management, ineffectively managed
operations and no segregation of duties of key personnel led to development of conflict of interest

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within the organization. Moreover, ineffective internal controls escalated the issue in a highly risky
derivatives market in which the management had limited competency. Barings' collapse was also
notable for the loop holes it exposed in the system of regulatory oversight, and the inability of
Barings' managers to discover the fraud in time. Barings' regulators, also part of a bureaucracy, failed
to timely detect or prevent Leeson's unauthorized trades. This suggests that weaknesses inherent to
bureaucracy also played a major role in having allowed Leeson to cause Barings' collapse.

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