Transcript
MARTIN UPTON
When we think of the financial risks associated with bad behaviour, we may think of exceptional circumstances. Or examples where somebody has acted outside of the law. This would include fraud for personal gain; such as the Ponzi scheme run by Bernard Madoff that cheated investers out of billions of dollars by lying about investment returns, or fraud to cover up mistakes - rather than for personal gain - as with the case of Nick Leeson, whose actions brought down Barings Bank in 1995. A similar, and more recent, example came in 2008 when the French bank Societe General announced losses of some 4.9 billion Euros as a result of trades undertaken by another rogue dealer Jerome Kerviel. Initially, at least, Kerviel was able to conceal these losses by making fraudulent entries into Societe Generale's financial systems. Perhaps more intriguing, though, are the instances of fraud on an organisational level that requires groups of people to be complicit rather than just individuals.
classic case in this respect was Enron, the US energy trading company. The company was found to have misled investors and regulators about their profitability. Enron eventually went bankrupt in 2001 leaving investors with losses estimated at upwards of $60 billion. The scale of the deception required the active involvement of many people within Enron. Others who may not have been directly complicit would at least have been aware of the deception.
With the cases of individual fraud, it is easy in retrospect to think of the individuals responsible as one-off rogues. But when considering fraud on an organisational level it is far harder to imagine how this could happen. Surely the whole organisation was not staffed entirely of rogues Certainly many if not most of those caught up in these situations will have found themselves involved by no design of their own.
The explanation could, therefore, be that human behaviour in the work place, is heavily influence by the business environment. In these extreme cases of organisational fraud it is hard to argue against the view that the business environment and the actions of others are major contributory factors to how people behave.
Even in the examples of individual fraud, it seems highly unlikely that someone can act for the time that they did, without the knowledge of other employees. People's behaviour can deviate dramatically from what you might rationally expect, depending on the company that they find themselves in.
The risks inherent in the inconsistencies of human decision making often go undetected and they pose a genuine threat to identifying and managing risk. They are not as easily or reliably measured in a quantitative manner as other risks in business.