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Deloitte
& Touche negligent in failing to uncover the Nick Leeson frauds,
but high degree of contributory negligence on part of Barings
The Barings
group collapsed in February 1995 as a direct result of unauthorised
trading conducted on the Singapore International Monetary Exchange by
Nick Leeson, the general manager of Barings Futures (Singapore) Ltd
(BFS). The frauds were perpetrated through an account numbered 88888
and resulted in losses amounting to £791 million. The Barings
group had funded these losses, in ignorance of the real use to which
the funds were being put. It was BFS' inability to repay its debts to
the other group companies that brought down the group.
Deloittes
had acted as auditors of the 1992 and 1993 statutory accounts. Over
20 allegations of negligence were originally made but in the end the
judge held the accountants to have been negligent in just two respects:
Leeson
had concealed the losses by "window-dressing": he credited
a payment from Barings Securities in London as received on 30 September
(the last day of the old financial year), when it was in fact received
on 1 October (the first day of the next financial year). Deloittes should
have detected that the payment had been credited to the wrong day and
that the credit was concealing a significant loss in BFS' accounts;
and
The December
1993 balance sheet showed BFS as having deposited more margin with the
Singapore International monetary exchange than it had received from
customers, when the balance should have been the other way around. Again,
had this been investigated, the unauthorised trading would have been
revealed.
The judge held against a number of other allegations of negligence.
For example, Deloittes were not negligent in failing to carry out a
test for open positions in 1992 or 1993. They were entitled to assume
that an account with a zero balance would not have open positions. The
audit procedures they followed gave them reasonable assurance that there
had been no misstatement or unauthorised trading and there was no obligation
on them to devise further procedures in relation to that risk.
Mr Justice
Evans-Lombe felt that he had to take into account the very high level
of fault on the part of BFS and those to whom the board of BFS delegated
their functions. He identified the failure of BFS' local management
to supervise Leeson's running of the BFS back office, the failure of
management in London and Japan to understand his "switching"
trading or question the high profits he reported and the lack of adequate
risk monitoring. Perhaps the most significant element of fault was BFS'
provision to Leeson from March 1994 onward of funding which was not
reconciled to trades or customers or supported by credible explanations,
without any serious attempt to investigate the reasons why it was needed.
So serious
was the contributory negligence that damages were reduced by a proportion
which increased over the relevant time from 50% to 80%. From the end
of April 1994 onwards (the period during which by far the largest part
of the loss was suffered), BFS' fault was so great as to be the only
cause of the loss, with the result that Deloittes had no further liability
from that date.
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