Corporate Governance And Ethics: Another Day, Another Trading Scandal Case Study

The effectiveness of the board at NAB

According to Carnegie (2016) corporate governance and ethics practice is vital for the success of any organization. It guides the activities within the enterprise and the management has the corporate responsibility for ensuring that the codes of ethics are adhered to within the organization. According to Batten, Lon?arski, & Szilagyi (2018) good governance comes with proper implementation of the formulated policies within the organization. Policies such as performance appraisal policy, recruitment policy, auditing policy and compensation policy have to be adhered for the success of the organization and the management should ignore any procedure for work as speculated in the policy. Lack of efficient auditing practices is what led to a big financial loss to the NAB which is a clear indication of how important it is to adhere to all the company policies.

Leaders have a role to enhance the success of the organization. They should be ethical in all their dealings with the company and not take an advantage of any situation like what they did at NAB by being dishonest and stole from the company(Fallon & Cooper, 2015)  Good leadership is built on the foundation of ethics and governance. This report is going to discuss the NAB scandal in details and outline effectively the violation of corporate governance and ethics practice by the NAB.

According to Harris (2017) the board at NAB remains ultimately responsible for all the fraudulent actions of the company due to negligence in the auditing department of the organization. There are various key indicators for the efficiency of the performance of the company such as the total shareholder return, cost efficiency ratios and the share price among others which had really decreased with a 19.7% as compared to the initial years. This was one of the clear signs that something was not right within the bank. It is evident that NAB’s management and the entire board lacked adequate accountability over transactions at the bank, there were also ineffective auditing practices and procedures within the bank which led to the breach of the integrity of the internal control structures of the bank(Liu, 2017).This resulted to a big financial loss for the bank which had a major impact on Australian economy since banks are usually the key foundations of the economy of any nation and poor performance usually have a major impact to the economic performance of the nation. The financial loss by the bank resulted to a significant reduction of its valuation in the market and loss of credibility in the market. The loss by the bank resulted to the fall of its share price on the Australian stock exchange by 30% for a period of nine months in 2004. According to Rogers, Wong& Nelson (2017)It further led to the erosion of trust among the investors which was a clear indication of poor corporate governance by the board for failing to formulate strategies to revive the company five years later after the scandal.

Other aspects of corporate governance that were problematic

 The members were not committed to a clear direction in relation to the financial performance of the bank(Montague, Larkin & Burgess,2016). They never held meetings to review on the performance of bank. It is usually a good corporate governance practice for leaders to meet and review the general performance of the company.

The board was not effective in monitoring the books of accounts which would have enabled them to identify the fraudulent activities that were been progressed by some of the leaders in the company.

The board should have held the financial manager liable for any financial discrepancies in the bank which would have made him keen and discover any unusual act in relation to the financial performance of the bank.

The board of management concentrated on their personal prospective leaving a few greedy individuals to run the bank which finally led to financial loss by the bank. This was in deed a poor act of corporate governance by the board.

There was inadequate feedback in relation to the performance of the company. The board assumed that everything was just right within the bank when in deed there were chaos.

The books of accounts were handled by a single person hence alterations were easily made in relation to the foreign exchange transactions in the bank. The bank was closed one hour late where fake transactions were formulated.

The board failed to conduct the risk assessment for various departments. This would have enabled it to insure itself against the fraudulent act of the employees and most probably it would have been compensated after suffering such a big loss.

The board should do the following to improve the corporate governance in NAB.

The board should formalize its functions and make it known in the entire organization. This is very important because nobody will question its orders especially when it requests for detailed auditing reports for the books of accounts.

The board of management must enlight all the employees on the significance of being honest to the organization. The bank used to be closed late than the stipulated time which was against the code of conduct for the organization since the one hour extension provided room for fraudulent activities by some of the leaders in the bank.

The board of management would have engage a serious external body in the auditing of the books of accounts which shall be very  efficient as compared to internal auditing that involved fake report provided to PBAC who were not efficient enough.

Things to be done to improve corporate governance in NAB

The board of management should  schedule the oversight process where each department have to submit their performance reports for verifications and statistical records formulated to determine the position of the bank at any given time in relation to its performance. This is important because it shall   enable the board to detect a slight change in the performance of the bank and precautionary measures can be taken to rescue the bank from the worst financial risk.

