Corporate Fraud Bank

In the era of globalisation, corporate scandals are no longer shocking news in corporate world. A recent corporate fraud has happened in Paris in Societe Generale Bank, where an employee committed a fraud of GBP 3.7 billions. It is not a new story for the corporate world as it has seen cases of BCCI (Bank of credit and commerce internationals), Polly Peck, Maxwell, Allied Irish Bank, Enron, Pamalat, Barings Bank, WorldCom, Xerox and many more. Frauds in Financial statements have become a common area of frauds now days. These frauds have increased the responsibility of auditors and also of government to pass effective laws so that scope of committing frauds can be reduced. Corporate Governance in any company is for that only. Companies are bounded by corporate governance guidelines and procedures, so that chances of fraudulent activities can be reduced.

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  • Meaning of Corporate Governance

According Cadbury Report 1992, Companies are controlled and directed by the system of corporate governance. In companies, Corporate Governance is the responsibility of Boards of Directors. Auditors and directors are elected and appointed by the consent of shareholders, which give them the feeling of satisfaction that a suitable corporate governance system is working to reserve their rights and benefits.

Corporate governance set the relationship between management, board, shareholders and other stakeholders. Corporate governance enables directors and auditors to manage their responsibilities towards shareholders and wide stakeholders of the company. In contrast , corporate governance increased the confidence of shareholders that they will get an reasonable return on their investments, whereas for the stakeholders it provide the assurance that company manages its impact on society and environment in a responsible manner. Corporate governance include the combination of various laws, regulations, listing rules and voluntary private sector practices that facilitate the company to draw more capital, execute efficiently, generate profit and meet other legal obligations and general societal expectations. Corporate governance is about commitment to values, about ethical business conduct and about making a distinction between personal and corporate funds in the management of a company.

Corporations pool capital from a large investor base both in the domestic and in the international capital markets. In this context, investment is ultimately an act of faith in the ability of a corporation’s management. When an investor invests money in a corporation, he expects the board and the management to act as trustees and ensure the safety of the capital and also earn a rate of return that is higher than the cost of capital. In this regard, investors expect management to act in their best interests at all times and adopt good corporate governance practices.

  • Need for Corporate Governance

A corporation is a body of various stakeholders include customers, employees, investors, vendors, government and society. It is necessary for any corporation to present transparent and true pictures to its shareholders. Today, this has become essential for the business world because every company wants to enter into the global capital and also want to draw the attention and also keep hold on the top human capital from different areas of the world. Company want the partnership with different vendors on the big collaborations and want to be in harmony and peace with the rest of the community. A corporation will never succeed until and unless it demonstrate and also it embrace the ethical conduct.

Corporate governance in business is in relation to the ethical conduct. Here, the ethic is very much concerned about the different codes of principles and the values which help the person to differentiate and choose between the right and the wrong and as a result, help to choose from the other alternatives. Additionally, the parties which are involved in the conflicting interest give rise to the ethical dilemmas. Therefore, keeping in mind the principles which are totally based on culture, context and the value of the company, the manager make their decisions. For a business which is running good, it is very much important that it always go in the good direction by keeping the stakeholders expectations in mind.

Well, corporate governance is not just the law,it is much more than the law and it can’t be imposed and run by the legislation alone because its different parts comes from the management’s mindset and their culture. The affairs of the organisation are conducted by the corporate governance in order to provide the fairness for all of the shareholders which comes from these three- accountability, integrity and the openness. To certify standards, the legislation can and should put down a general framework which is the “form”. The integrity and the credibility for process will finally determined by the “substance”. The substance is inevitably connected to the management’s ethical standards and mindset.

The corporations should always need to identify that the prosperous development and the growth of the company require the full support and the cooperation from their stakeholders and this is possible only when the corporation is following the best practices of the corporate governance. Here for shareholders, management of the corporation needs to perform as the trustees and avoid the difference of benefits among various sections of stakeholders, particularly between the owner and the other stakeholders.

Corporate governance becomes the key element in order to improve the firm’s economic efficiency. With the help of the corporate governance, the corporations keep in mind the interest of the ample series of constituencies, and also of community where they are operating. Additionally it ensure that the board is accountable for shareholders. As a result, it guarantees that the corporations as a whole are operating for the benefit and profit of society. Though by taking the advantage of asymmetry between the shareholders, huge amount of profit can be made in short run, and by balancing the interest of all shareholders itself guarantee the growth and the survival of the corporation in long run.

Heavy cost can be incurred if there is failure to execute the good governance which can be the regulatory problems. Many proofs suggest that those corporations or companies which do not implement and follow the significant corporate governance measures can give the considerable risk premium in the public market at the time when it is competing for the limited capital. In recent times, the analysts of the stock market received a high appreciation from the market for showing the relationship between the returns and the governance. For this context, different reports do not only talk about the governance in common but they also recommend the explicit alter investment which is totally based on weakness or strength of the infrastructure of the corporate governance of the company. The best thing about the credibility which is given by the procedures of a good corporate governance is that it help to provide the confidence of clients (national & international) in order to draw more ‘patient’, the capital for the long term, and also help to cut down the capital cost. All this increased attention is because of arises of the financial crises in different parts of the world. Like, the financial crises in Asia brought the attention of the corporate governance subject in Asia. Recently, the scandals in the US also disturb the unsatisfied corporate landscape and peace which are unexpected in a sense. These scandals lead to a new set of initiatives in corporate governance in US and trigger a new discussion in the United Kingdom with European union and in the rest of the world.

  • Meaning of Financial Statement Fraud

Financial statements are the picture of financial position of a company which includes balance sheet, profit and loss accounts, and trading accounts. Frauds here, means deliberately and intentionally done activities for self interest and cheating the second party. Under the Statement of Auditing Standards (SAS) 1101, it is stated that “Auditors should plan and perform their audit procedures and evaluate and report the results thereof, recognizing that fraud or error may materially affect the financial statement”.

Accounting to Benny K.B. Kwok 2005, Misstatements in financial statements can arise from either by error or by fraud. Error refers to an involuntary misstatement in financial data of a company which include omission of an amount or disclosure, such as

  • A mistake in gathering or processing data from which financial statements are prepared;
  • An incorrect accounting estimate arising from oversight or misinterpretation of facts; and
  • A mistake in the application of accounting principles relating to measurement, recognition, classification, presentation or disclosure.

The usage of both – the dishonesty to get the financial advantage illegally and intentionally falsification also disturbing the statements, leads to fraud which can be done by any person from the management, or the employees or any third party.

In fraud following things involves “Falsification or alteration of accounting records or other documents; Misappropriation of assets or thefts; Suppression or omission of the effects of transaction from records or documents; Recording of transaction without substance; Intentional misapplication of accounting policies; Wilful misrepresentations of transactions or of the organization’s state of affairs”.

