Reference no: EM133187428

Another Day, Another Trading Scandal: The Case of National Australia Bank Overview In January 2004, an employee within the National Australia Bank (NAB) revealed that there were cases of unauthorized foreign currency derivatives trading that resulted in total losses of A$360 million. The NAB trading scandal was one of the largest rogue trading scandals that shook the Australian market. The traders had concealed losses by entering into fictitious one sided currency transactions. The Australian Prudential Regulation Authority (APRA), the regulatory body for banks, condemned the bank for its lax management, as it had ignored the warning signs of irregular currency options trading practices. The objective of this case is to allow a discussion of issues such as the important elements for good corporate governance, board oversight, internal control and risk management. Headquartered in Victoria, Australia, NAB provides personal and business financial services, including credit cards and loans. It has expanded globally and established its presence in New Zealand, Asia, the United Kingdom and United States with over 12 million customers and 50,000 employees. The organisational structure of NAB dictated that the risk management responsibility such as the trading, profit and risk responsibility, had to be delegated to the traders with varying layers of supervision, monitoring and reporting procedures to be followed. This risk management philosophy was consistent with the approach widely used by other major financial institutes at that time. Within the CIB division, the risk management function was disaggregated into smaller units that served the business units. Operations were split into different desks, which reported to CIB management and Group Risk Management separately. The Market Risk and Prudential Control Department (MR&PC) in CIB was responsible for ensuring the compliance of risk strategy. It was the responsibility of the internal audit function to ensure effective operation and compliance with the bank's policies and procedures. Three principal methods of concealment were used. Initially, smoothing of earnings was done through entering incorrect dealing rates into the system. This allowed profits and losses to be shifted from one day or one period to another. Thereafter, two more methods were employed: processing false spot foreign exchange and false option transactions. Risk management controls were overridden. NAB required proper approval from before traders could engage in transactions that involved new products. However, the rogue traders did not seek approval from MR&PC. Despite this concern being raised by MR&PC to their supervisor, no action against the traders was taken. In fact, MR&PC was pressured to approve the options transaction. Although MR&PC eventually did not approve these transactions, they were overridden when the head of global markets gave his approval. In January 2004, the firm announced that it had uncovered losses of up to A$185 million. The majority of the fictitious trades had occurred between October 2003 and mid-January 2004. A revaluation of the options portfolio raised the options losses to A$360 million.

1 Evaluate the effectiveness of the board at NAB. 

2 In your opinion were there other aspects of corporate governance at NAB that were problematic? 

3 In 2003, the currency option control issues were not reported to Principal Board Audit Committee (PBAC) despite it being a "3-star" problem. The Internal Audit function believed that the monetary value of this issue to be less than A$5 million threshold. Was the reliance of the PBAC on Internal Audit to screen the firm's control issues reasonable? Should PBAC only have reviewed issues with a "3-star" and above rating?

4. In your opinion, what needs to be done to improve the corporate governance at NAB? 

5. Prior to the NAB trading scandal, rogue trader Nick Leeson's unauthorized trading led to the collapse of Barings Bank. More recently, Societe-Generale, UBS and JP Morgan also reported massive losses from unauthorised trading. Why do such trading scandals continue to happen in banks? 

6. In your opinion are banks just too complex to govern and manage well?