The Principal Board Audit Committee made a very big mistake by relying on the internal Audit in the process of screening the firm’s control issues in the year 2003. This is because the management took an advantage of the trust that the board had on them and assigned a very low rating to the internal audit when in real sense the bank was suffering a huge financial loss which went un noticed for over a long period of time. The management proved un trust worthy through its acts of failing to submit the external auditor report to the board which automatically meant that the management was hiding a very crucial information from the board.

PBAC should not only have reviewed issues with a ‘3-star’ rating and above but should have also reviewed even the small issues so as to ascertain where the real problem was. PBAC should have aimed to make NAB a hundred percent perfect in its internal operations by ensuring there were no issues within the bank.

In May 1999 the internal audit report gave the emerging issues a rating of 3. This implied that there were several serious matters which required an immediate action from the managing director with the entire Board Audit Committee. PBAC made a big mistake by trusting the management and in 2000 it published a report that the weaknesses identified in 1999 had been dealt with by the management without full approval with made the management to continue with their fraudulent activities within the Bank(McIlroy, 2018). In the year 2001, the auditing report provided by PBAC provided an adequate rating which implied that everything was in good condition in relation to foreign exchange business together with various currency options which was a fake report from the management. During the same year, PBAC identified two-3- star issues which were related to the various currency options where breaches occurred and further more incorrect VaR numbers were produced during transactions but PBAC never raised a concern about it since the management promised to deal with the issue. Nothing was done about because the daily limit breaches in transactions were not explained by the management and the incorrect VaR was related to the lack of use of volatility smile which were just a pack of excuses by the management to satisfy the concern of PBAC which never bothered to determine whether they claims were genuine. The head of internal Audit came up with a new rating system for the setbacks where all the issues that ranged between A$5 to A$ 30 million were rated 3-star which was initially rated as from A$1 to A$30 which reduced the number of issues in the bank from 70 to 21 without providing a new rating report to PBAC who thought the Bank was faring well until the worst happened in 2004.

Banks are continuously facing trading scandals not because they are too complex to govern and manage but it is due to the following reasons:

Managers are not honest and they use various means to steal from the bank which in the long run lands the bank to the financial loss

There are poor auditing practices in most of the banks where internal auditing is heavily considered than the external auditing and in most cases the internal auditing report is usually manipulated to suit the need of the few individuals within the bank who have got ill motives.

In most cases the board of the directors delegate all the responsibilities to the managers without adequate monitoring their activities which makes the managers to take advantage of the trust they have been bestowed by the board

Conclusion

The success of the financial institutions requires a high degree of integrity in the management. The board should not operate on assumptions but should dig into the matter so as to know how the bank is faring. External auditors should always ensure that all the issues identified during the auditing process have been effectively addressed rather than relying on the report provided by the management.

References

Carnegie, G. D. (2016). The accounting professional project and bank failures: The case of the early 1890s Australian banking crisis. Journal of Management History, 22(4), 389-412.

Batten, J. A., Lon?arski, I., & Szilagyi, P. G. (2018). When Kamay Met Hill: Organisational Ethics in Practice. Journal of Business Ethics, 147(4), 779-792.

Fallon, F., & Cooper, B. J. (2015). Corporate culture and greed—The case of the Australian wheat board. Australian Accounting Review, 25(1), 71-83.

Harris, H. (2017). A Short History of Applied Ethics in Australia. In Ethics in the Global South (pp. 153-174). Emerald Publishing Limited.

Liu, H. (2017). The masculinisation of ethical leadership dis/embodiment. Journal of Business Ethics, 144(2), 263-278.

Montague, A., Larkin, R., & Burgess, J. (2016). Where was HRM? The crisis of public confidence in Australia’s banks. In Asia Pacific Human Resource Management and Organisational Effectiveness (pp. 67-86).

McIlroy, J. (2018). Bank scandals fuel calls for completely new system: Why we should nationalise the big four under democratic control. Green Left Weekly, (1178), 8.

Rogers, D., Wong, A., & Nelson, J. (2017). Public perceptions of foreign and Chinese real estate investment: intercultural relations in Global Sydney. Australian Geographer, 48(4), 437-455.