  • Financial reporting in UK based on three principles:-
  • Companies Act 2006
  • Accounting standards or specifically Statements of Standard Accounting Practices(SSAP) and Financial Reporting Standards
  • And the requirements of the Stock Exchange.
  • Companies Act 2006

According to the Companies Act 2006, accounting records maintained by every company must:

  • Be sufficient to show and explain the company’s transactions;
  • Disclose with reasonable accuracy at any time the financial position of the company at that time and
  • Enable the directors to ensure that any Profit and Loss account or Balance Sheet gives a true and fair view of the company’s financial position.

Accounting records should contain day to day entries of all transactions, full record of company’s assets and liabilities and full information regarding company’s stock. According to Companies Act 2006 under section 145(B), if the financial statements of a company do not meet the requirements of the Act, the court may ask for revised financial statements and the cost of re- preparing financial statements would be bear by the party in abuse of preparing defective or false financial statements.

  • Accounting Standards

In UK, all accounting standards till 31 July 1990 used to be called Statements of Standards Accounting Practice (SSAP) which was formulated by the Accounting Standard Committee (ASC). SSAP was then gradually replaced by Financial Reporting Standards (FSA) produced by the successor to the ASC, the Accounting Standards Board (ASB). UK Accounting Standards laid down the guidelines regarding how particular types of transaction should be reflected in the financial statements of a company to present true and fair picture of company’s financial position.

  • The stock exchange listing requirements-Yellow Book

Rules which governed the listing of securities of the stock exchange in the UK are known as the Yellow Book. According to Yellow Book, listed companies are required to publish their financial statements within six months of their financial year end. Most of the listed companies however, publish their financial statements quarterly. It is necessary from the point of view of shareholders because shares of companies are in the hands of general public and they need continuous information regarding firm financial position so that they can take right investment decision.

According to SSAP December 1999, “the objective of financial statements is to provide information about an organizations financial performance and financial position that is useful to a wide range of readers for assessing the stewardship of the organization’s management and for making economic decisions”.

For the purposes of this discussion, we are talking about financial statement fraud in a major public company context; a context that can affect confidence in the financial system. We are not talking about what might be called ‘internal fraud’ or a great many other types of dishonest conduct in corporate life. This is about projecting a false state of affairs on a large scale and in a very public context.


Corporate governance is about promoting corporate fairness, transparency and accountability

Wolfensohn, president of the Word bank, June 21, 1999.

“Corporate governance is the system by which business corporations are directed and controlled. The corporate governance structure specifies the distribution of rights and responsibilities among different participants in the corporation, such as, the board, managers, shareholders and other stakeholders, and spells out the rules and procedures for making decisions on corporate affairs. By doing this, it also provides the structure through which the company objectives are set, and the means of attaining those objectives and monitoring performance”, OECD April 1999. OECD’s definition is consistent with the one presented by Cadbury [1992].

According to Elliot and Willingham, “financial statements fraud is management fraud, the deliberate fraud committed by management that injures investors and creditors through materially misleading financial statements”.

Key words used in the research:

Currency option: In this option the possessor has the right to sell or buy the currency at a particular phase of the time at a particular price. In this the possessor doesn’t have the obligation.

Currency forward: The prices are locked in this contract so that the counterparties can sell or buy the currency on the upcoming or future date. Here the possessor who holds the contract are obliged to sell or buy the currency at a particular future date, at the particular quantity and on a particular price. These transactions are also called as outright forward currency transactions.

Option: when the option is exercised to earn profit then it is known as in- the-money option.

Call option: In this type of option, the buyer who wants to buy any assets, commodities etc. has the right to buy at a particular period of time but he is not obliged, whereas the seller is highly obliged to sell the assets etc. at a particular time to the buyer. A premium has to be paid by the buyer to hold this right. This option is carried out when the strike price is below the price of the market of the agreed commodities.

Put option: In this option, the seller has obligations to buy the commodities, assets etc. from the buyer whereas the buyer has the right, but there is no obligation, to sell the agreed commodities, assets etc. at a particular period of time for a particular price. This option is carried out when the strike price is more than the price of the market of the agreed commodities.

Prime broker: The person who settle down the cash and security for their clients in the financial market by charging them fees is known as the prime broker. They manage the money of their clients by using different strategy in the market.

  • Research Questions and Objectives
  • Research Questions
  • Financial statements frauds -ethical or technical issue?
  • How firms manipulate their financial statements?
  • What are the motives of financial frauds other than monetary?
  • What is the role of corporate governance in controlling these frauds?
  • Research Objectives:
  • To analyse the major areas of frauds.
  • To examine role of top management in fraudulent practices.
  • To analyse the efficacy of various acts and rules passed for enhanced corporate governance.
  • To analyse the importance of financial statements in investment decision making.
  • To explore the causes and consequences of financial statements frauds.
  • Scope of study:

Research study will be restricted to European countries financial statement frauds as US market is more explored than European market. Research will examine and critically analyse the case study of Ireland based bank named Allied Irish Bank.

Remaining chapter shall follow the following planned strategy:

Chapter Two: Literature review: – It will cover 3000 words and include journals and articles citation.

Chapter Three: Research Methodology: – It will cover 1500 words. This section will give idea of data collection and also briefly explain limitation attached to it.

Chapter Four: Data Analysis: – This section will evaluate and analyse the data and follow the discussion.

Chapter Five: Conclusion and Recommendations: – This section finally concludes the research and provides recommendations.


  • Literature Review

2.1.1. Agency problem and Corporate Governance Separation of ownership -origin of agency problem

Agency problem resulted from separation of ownership from control (Berge & Means 1932; Jensen & Meckling 1976) is still prevailing around the world. Findings have proved that firms having weaker corporate governance policies and structure face greater agency problems; which allow senior managers to cook their recipe of extracting more private benefits and finally firm perform worse at all levels (Core at al. 1999). Evidence for such a weak corporate governance structure and higher agency problems can be found from Asian Financial Crisis in 1997. At the time Asian Crisis 1997, firms which had good corporate governance structure provided better protection to shareholders especially to minor shareholders and performed better during the crisis (Joh 2003 and Mitton 2002). In countries like USA and European countries especially UK, agency problems are higher as evidenced from corporate scandals in USA and UK for example Maxwell Corporation (1991), Polly Peck (1991), BCCI (1991), Enron (2001), Barings Bank (1995), Parmalat (2003) and many more. The recent scandal happened in Societe Generale Bank of Paris 2008, in this also agency problem was the main reason for the frauds committed by the employer of the Societe Generale Bank of Paris.

An Agency problem is very crucial problem which had taken birth during 19th century. Agency theory is defined as a “contract under which one party (the principal) engages another party (the agent) to perform some service on their behalf” (Jensen and Meckling 1976). The problems arises when the agent do not work in the welfare of principal. More cases of frauds, where involvements of company’s top management were high, coming into light and the simple reason is principal agency problem. In the case of HealthSouth, CEO Richard Scrushy had instructed senior managers to show fraudulent income of $2.5 billion in order to meet Wall Street expectation. Agency Cost

Agency costs are another issue which is bear by the principal for the frauds committed by the agent. The result of agency problem is reflected in company’s share price which can be seen as the loss to shareholders in terms of declined in the price of shares in stock exchange.Jensen and Meckling (1976) explained agency costs as the sum of monitoring

costs, bonding costs, and residual loss.

