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FINANCIAL RISK MANAGEMENT

Systems security measures should be in place to ensure that no one other than authorized support personnel can make entries or changes to
management information systems. In particular, no frontoffice personnel should have such access.
The firms auditors should perform a periodic review of all operating
procedures.
Control functions must budget some spare capacity for investigative
work. The advantage of the control functions relative to an attempt at
concealing positions is that only one clearcut instance of concealment
needs to be uncovered to expose a fraud and that any significant attempt at concealment will create a large number of warning indicators
that can potentially trigger an investigation. But the disadvantage of
control functions relative to an attempt at concealing positions is that
a skillful perpetrator of fraud can be expected to be adroit at offering
superficially plausible explanations of unusual patterns.
If an investigation is being done in a little spare time of control
personnel with a full plate of daily responsibilities, it will be too easy
for them to try to wrap it up quickly by accepting a plausible explanation. If control personnel have some budgeted time for conducting such
investigations and know that the thoroughness of performance of this
task will be part of their job evaluations, it is far more likely that they
will perform the extra work needed to uncover the true situation. This
will lead to other benefits as well, since thorough investigation of unusual patterns may turn up other gaps in the control system, such as the
need for new risk measures or accidental errors in recording positions.
Control functions should maintain some central registry of investigations they have conducted (along with outcomes). Even if a perpetrator
of fraud has been successful in fooling control personnel in several investigations, the unusual number of investigations that the perpetrators
activity is engendering may itself be a clue that leads to a more thorough
investigation.
An overriding concern must be to protect control personnel against bullying. To have a good chance of uncovering frauds, investigations need
to be launched based on warning indicators that will create many false
positives. This means that the control personnel will go into the investigation knowing that the most likely outcome will be a finding that nothing is wrong. The very fact that they are conducting an investigation is
likely to be resented by traders (as a waste of time and as an indicator
that their honesty is being questioned). If control personnel feel they are
going to be berated by the traders when their investigation finds nothing wrong, then they are likely to conduct fewer and more superficial
investigations. Trading management needs to make sure that they give