Moral Risk Student :Minh, Nghiem Van MA1N0234
Problems with ethics • Problems with ethics can be found throughout the business world. Its can be resulted in the devastating effect to company and company’s investers. • According to CFO magazine, 41% of surveyed chief financial officers admitted ethical problems in their organization, 48% of surveyed employees admitted engaging in unethical practices : cheating on expense accounts for forging signature. In the 2004 survey, 47% of CFOS said that they felt pressure from CEOs to use aggressive accounting to “Make the numbers work” or “ Hit the numbers”.
Baring Bank Bankruptcy • Barings Bank (1762 to 1995) was the oldest merchant bank in London , founded and owned by the German-origined Baring family. The bank collapsed in 1995 after one of the bank's employees, Nick Leeson, lost £827 million ($1.3 billion) due to speculative investing, primarily in futures contracts, at the bank's Singapore office.
The reason of bankruptcy • Because of the absence of oversight, Leeson was able to make seemingly small gambles in the futures arbitrage market at Barings Futures Singapore and cover for his shortfalls by reporting losses as gains to Barings in London. Specifically, Leeson altered the branch's error account, subsequently known by its account number 88888 as the "five-eights account", to prevent the London office from receiving the standard daily reports on trading, price, and status. Leeson claims the losses started when one of his colleagues bought 20 contracts when she should have sold them, costing Barings £20,000. • By December 1994, Leeson had cost Barings £200 million. He reported to British tax authorities a £102 million profit. If the company had uncovered his true financial dealings then, collapse might have been avoided as Barings still had £350 million of capital.
What can be done to minimize moral risk? • To build awareness through a code of ethics that spells out general principles of right and wrong conduct. • Provide whistle- blower protection for employees with ethics-related concerns. • Establish an ethics director. • Evaluate manager’s ethics in performance reviews