  • Monitoring cost:-

In UK companies are required to follow Cadbury (1992) and Greenbury (1995) reports for corporate governance. Monitoring cost are paid by the principal to monitor the behaviour of agents. Monitoring cost generally include costs of conducting auditing, writing executive compensation contracts and sometimes cost of firing the fraud employees and other top managers or executives. All these costs are paid by the principal, but Fama and Jensen (1983) argued that these agency costs which are initially born by the principal, ultimately borne by the agents as the compensation of agents are adjusted to cover these costs. Some researcher further argued that monitoring will restrict the managerial initiative (Burkart, Gromb and Panunzi 1997). Criticisers of Cadbury Report (1992) have argued that high level of monitoring may restrict the managerial entrepreneurship.

  • Bonding Costs

As argued by Fama and Jensen( 1983), monitoring cost ultimately bear by agents which need to set up structure that will act in interest of shareholders or principal , the cost of establishing these set up or system is known as bonding costs. These costs are not always financial in nature; it may include additional information provided to shareholders. Denis (2001) further argued that “the optimal bonding contract should aim to entice managers into making all decisions that are in the shareholder’s best interests”.

In UK, bonding structure which is imposed on closely held companies’ management, require companies to distribute all income after meeting all business expenses. Earning retention is big problem in UK; the mechanism of bonding may reduce the scope of this problem.

  • Residual Loss

“Residual loss arises because the cost of fully enforcing principal-agent contracts would far outweigh the benefits derived from doing so. Since managerial actions are unobservable ex ante, to fully contract for every state of nature is impractical. The result of this is an optimal level or residual loss, which may represent a trade-off between overly constraining management and enforcing contractual mechanisms designed to reduce

agency problems.” (Patrick McColgan 2001:8). Stewardship theory

Agency theory is more dominant in the perspective of corporate governance mechanism, but this view has been criticized by many writers (Hoskisson et al. 2000; Blair 1995; Perrow 1986). Agency theory had limitation in explaining sociological and psychological involved in principal agent conflicts (Davis & Thompson 1994; Davis et al.1997). Stewardship theory assume mangers as good stewards of the firms. Managers act diligently in order to attain high corporate profits and shareholders returns (Donaldson & Davis 1994). In an empirical study performed by Tian and Lau 2001 in Chinese shareholding firms, they find stewardship theory has received strong support in comparison to agency theory. Further Phan 2001 explained that “whether the assumptions of Agency Theory can be generalised to emerging markets, with their different sociological, economic, and developmental fundamentals, remains an important research question”.

In summary, agency theory has its roots in industrial and organisational economics. Agency theory assumes that behaviour of human being is opportunistic and selfish. Therefore, the theory recommends strong director and shareholder control. It suggests the fundamental function of the board of directors is to control managerial behaviour and try to ensure that managers act in the best interests of shareholders.

2.1.2 Review of Corporate Governance reports

In this section, international reports on corporate governance will be critically reviewed which were published in last decades. The international reports considered in this section are as follows:

  • “Report of the Committee on the Financial Aspects of Corporate Governance” (Cadbury Report, 1992)
  • “Where were the Directors? Guidelines for Improved Corporate Governance in Canada” (Dey Report, 1994)
  • The General Motors Corporation Guidelines (GMC, 2001)
  • “Committee on Corporate Governance” (Hampel Report, 1998)
  • “OECD Principles of Corporate Governance” (OECD Report, 1999)
  • Sarbanes- Oxley Act 2002

After the unexpected corporate scandals of renowned companies like Maxwell (1991), Polly Peck (1991), and BCCI (1991) among others in the UK, the committee for corporate governance under the guidance of Sir Adrian Cadbury along with Financial Reporting Council (FRC), the London Stock Exchange (LSE), and the other accountancy profession has been formed to address corporate governance issues. This report was known as Cadbury report which was first report in UK focused on the aspect of corporate governance such as financial reporting and reviewed the role of boards and auditors. This report was published in 1992. The Cadbury committee report finally draw two major recommendation for the structure of UK corporate board. Cadbury report suggests at least three non executive directors in the board and two of them should be independent from management. The positions of chairman and CEO should not hold by the same person. The purpose behind this set up was to reduce the individual dominance and ensuring higher level of monitoring for corporate board by introducing more independence. Beasley (1996) and Dechow et al. (1996) found that “firms with more independent boards are significantly characterised by a lower likelihood of financial statement fraud and earnings management”.

In Canada, during 1994 Dey report was published. This report was the first fully fledged report on corporate governance which a company should follow in order to list on stock exchange. Toronto stock exchange (TSE) adopted these guidelines in 1995 which were laid down by the Dey report. All TSE listed companies required to provide the difference in their corporate governance guidelines and guideline laid down by the Dey report.

After Dey Report 1994, other similar reports in other jurisdiction have been published. General Motors Corporation (GMC) in USA published its own corporate guidelines in 1994 after criticising by the shareholders regarding poor company performance and doubtful board practices. These guidelines were developed with consent of GMC board, its shareholders and other activists for corporate governance. These guidelines were welcomed by the institute California Public Employees’ Retirement System (CalPERS) and by the industry. GMC guidelines become the benchmark in USA for corporate governance.

In UK, during 1998, Hampel Committee was formed to review the recommendations of Cadbury report (1992) and the Greenbury report (1995) relating to executive remuneration. The Hampel committee was also formed to cover some gaps by these two reports i.e. Cadbury report and Greenbury report. Hampel report suggests that good corporate governance goes beyond prescribed corporate structures. According to Hample Report (1998:15) on Corporate Governance Sir Hample “recommend that companies should include in their annual report and accounts a narrative statement of how they apply the relevant principles to their particular circumstances. Given that the responsibility for good corporate governance rests with the board of directors, the written description of the way in which the board has applied the principles of corporate governance represents a key part of the process”. Hampel report drew attention for the approach of box ticking which is a serious issue for corporate governance. It also examined the implementation of Cadbury and Greenbury report and suggested more clear recommendations on policies of remuneration, accountability and auditing.

During 1999, Organisation for Economic and Co-operation Development (OECD) laid down principles of corporate governance for the listed companies of member countries of OECD. It cover main subjects areas like rights and equitable treatment of shareholders, role of stakeholders in corporation structure, disclosure and transparency of financial facts and figures and majorly role and responsibilities of board. OECD guidelines become starting point for local policy makers of corporate governance.

