Professor Elam

Jerome Kerviel has lost Societe Generale, the largest bank in France, about $7.2 B.  Jerome learned the audit trails for the bank in his first job, he went on to become a trader in futures, earning $145,000 a year. Described by his professors as brilliant, he covered his tracks using his knowledge of how the bank’s reporting system worked.  The recent collapse in markets brought the losses to light. Oddly he did not personally profit from all the schemes.

You will have to click to enlarge the image at left. I learned some more after posting the above item about the bigget bank fraud ever. This item highlights the importance of receiviing correct information for basing decisions.  Societe General had $7.2 B worth of stock that it did not want to hold as a result of the fraud. And so on Sept 21, a day whe US markets were closed, it proceeded to ell a massive amount of stock. You can see the spike down in prices on the CAC French stock exchange that day.  The American FED however had no knowledge of this one large sale that, occurring in markets that were already falling, the sale only accelerated prices dropping. The selling was not confined to France as the stocks were held and sold in various Euro exchanges. So, the FED eyeing the big drop in Europe decided something absolutely had to be done. And that is why the FED dropped rates 3/4  point for the first time since 1984.  Asked if they would do anything different, of course they responded that they were content with their actions. Now, European Central Banks have not cut rates. So this is also an example of not regulating and stimulating but letting the markets sort things out.  I pointed out in class that with this latest cut the FED only had this option left about four times before money would essentially be free.  Correct information is essential to good decision making.  This is an incredible story of how the fraud of one individual, undetected by Societe’s Internal Auditors, caused a shot heard round the world. This is why accountants and auditors, both internal and external, have a public responsibility to act ethically and exercise their oversight function.

Updates on this case click here

Meawhile right here in DFW an Arlington real estate appraiser was sentenced to five years in prison. Gandhi Ben Morka would appraise a house far beyond its actual value.  The schemers targeted the home at a  lower price, took out the mortgage, paid the original owner, then pocketed the rest. In addition he must re pay $2.3 M to Countrywide Financial.  Others have been previously sentenced in the case.

My take.  Fraud is usually perpetrated by those one would least expect. This is the reason  the phrase ‘professional  skepticism’  should be used by a good auditor.   It is true that fraud has three cornerstones, opportunity, the urge to meet an artificial goal, and the ability to rationalize the act. That though is the description of an individual usually acting against the company or shareholders. The real estate case is one of just plain white collar crooks seizing an opportunity to turn the greed of lenders on themselves.  The same thing happened right here in Dallas with the land flips of the 1980s.  Apparently Countrywide did not employ anyone with enough experience to remmber those deals.  Bubbles bring fraud as swindlers let greed sweep lenders and bankers off their feet.  And of course, greed gets to the swindlers that are caught.  We will no know how many managed to stop just short of being caught and get out of town.