What created the opportunity for fraud?
Fraud research indicates three conditions must exist before a fraud occurs: Pressure/Incentive, Rationalization, and Opportunity.
Opportunities. Flaws in the design and effectiveness of internal controls enabled Kerviel to create
fictitious trades and take overly risky trading positions (control weaknesses are outlined in the
case). Kerviel spent his first 5 years with the bank in the “back office.” Here, he became intimately
acquainted with the company’s control policies and procedures. This experience provided the
knowledge regarding what and when controls would take place. For example, an internal report on
the fraud stated Kerviel, “knew that they [certain trades] were only monitored at the end of the
month and cancelled them before the control took place.” His knowledge of the back office’s actions
gave him the opportunity to circumvent controls and hide his actions for years.
Control weaknesses that allowed Kerviel to have “secret” accounts and create fictitious trades
included:
Poor segregation of duties as Kerviel was able to both authorize and record trades. He also managed
his own records and would make multiple revisions and corrections without supervisor approval.
Delta One is not watched (monitored) like the A-league traders
The system could not distinguish between real and fictitious transactions. Furthermore, the system
provided traders the ability to enter temporary transactions and revise past transactions without
additional approval from a supervisor.
Restricted access was weak, unauthorized access was provided through “borrowed” passwords.
There was no manager over the Delta One trading desk for 21?2 months.
Compliance officers only performed “routine” checks and did not dig deep in their follow-up of
alerts.
The system did not capture and report evidence of alerts and discrepancies associated with a
trader across different types of securities.
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