After the ,shocking scandals of Enron and WorldCom, US congress along with NYSE (New York Stock Exchange) passed the reforms to address conflicts of interest and redefined relationship between companies and auditors. This reform was known as the Accounting Industry reform Act 2002 which is widely known as Sarbanes Oxley Act 2002. The main purpose of this act was to enforce the independence of external auditors. The act also reinforced duties and responsibilities for CEO’s and CFO’s by imposing strict penalties for misrepresenting company’s quarterly and annual reports. The penalty for misrepresentation was personal fines of US$ 1 million or imprisonment up to 10 years or both. Sarbanes Oxley Act has intense effect on the corporate governance policies on US and rest of the world. NYSE also imposed additional requirement for listed companies, under which listed companies must have independent directors in majority and must disclose business code of conduct and ethics for directors, officers including managers at all level, and employees. Whittington(1993) and Melis, (2004a) argued that “corporate financial reporting and corporate governance systems are highly correlated, with any improvement in either system having a positive influence on the other, and vice versa”

Combined code issued in 2006 replaces the combined issued in 2003. Financial service authority of UK, require listing companies to be obliged by the combined code 2006 and carry out consultation before listing. This new code contains main principles and provisions. Combined code 2006 asks listed companies to make a disclosure statement for code and that should be in two parts. Some of the provisions are not or less relevant for small or new listed companies. Also some provisions do not apply to companies below FTSE 350.

2.1.3 Global findings for adoption of corporate governance guidelines

According Stephanie Maier (EIRIS 2005:1) findings, “Only 25% of US companies separate the roles of chairman and CEO compared with at least 50% forcompanies in other developed economies. Swiss boards have the highestpercentage of independent directors(81%) – Germany, Austria and Japanall have less than 10%. Only 4% of companies in Japan haveaudit committees comprising amajority of independent directorscompared to over 95% in the USA,Canada, the Netherlands,Luxembourg, the UK and Ireland• Only 22% of companies in Singaporeand 25% of companies in Hong Konghave meaningful codes of ethics”.

Board size:

According to EIRIS 2005, average board size is minimum in New Zealand (7.2) and maximum in Germany (22.8). USA and UK comes at rank 7th and 8th with average board size of 10.7 and 11.4 respectively ( see appendices for details). Higgs Review (2003) suggested “An effective board should not be so large as to become unwieldy. It should be of sufficient size that the balance of skills and experience is appropriate for the requirement of the business and that changes in the board’s composition can be managed without undue disruption”.

Separation of ownership and CEO

According to findings by EIRIS 2005, in UK nearly 97% separate the ownership under unitary board structure whereas in US only 25% companies separate the ownership under the unitary board structure. In Ireland and Luxemburg 100% companies separate the ownership under the two tier board structure (see appendices).

Independent Directors

Switzerland, Canada and USA have high percentage of independent directors in board structure whereas in Austria and Germany this percentage is below average. UK has mean percentage of 51.7 independent directors (see appendices for more details).

Audit Committee Independence

The role of audit committee is become vital important after the accounting scandals in US and UK. Ireland and Luxemburg has 100% independent audit committee whereas UK has 97.7% independent audit committee as directed by Turnbull (1999) and combined code (2006). Japanese companies have only 4.1% independent auditors.

Remuneration disclosure

Higgs (2003) suggested “Levels of remuneration should be sufficient to attract, retain and motivate directors of the quality required to run the company successfully, but a company should avoid paying more than is necessary for the purpose. A significant proportion of executive directors’ remuneration should be structured so as to link rewards to corporate and individual performance”. UK and Ireland has 100% disclosure regarding remuneration of top managers, CEO and directors whereas 44.1% Japanese companies disclose remuneration in their annual reports (see appendices for more details).

Board Diversity

Norway has highest number of women in decision making process and Japanese companies have lowest number in decision making process.

Code of Ethics

In Finland 100% companies follow code of ethics, whereas 93.2% UK companies follow code of ethics. In compare to this most of Singapore and Luxemburg companies do not follow code of ethics.

Overall corporate governance performance across nations

According to survey conducted by EIRIS, UK comes on top in applying corporate governance into practice and Japan is worst in applying governance principles.

Globalization and Corporate Governance

In today’s world globalization is everywhere which help to bring the awareness between the different companies so that they can easily practice with their overall strength in today’s world which is highly competitive. Today, the firms want the clearly focused practices for their business which should be in the favor of the public interest. The best thing is that there is a lot of competition everywhere which enables the multinational as well as the national companies to take the benefit by introducing themselves in the newly developing countries and make the relationship with the public, society and the government.

However, some of the developing countries do not allow the multinational companies or restrict them with their business & trading rules and regulations and keep hold on the means of the business success. And this is because the government of that particular country is much more diverted towards the those firms who keep the interest of their shareholders in mind. Finally, the companies throughout the world want to grab the intangible assets importance, morale of the staff or to be a brand name. With the goodwill of common people and ideal people of the corporations, the company can be able to build up the tangible asset into strategic advantage. Overall involvements of all factors are shown with the help of the following diagram:

The main purpose of the companies is to maximize their profit but here the corporate governance plays a very vital role which forces the companies to divert from their main target and give more priority to the society by improving their social as well as their economical standards. Therefore we can say that the corporate governance is an extra obligation made by the companies to improve the status of the shareholders in terms of the economic and social standard by following the economic and also the legal necessities. In emerging economic countries, the growth of the corporate governance shows the different outcome. So finally we can say that a good corporate governance can lead as well as restrict the companies.

Corporate Governance may be defined as “A set of systems, processes and principles which ensure that a company is governed in the best interest of all stakeholders”.

Roots of Corporate Governance

In the 12th century , the term known as ‘governence’ was used in France. This was originated from the Latin word which means the steering. The term ‘corporate governance’ was first to be used in one of the American Journals in 1970’s. In UK, this term was rarely used before 25 years but now if we see then this is the most common name which is used by every organization, authorities etc. Now it has became very important because this helps the firm to run in a good and prosperous condition by with the importance on their risk management, accountability and also the integrity. The term ‘corporate governance’ revolutionized in UK, when Sir Adrian Cadbury presented this as a best practice code with its Cadbury report. This code was generally accepted by city and stock exchange for the listed firms and this proved as a benchmark for standard practices. After this report, the Greenbury report came into existence with some principles (remuneration of the executive directors) which are added to the earlier ones. Further in the year 1998, a new report came into existence which was known as Hample report which had a joint code of the two earlier report. After that, in year 1999, the turnball report resoluted on the internal controls as well as on the risk management of the organizations.



3.1.1 Chapter Overview

A key feature of a good research lies in the analyses, in other words, besides collecting relevant data, what is done after that is also an important determinant and a key factor to a good research. According to Fitzpatrick (1998), “In order to contribute to understand a complexity, researchers have to choose from a range of possible methodologies and cast aside entrenched theoretical & ideological positions”. Research design will give an idea to the reader regarding how the research has been conducted by the author. This chapter also throw light on research design and methodology used by the author for successful completion of research by answering the research questions and achieving desired research objectives.

