Perverse Impacts Of Well Intentioned Organization Structures & Processes (Term Paper Sample)

BARINGS BANK-NICK LEESON
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Perverse impacts of well-intentioned organization structures & processes
According to Tsai (2011), organization structure and processes are put in place to ensure adequate operations. In other words, they are measures that ensure the objectives are achieved in a regulated environment. However, in Barings Bank, their failure was attributed to normal accidents, structural failure, and bureaucratic dysfunction. The three combined to allow Leeson to continue his trading activities that were the proximate cause for the failure of the bank that had been in operations for over two centuries.
Bureaucratic dysfunction is manifested through lack of communication, alienation, displacement of goals, circumventing regulations, and incompetence among the management team and employees (Tsai, 2011). At Barings Bank, the management had instilled a culture of fear and rigidity in their operations. This resulted in the poor relations between the management team and their subordinates. Moreover, there was a lot of cover-up among the employees to protect their jobs at the bank. This form of organization structure provided a suitable atmosphere for Leeson to carry out his trading activities that were not authorized without detection (Nguyen, 2016).
Additionally, circumventing regulations was possible at the Barings Bank. Leeson managed to create segregation between dealing and settling. This indicated that the Error Account 88888 was able to operate without the management and auditors noticing it. Moreover, Leeson had the leeway to operate beyond his job scope by manipulating the regulations in the bank. He traded in unauthorized derivatives, which placed the bank in a precarious position (Chorafas, 2015).
Chorafas (2015) also indicates that the management was incompetent and negligent in their obligations. The management team is tasked with the responsibility of ensuring that operations are running concerning the set goals. They need to know about all the activities under their supervision. On the other hand, the senior management at the Barings Bank was careless and lacked sufficient knowledge to help them comprehend the derivatives market. Moreover, they were gullible to believe what Leeson presented to them on the status of various readings. They never used their authority to substantiate the reports and act on the warning signals that they saw.
Additionally, the high levels of profits that were being generated from authorized but low-risk arbitrage transactions by Leeson did not raise speculations. In the financial markets, low risks investments rarely generate the profit margins that Leeson was reporting. It deals with locking profits with no risks by simultaneously taking part in transactions that are in two markets. However, they incur low profits and not the excessive profits presented by Leeson. The management decided to focus on the profit margins neglecting the fundamental facts that there was something wrong (Nguyen, 2016).
According to Chorafas (2015), there was a time when 60 percent of the revenues of Barings Bank were from arbitrage trading carried out by Leeson. In a functional bureaucracy, no one is above the ethical structures that guide the financial institutions. However, as a result of the bureaucratic dysfunction at Barings Bank, Leeson became untouchable. He had the leeway to engage in different unauthorized activities without questions.
Furthermore, in a dysfunctional bureaucracy, there is confusion that arises from the failure of the duties to be segregated. Leeson performed different duties that gave him the power to go unchecked. He carried out trading activities, account settlement, the signing of checks, signing off on various trades and preparing the reconciliation of bank statements, all of these obligations are supposed to be divided in a financial sector to ensure that mistakes or greed does not take place. Moreover, the combining of the front office and the back office operations under the influence of one person left the Barings Bank vulnerable. This resulted in Leeson engaging in very risky and volatile transactions that led to losses. Moreover, he used his influence to hide the losses incurred in the error account he had created 88888 (Chorafas, 2015).
Also, structural failure is a significant factor in a dysfunctional bureaucracy. Structures are put in place to ensure that rules and organizations are followed. Also, they prevent the occurrence of scrupulous actions by the employees. Moreover, they ensure that there is a hierarchy of reporting and enforcement of different recommendations. On the contrary, Barings Bank had a weak structure; Leeson lacked a person who was supposed to supervise his actions (Bhasin, 2015). Some recommendations were provided by the internal audit review that was done on BFS in 1994 August. However, the bank systems took a lot of time to implement the suggestions. This widened the risks that the company was exposed to as a result of the derivatives trading that were taking place in the Barings Bank (Reason, 2016).
The human resource function is meant to complement the structure of an organization. They ensure the employees have the required skills to foster the objectives of the organization. However, Leeson did not have the necessary skills to work in the capacity and obligations that he was assigned to at Barings Bank yet he was employed and promoted. This translated into him making wrong moves like top straddle technique in selling a call and a put with a similar exercise expiration date and price Nikkei 225 index. This is a risky investment, and an experienced person would not have succeeded (Bhasin, 2015). Superiors at Barings Bank failed to ensure that there was a structured reward system for the traders. Leeson's salary was 50,000 Euros; however, his bonus for 1994 was 450,000 Euros. This is an absurd reward system as it was nine times his monthly salary and goes against the performance reward system in any progressive institution (Nguyen, 2016).
Quality Control and Oversight
Bhasin (2015) indicated that oversight and quality control are in place to enforce order in different operations. Quality control removes the mistakes that are prone to occur in the activities of organizations. Also, they ensure that the systems of controls are implemented to streamline operations. Quality control is undermined when there is a lack of oversight. Different people are involved in oversight; they are auditors, government regulators, compliance officers, senior management, and board members among others.
However, Barings Bank had a poor quality control system. They lacked a system that could detect fraudulent activity at its advanced stages. This would have helped the bank cover their any loopholes from the actions of unscrupulous employees like Leeson. Moreover, quality control dictates that boundaries should be set to regulate the operations of a business. On the contrary, Barings Bank lacked any proper trading limits. This resulted in Leeson being provided with large amounts of money, which extended the liability of the company beyond a reasonable scope in the dealings he engaged in the name of Barings Bank (Bhasin, 2015).
Barings Bank had weakened oversight systems, which placed the bank in a dangerous situation. The bank lacked a reporting system that could evaluate and identify the different risks and exposure that were imminent. In other words, they required a risk management department that could monitor financial transactions, market risks and provided regular reports on the activities done by traders. Also, the accounting department was negligent in its operations.
They have the oversight responsibility of determining the liquidity risk of the company. This would have reduced the trading activities of Leeson helping the bank to respond to the market tribulations and changes, promptly (Reason, 2016).
On the contrary, the lack of oversight resulted in the bank collapsing as they lacked finances to cover the losses that Leeson had accrued in his trading activities in the name of Barings Bank. Furthermore, they had a matrix reporting system that complicated the oversight role in Barings Bank. Leeson took advantage of this system as he reported to different managers at different times. His activities were ambiguous which enhanced the level of ineffective practices in Singapore (Reason, 2016).
In the banking sector, there are government regulatory agencies that are obligated to carry out monitoring trading activities. In Britain, the Securities and Futures Authority (SFA), carried out their investigations on Leeson. They discovered that he was dishonest in his application for his trading licenses. This is because he had failed to disclose that he had a judgment from the county court that was against him for 639 Euros. This resulted in the making the decision that he would not be allowed to trade in the City. However, Barings Bank ignored the early warning signal as they transferred him to Singapore where regulations were less stringent (Nguyen, 2016).
Also, quality control dictates that there are statutory auditors who are trained in their activity to monitor the bank. Nevertheless, Barings Bank had untrained statutory auditors as they were unable to detect the forged documents by Leeson. This indicates that the oversight regulation procedures in accounts were not efficient. Moreover, the external regulatory controls in Singapore performed checks in the financial institutions to strengthen the stability of the industry. However, they failed to discover the false declarations that were made to them by Leeson. This enhanced his confidence in his trading activities that resulted in him accumulating losses while avoiding the margin call that would have audited the losses he was accumulating (Nguyen, 2016).
Quality control...