Breakdowns in Internal Controls over Bank Trading Information Systems: The Case of the Fraud at Societe Generale

• In Event: Forensic Accounting, Historical Perspecitves
  In Paper Session: Forensic Accounting, Historical Perspectives

Abstract

The purpose of this paper is to examine breakdowns in internal controls in bank trading information systems through an investigation of the fraud perpetuated by a mid-level derivatives trader at a large French bank, Société Générale, in January 2008. The paper explores two hypotheses regarding breakdowns in internal controls. The first hypothesis is that cultural differences among countries may lead to breakdowns in controls. The second hypotheses is that there may have been a sort of willful blindness through which bank management did not react to risky trading practices even though there were controls in place that provided early warning signals about the risky trading practices. Ultimately, we place greater emphasis on the second hypothesis focusing on the possibility that bank management may have overlooked risky trading practices as long as these practices resulted in profits, but that bank management quickly took action to correct such problems when the trading practices led to losses, as was the case in the Kerviel fraud.

Authors

• Charles Baker, Adelphi University

• Bruno Cohanier, NEOMA Business School

• Nancy J. Leo, Adelphi University