  • Research Methods
  • Research philosophy

According toSaunders(2003), research perspectives usually include three parts, namely, the perspective of positivist, interpretive and realist approaches.

Positivistic approaches are founded on a belief that the study of human behavior should be conducted in the same way as studies conducted in the natural sciences (Collis & Hussey, 2003, p.52). The first step of the “research onion” [Saunders et al, 2003:83] is the most crucial as it will suggest what research approach and strategy is to be followed throughout the research. The careful analysis of research objectives suggests the researcher to follow the philosophy of interpretivism. The researcher is critical about the use of philosophy of positivism as he agrees with Saunders (2003:84) “that the social world of business and management is far too complex to lend itself to theorising by definite ‘laws’ in the same ways as physical sciences”. The researcher further believes “that rich insights into this complex world are lost if such complexity is reduced entirely to series of law-like generalisations”, Saunders et al (2003:84).

There are three different perspectives in research philosophy named as Positivism, interpretivism and realism (Saunders, Lewis and Thornhill 2007). It is known as Epistemology. “Epistemology concerns what constitutes acceptable knowledge in a field of study” (Saunders, Lewis and Thornhill 2007). This research work will take interpretivism approach. “Interpretivism is taken to donate an alternative to the positivist orthodoxy that has held sway for decades. It is predicated upon the view that a strategy is required that respects the differences between people and the objects of the natural sciences and therefore requires the social scientist to grasp the subjective meaning of social action” ( Bryman and Hell 2007:19).

  • Research design

Good research design is the first rule of good research (Singleton, 2003). Once the research problem and objective is identified then we have to work on research design. For this particular report my research design will be “Exploratory research”. Exploratory research is most commonly unstructured, informal research that is undertaken to gain background information about the general nature of the research problem. In the case of exploratory research analysis is done with the help of various methods like Secondary data analysis, experience surveys, case analysis, focus group and projective technique (Burns and Bush, 2007).

In research report, author will use the secondary data analysis and case analysis for analyzing research question. No doubt secondary data is easily available but it also consume more time. It has its own advantages and disadvantages. “Availability is normally high, but there are great difficulties associated with applying secondary information to specific current situations because of how it was originally assembled or because the original reasons for collecting the information are unknown”, Hair et al (2003).

The research will include a single case study of Allied Irish Bank of Ireland. “With a case study, the case is an object of interest in its own right and the researcher aims to provide an in depth elucidation of it” (Bryman and Bell 2007:63). Case study often included in qualitative research methods but sometimes it comes under quantitative research methods. Robson (2002:178) defines a case study as “a strategy for doing research which involves an empirical investigation of a particular contemporary phenomenon within its real life context using multiple sources of evidence”. What is a case?

Case study is concerned with the complexity and particular nature of the case in question. A case can be related to a single organization, single location, single person or single event. In case study emphasis is laid down on an intensive examination of the setting. The qualitative research method provided a more in depth analysis and makes the research more meaningful by assisting the author in understanding the motives of the joint venture, and the reasons of failure. The case study follows idiographic approach where the author is more concerned to explain the unique features of the case in question. When the major research strategy is qualitative then the case study is likely to take an inductive approach to the relationship between theory and research. Types of case study

There are different types of cases which are as follows:

  • Critical case: – In this, researcher first develops a clearly specified hypothesis and the case is chosen on the grounds which will derive a clear understanding of the 0circumstances in which the developed hypothesis will and will not hold.
  • The Unique case: – It observes a common focus.
  • Revelatory case: – “The basis for the revelatory case exists when an investigator has an opportunity to observe and analysis a phenomenon previously inaccessible to scientific investigation” (Bryman and Bell 2007:64).
  • Representative or Typical case: – This kind of case seeks to explore the case that demonstrates an everyday situation or form of organisation.
  • Longitudinal case: – This type of case is more concerned and explores how a situation changes over the time period.
  • Data collection

Data collection is very important in any research. It is very crucial to collect the data out of pool of sources available which can be secondary or primary source. This research will undertake secondary data sources to address its objectives. According to Stewart and Kamins (1993), secondary data sources have higher quality data compared to data collected through primary sources. According to the views of Bryman and Bell (2007), secondary data access the high quality data without much investment in terms of cost and time. “It can be useful to compare data that you have collected, with secondary data” (Saunders, Lewis, and Thornhill 2007). Further, Bryman and Bell (2007) reveal an interesting observation regarding the time spend for data collection. They argue that more emphasis can be made on data analysis as collection of secondary data is comparatively much faster than primary data.

  • Tools of data collection
  • Records obtained from the companies about policies, performances, etc.
  • Journal articles by well known authors who take up case studies, analyze them and interpret their findings
  • Online databases and internet data sources which are very popular method and widely used all over the world.
  • News paper articles about Fraud companies.
  • Sampling Strategy

The research will use purposive sampling strategy which will enable the author to address the research questions and objectives.“Purposive sampling enables the researcher to use their judgement to select cases that will best enable them to answer their research questions and research objectives” (Saunders, Lewis and Thornhill 2007). For carry the research in right direction case study of Allied Irish bank is taken to explore and find the answers for the research questions and address research objectives more accurately.

  • Data Analysis

This research work includes a single case study of Allied Irish bank which was engaged in the Financial Statement Frauds and breaching regulation of Corporate Governance. Case of Allied Irish bank will be analyzed through all dimensions in order to find the answers for already laid down research questions.

  • Validity, Reliability and Generalisability

According to Saunders, Lewis, and Thornhill 2007, Reliability should provide a possibility for other researchers to replicate the results. There are four threats to reliability, as quoted by Robson (2002) in Saunders et al (2007:149), which should be avoided – subject of participant error, subject of participant bias, observer error and observer bias.

  • Limitations of the research

3.7.1 Geographical limitation – Study is based on UK only.

3.7.2 Sample limitation- Sample size is not very large because of the time constraint.

3.7.3 Limitation of using secondary data

  • High reliability on secondary data.
  • There may be time lag between the original data collected and data used for conducting research.
  • There may be errors pertaining to the content and other factors.
  • The nature, which includes the key variables, measurement units, categories used and examination of relationships may have to be reconfigured to increase their usefulness.
  • The dependability of the source, i.e. the credibility, reputation and trustworthiness of the source may be put to question at times.
  • Secondary data is useful in understanding the condition or status of a group but are imperfect reflection of reality. Only proper interpretation will help in understanding why something is happening.
  • The volume of the secondary data collected can be overwhelming. Hence selectivity has to be exercised.
  • Since the data is not collected for the same purpose as the original researcher, there is a chance of potential bias in the original study
  • Ethical consideration

Research has been carried by taking into consideration guidelines laid down in BES Ethics student book provided by the Coventry University Business School .Research should be conducted in ethical way. It is the responsibility of researcher to maintain the privacy of data and participants. It will be necessary to confirm the complete anonymity of the participants and to reinforce the message of complete confidentiality of information obtained in line with Data Protection legislation. This is both in relation to actual discussions and subsequently during the reporting stage.

In addition, plagiarism which can easily happen in making use of secondary data research for the study also requires full attention of the researcher. Accurate referencing and intellectual honesty should be respected in the research since the researcher considers his study to be a number one serious thing in her academic pursuing process. The researcher will follow the Harvard Referencing guideline provided at the university website.

To sum up, total attention and cautiousness would be given to the whole process and procedure of the research so as to abide by the law as well as ethics rules in this project.


4.1 CASE REVEW Allied Irish Banks (AIB) had a subsidiary in US by the name of AllFirst Financial Inc. On February 06, 2002, AIB found that its US subsidiary had made a total loss of the 750 million dollar in the foreign exchange trading operations (Please refer to Exhibit1). The losses which were incurred are the results of the John Rusnak’s fraud activities incurred by him from trading.

Rusnak was held there in order to maximise the profit by taking the advantages in futures, options and also in the cash market by using the discrepancies in the currency value. By his trading activities, from 1997 to 2001, he makes the huge amount of losses for AIB in the foreign exchange market. However, he was able to offset those loses which were genuine by making the fictitious option trades. Due to the senior management’s carelessness and also because of the lack of the intelligent and the experienced managers, he easily changed the records and the documents of the bank and finally generated the false profits which ultimately affect the Allfirst.

According to the different analysts AIB was able to bear those losses because that was less than 10% of its total equity capital and in future it could make much more worth for the bank in order to make takeover attempts. They strongly commented that inadequate risk management control systems and the lack of the supervision activities of the traders lead to the massive financial losses by leaving the negative impact on other big and prominent companies. The trader of the AIB bank charged with frauds. BACKGROUND NOTE Allied Irish Banks is a Irish bank and it was founded in the year 1966. AIB was formed by merging the three important banks of the Ireland named as the Royal Bank, Munster & Leinster bank and Provincial bank. The Provincial bank was formed in the year 1825 which had pioneered the branch banking concept whereas the Royal bank was set up in the year 1836 and was famous for its mercantile links and the Munster & Leinster Bank was founded in the year 1885, having the best extensive branch network. In the Mid of the 1960’s, these three banks came up with an idea to stop the upcoming opportunities in the market globally and finally agreed to merge and establish the AIB bank.

In 1970’s, AIB opened the network of the branch in UK which was followed by the major investments in the US in the 1980s. After that bank focused on the US market and decided to invest in equity and make the first investment in the First Maryland Bancorp, which was US based. By the year 1989, the AIB bank owned the 100% equity stake in FMB. In the year 1997, Dauphin Deposit Corporation (DDC), a US based company was also owned by AIB. Later, DDC was merged with FMB in order to form Allfirst in year 1997.

Allfirst’s treasury operations were headed by a Senior Vice-President who reported to the treasurer of the Allfirst. Assets & Liability management (ALM), Risk Control & Treasury Operations (RC & TO) and Treasury fund management (TFM) are the three different departments of the treasury operations. In the year 1993, TFM was the front office for the Allfirst treasury operations and was headed by the Bob Ray. Treasury funding, global trading, investment portfolio management and the risk management are the four main functions of the TFM. There were two Managing Directors, one responsible for interest rate derivatives and the other, named Rusnak, who was responsible for the trading in foreign exchange. There were two Vice presidents and one Assistant Vice- President appointed for the ALM which act as Middle office of the Allfirst treasury operations. They were resposible for the Assets & liability management. The other Vice President was resposible for the financial analysis of treasury and also a risk control officer. The RC & TO acted as a back office where the trades likes confirm, booking and settling are carried out by the banks foreign exchange and interest rate derivative traders. In this portfolio operation was there and also one Vice President was appointed for the system and technology. EVENTS LEADING TO THE LOSS In 1989, the different actions for currency trading were narrow. It was used in order to met the foreign exchange needs of its commercial clients who were busy in the export as well as in the import activities as it was important because it was a fee based business and did not entail high risk as well. In the tear 1990, a new trading was introduced which was known as Proprietary and for that position a new person was recruited.

In the year 1993, Rusnak was appointed where he was responsible for trading the currency option. Earlier he had worked for Chemical bank and also for Fidelity (1986-1988) bank where he was responsible for the same job. In early 1993, Rusnak was appointed to the post by Ray because the trader left the job. In Allfirst, Rusnak started the arbitrage. Earlier, directional and forward trading were in practice at Allfirst. Rusnak after joining tried to convince his seniors about his trading approach which would help the Allfirst to take the benefit of the price discrepancies between currency options and the currency forwards, thereby diverting the areas for revenue stream arise from simple directional trading. Rusnak also said that he had a very good knowledge and he his very much familiar with the exchange option trading and could easily and constantly make the money by buying big option position and hedging the position in the cash market. This tactic entail buying options when they were cheaper relative to the cash or money (i.e. implied volatility for the option is lower than its normal range), and sell them in the market when they are quite expensive i.e. implied volatility is higher than normal). Senior management ask the Rusnak to go ahead and carry on his strategy and was kept under the supervision of a manager of the trading department who was supervising the proprietary interest rate traders as well. Rusnak, however, started the trading conversely to his arbitrage trading strategy. He involved in the directional trading involving bets that the market would move in a particular direction. Rusnak took positions in the currency forwards and foreign exchange options with high deltas (options which are‘deep in the money’8 and had large premiums). In the year 1997, rusnak start betting on the movement of the Japanese yen and then entered into the currency forwards and had bought the large amount of yen for the future delivery. Subsequently, the value of the yen also decreased and therefore Rusnak suffered a huge loss on his forward positions. Then in order to hide the loss and his position, he engaged himself into the fraudulent activities and created the fictitious options. Rusnak used the different strategy to exploit weaknesses in allfirst’s control system was a cleverly thought out one simultaneously, he entered two bogus trades into the Allfirst’s trading system. He designed the fictitious options in such a manner that gives the appearance of the fully hedged position. Then he also claims to sell ‘deep-in-the-money’ option on Yen to a counter party at Singapore or Tokyo. After that he bought an offsetting option from the same purported counterparty.

The currency and the strike price which was involved in the two options were same and both of them would offset one another from the point of cash. The first option involved the receipt of a large premium whereas the option involved an identical premium payment. On both the options there was only difference of the expiry date. First option expiration date was on the day which it was purportedly written however the second options expiration date was one month or more after the date of expiry of the first option.

There were no report listing prepared by the Allfirst for the one-day options and therefore the activities of the Rusnak did not attract the attention of the supervisors. Allfirst installed the surveillance system for the options but it did not have the feature of an automatic alert to the supervisors if by chance those options were not exercised. The inadequate supervision on Rusnak meant that no one raised the question of how two options with two different expiration dates could have the same premium and why the ‘deep-in the-money’ option would expire unexercised by the counterparty. The quitting of the immediate supervisor (the trading manager) of Rusnak in 1999 and the scrapping of that post due to financial constraints led Rusnak to report directly to Ray. While Ray had significant experience with interest rate products, he had limited knowledge about foreign exchange. Hence, he devoted less attention to Rusnak’s trading activities.

Rusnak created bogus broker confirmations to validate the trades undertaken by him so that the back office could not detect the bogus trades. Post-1998, he was successful in persuading the back office staff not to seek confirmation for the purported pairs of options. Rusnak argued that since there was no net transfer of cash there was no need for confirmation. Because of the lack of the back office interference, Rusnak ensured that the liability represented by one day bogus options would not appear on Allfirst’s books, while the other purported unexpired option i.e. “deep in the money” for which the company had apparently paid a large premium appeared in the books. As a result, Allfirst’s balance sheet reflected that the bank was holding a valuable asset and concealed the losses Rusnak had accumulated through his directional spot and forward trades. Rusnak continued to keep the nonexistent asset in the books by repeatedly rolling it over into new bogus options when the original ones purportedly became due. While Rusnak made bogus options so that he can cover up the losses, and also continued to lose money in real spot and forward transactions that he entered into. He entered into prime brokerage agreements with Bank of America and Citibank. According to the agreements, spot foreign exchange transactions between Allfirst and its counterparties would resolved through broker and also ‘rolled’ into a forward transaction. At the end of every day, all of the trades in the spot foreign exchange were swapped into a forward foreign exchange trades among the two- the Allfirst and the prime broker. Those forward trades were cash settled ,in dollars, every month on a fixed date. Whereas prime brokers9 typically charged full bid-offer pricing on the forward transaction rollovers, they were paid a fee for settlement of foreign exchange spot transactions. These accounts not only enabled Rusnak to significantly increase the size and scope of his real trading but also effectively permitted Allfirst to make trades in the prime brokers’ names. This in effect made the prime brokers the back office for those trades and Rusnak was able to convince his supervisors to allow this setup by arguing that it eliminates the requirement for the extensive back office operations.

The use of prime brokerage accounts helped Rusnak increase his trading activity significantly. Rusnak’s use of Allfirst’s balance sheet through bogus option positions also increased simultaneously. In 2000, Allfirst’s treasurer found that while the overall trading income had increased from $6.6 mn to $13.6 mn, when adjusted for the cost of funds, it showed an increase of only $1.1mn. So he ordered that henceforth the charge for the cost of funds should be reflected in the trading income. By 2001, the finance department and the auditors started taking note of the fact that the balance sheet does not justify the Rusnak’s earnings .An inquiry was launched by audit and internal finance department. Subsequently, the treasury funds manager directed Rusnak to reduce his balance sheet usage. The increasing supervision and control led Rusnak to change his strategy. Starting from February 2001, Rusnak started to sell real one year, deep-in-the-money options. The funds raised through these options were used for the monthly settlement of foreign exchange forward transactions. The options (selling yen puts against the dollar) also reinforced Rusnak’s long spot and forward positions in yen. These options were liabilities of Allfirst and were recorded as such in the books. Rusnak was able to get these liabilities out of the books by recording bogus option deals which gave the impression that the original options had been repurchased. This activity of Rusnak ensured that a large amount of liabilities remained unrecorded in Allfirst’s books. Rusnak’s annual bonus was directly related to his net trading profits. He get the bonus which was equivalent to the 30 percent of the net trading profits he generated in extra which was five times his salary. By constantly manipulating his trading profit figures, Rusnak was able to generate a hefty bonus for himself during the five-year period from 1997 to 2001 (Refer Table I for details about Rusnak’s compensation). In June 2001, Rusnak also got promoted to the post of managing director in charge of foreign exchange trading. In December 2001, during a checking, the back-office supervisor made an enquiry with an employee responsible for confirming foreign exchange options about two trade tickets because those tickets do not had the attached confirmations The back office employee said that offsetting trades with the same counterparty did not required confirmation. However, the supervisor insisted that all trades needs confirmations, despite of any offset and irrespective of the counterparty. For December 2001, the foreign exchange trading turnover was reported to be $25bn. The high turnover had drawn the attention of Allfirst’s treasurer and he became concerned aboutRusnak’s trading operations. In order to verify Rusnak’s trading, he planned to square off allRusnak’s trading positions. On January 28, 2002, the treasurer ordered the settlement of all Rusnak’s trading positions. The back office staff supervisor started verifying the confirmations of Rusnak’s trading deals. It was found that there were 12 unconfirmed trades. Subsequentconfirmations provided by Rusnak for these trades seemed bogus and the back office manager insisted on confirmations on the phone. Rusnak agreed to provide the phone numbers of brokers who arranged the trades by February 03, 2002. However, Rusnak neither called up nor reported to the office from February 4. The treasurer reported the matter to Allfirst’s senior management who informed the AIB headquarters. The discovery of bogus options immediately led to an intensive review of Rusnak’s trading transactions by AIB and Allfirst. Transactions made with 71 counterparties were examined. Nineteen of them were Asian counterparties and those transactions found to be bogus. For 47 counterparties, nothing was found like bogus transactions and not any of the transactions fitted the bogus-option pattern (that is, same-day transactions that netted out). Lastly, AIB and Allfirst discovered that there were five counterparties and with them there were unrecorded real options that had been removed with bogus liquidating options. Out of $691.2 mn loss, a huge portion of the loss occurred in 2001 and 2002 (please Refer Table II).

Case Analysis


Industry analysts felt that a combination of factors led to the loss at Allfirst. The bank had completely failed to implement a proper operational control system. Due to the lack of effective control and supervision, Rusnak got an opportunity to conduct fraud and also successfully hide them from being detected. The major reasons that led to the disaster were:


There were numerous deficiencies in the control system of Allfirst. The absence of any net cash payment from Rusnak’s trading activity and the difficulty in confirming trades at midnight had resulted in the back office decision not to confirm offsetting pairs of options trades with Asian counterparties from early 2000. Confirmation of all trades was the basic standard practice, and failure to do so proved to be a disastrous for Allfirst.

Another major deficiency was the failure of the middle and back offices to obtain foreign exchange rates from an independent source. On the request of Rusnak, the treasury risk control analyst had developed a system wherein the rates would be downloaded from Rusnak’s Reuters terminal to his personal computer’s hard disk drive, and then fed into a database on the shared network, making it accessible to the front, back, and middle offices. Through this system, Rusnak could manipulate the prices – a key input into the bank’s back office and risk control functions.

The lack of experience and inadequate staff resulted in the internal audit department paying less attention to foreign exchange trading as a possible risk area. The confusion between the middle office and the credit risk department regarding their scope of control ensured that neither of them investigated the instances where Rusnak had exceeded the counterparty credit limits.


Inadequate supervision ensured that Rusnak was able to carry on with his fraudulent activities without being detected. In spite of the huge size of Rusnak’s positions, none of his supervisors -trading manager, treasury funds manager or treasurer – undertook a careful examination of Rusnak’s trading positions. A little vigilance would have raised questions as to why the offsetting options for the two different expiration dates had the same premium and why the deep-in-the- money options expired unexercised by the counterparty. The basic requirement of examining Rusnak’s daily profit-and-loss figures and their reconciliation with the general ledger was also not done properly.

The prime brokerage account used by Rusnak had a feature that allowed Rusnak to net trades at the end of each day. This prevented the treasury risk control from determining if there had been off-market trades with a particular counterparty in the course of that day. The back office also did not always confirm the end of the day settlement positions and considered the confirmation process as a mere formality.


The risk control department at Allfirst never made an attempt to benchmark the policies and procedures against the best practices in the industry. They relied on the Value at Risk (VAR)10 model (Refer Exhibit II) and ignored other risk related information that was available to them. The VAR model developed by the AIB Group used the Monte Carlo simulation technique to generate 1,000 hypothetical foreign exchange spot and volatility rates and calculated the resulting profit or loss. The VAR is equated to the tenth-worst outcome produced by the simulation, which yields a 99 percent level of statistical certainty.

Rusnak manipulated the VAR in many ways. Firstly, the bogus options noted by Rusnak appeared to hedge his real positions thus reducing VAR. Secondly, he manipulated the figures of holdover transactions (transactions entered into after a certain hour towards the end of each day), which were critical inputs in the calculation of the VAR. As a result, the transactions created an illusion of reduction in Rusnak’s open currency position, which in turn, resulted in a lower VAR (the larger the open position, the higher the calculated VAR). The employee responsible for checking the VAR relied on a spreadsheet that obtained information regarding the holdover transactions from Rusnak’s personal computer.


After the fraud was discovered, AIB undertook a thorough investigation into the foreign exchange trading operations at the Baltimore headquarters of Allfirst. The investigation was led by Eugene A. Ludwig, an eminent US banking figure. Ludwig disclosed his findings in a report (Refer Exhibit III), which blamed the weak control environment at Allfirst for the fraud. Alfred J.T. Byrne, the chairman of the financial institutions practice at LeClair Ryan, a Richmond-based law firm said, “The Ludwig report makes clear that some of those responsible for compliance with internal controls at Allfirst were asleep at the switch. One has to wonder whether the lights were out at Citi or Bank of America on these transactions as well.”

Following the report, AIB discontinued all foreign exchange trading operations in Allfirst with the exception of customer service obligations. The company decided to centralize the management and control of all its treasury activities throughout the AIB Group, bringing them under its subsidiary AIB capital markets, based in Dublin, Ireland. The fraud was reported to the US Federal Bureau of Investigation seeking its assistance in the investigation. AIB fired Rusnak and six other employees

– the executive vice-president & treasurer, the senior vice-president of treasury funds management, the senior vice-president of investment operations, the head of the internal audit, an operation unit clerk and an internal audit staff. To reflect the fraud losses, AIB restated Allfirst’s earnings from 1997 to 2000 and the first three quarters of 2001. The restatement reduced 1997-2001 earnings by $438.1 mn. The reduction for 2001 was $242.6 mn. Frank Bramble, the chairman of Allfirst, opted for retirement, in June 2002.

AIB appointed John G. Heimann as a special advisor to the Board on Risk Management across the AIB Group. In January 2003, Rusnak was sentenced to seven and a half years in prison and five years’ probation. He was also ordered to compensate the losses incurred by Allfirst. The court ordered him to pay $1,000 a month during his probationary period. In May 2003, AIB sued Citibank and Bank of America seeking to recover about $500 mn in compensatory damages – the share of the losses it attributed to the banks’ alleged wrongdoing.

VAR is a statistical measure used to estimate the maximum range of loss that is likely to be suffered in a given portfolio.

Analysts stated that AIB being Ireland’s largest bank had a strong financial position which would enable it to overcome the losses from the fraud. They further stated that in view of the numerous trading scams, it was time that commercial banks with trading operations gave due importance to risk management. Apart from creating strong risk management policies and procedures, banks should provide effective management supervision, examine all new trading strategies very carefully and avoid dual reporting relationships.



The Board of Directors should create a Committee on Corporate Governance. It is particularly important that asset management firms develop General Meeting voting guidelines including voting criteria for resolutions; their confidential content is naturally left to the discretion of each.

The company’s framework should be designed to:

• enable the board to provide strategic guidance for the company and effective oversight of management

• clarify the respective roles and responsibilities of board members and senior executives in order to facilitate board and management accountability to both the company and its shareholders

• ensure a balance of authority so that no single individual has unfettered powers

Fundamental objective of corporate governance is the “enhancement of shareholder value, keeping in view the interests of other stakeholder”. The Board should harmonize the need for a company to strike a balance at all times between the need to enhance shareholders’ wealth even as not in any way being detrimental to the interests of the other stakeholders in the company.

The company should:

• clarify the standards of ethical behaviour required of company directors and key executives (that is, officers and employees who have the opportunity to materially influence the integrity, strategy and operation of the business and its financial performance) and encourage the observance of those standards

• publish its position concerning the issue of board and employee trading in company securities and in associated products which operate to limit the economic risk of those securities.

Have a structure to independently verify and safeguard the integrity of the company’s financial reporting.

This requires the company to put in place a structure of review and authorisation

designed to ensure the truthful and factual presentation of the company’s financial position. The structure would include, for example:

• review and consideration of the accounts by the audit committee

• a process to ensure the independence and competence of the company’s external auditors.

Such a structure does not diminish the ultimate responsibility of the board to ensure the integrity of the company’s financial reporting.


Corporate Governance is an increasingly important part of the business environment. The past twenty years have seen a radical change in the relationship between business and Fraud. Key drivers of this change have been the globalization of trade, the increased size and influence of companies, the repositioning of government and the rise in strategic importance of stakeholder relationships, knowledge and brand reputation. Corporate Governance, defined in terms of the responsiveness of businesses to stakeholders’ legal, ethical, social and environmental expectations, is one outcome of these developments.

Corporate Governance has generally been a pragmatic response to consumer and civil society pressures.

Ultimately, the long-term success of Corporate Governance will be based on its ability to be positioned within the core of business strategy and development, thereby becoming part of ‘business as usual’.

The escalating level of fraud, and particularly financial statement fraud, is an issue that has in recent years been highlighted in international research and the public media.

To manage the risk of fraud, including financial statement fraud, an entity should address the problem holistically. Measures to prevent, detect and investigate fraud should be in place. The risk of financial statement fraud is clearly a responsibility of the board of directors, or its equivalent in other organisational structures, especially the non-executive members. The audit committee is ideally positioned to assist the board in discharging this responsibility.

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Corporate Fraud Bank. (2017, Jun 26). Retrieved December 4, 2022 , from

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