Tag Archives: error

Nobody’s Perfect

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Barings Bank was the United Kingdom’s oldest merchant bank and the second oldest merchant bank in the world. In 1992, the bank sent 25-year-old Nick Leeson to be the general manager at its new office in Singapore. During that first year there, Leeson made unauthorized trades that earned Barings £10 million in profits. The bank should have had a system where one person was a trader, and another was double-checking and then authorizing these trades. Instead, Leeson did everything with no checks and balances. Yes, these trades were unauthorized, but they made the bank a lot of money and so, instead of nipping the unauthorized trades in the bud, Barings paid Leeson a massive bonus and labeled him a rising star. Things changed very quickly, and Leeson started losing money on his trades. Instead of reporting his losses, Leeson hid them in a suspense account, that he created and tried, unsuccessfully, to recoup his losses. He would then hide those losses in this suspense account as well. By the end of 1994, the losses stood at £208 million. In February of 1994, Leeson left a note stating, “I’m sorry”, and fled Singapore, leaving Barings Bank with £897 million in losses (equivalent to $1.4 billion). Barings Bank could not recover from those losses and, after being in business since 1762, collapsed and was bought by ING for £1.

The story of Barings Bank and Nick Leeson is like one of those puzzles where you circle the ten things wrong in a picture – there are that many problem areas and weaknesses that led to the downfall that we could revisit this story many times for lessons. Today we shall focus on Nick Leeson hiding his bad bets. Initially, Leeson made errors and miscalculations on some trades that he made and lost money from those errors. From some of the accounts from Leeson, it is implied that mistakes were not looked upon kindly. Leeson claimed that he first opened the suspense account in which he hid losses after a colleague lost £20,000 after making an error herself. Instead of either one of them reporting the error, they decided to hide this error from leadership. Nick Leeson then went on to hide more of his trading errors here, thinking, in the manner of a gambler, that he could gain the money he had lost back, and his bosses would never find out what he was doing.

I thought about Nick Leeson this week because I am reading Principles by Ray Dalio. In it, he tells the story of how his employee Ross, who was in charge of trading at the time, forgot to make a trade and that cost the business “several hundred thousand dollars”. Dalio tells us that, with such a costly error, he could have dramatically fired Ross and “set the tone that mistakes would not be tolerated. Instead, Dalio recognized that mistakes happen to us all the time, he himself had made mistakes so large that he had essentially lost his business at some point. Dalio’s approach, which is an approach that I am a huge fan of and have tried to follow for a long time, is to think about what to learn from mistakes and how to improve things to minimize the chances of those mistakes happening again, or at least how to minimize their impact should they occur. As I have written before, Dalio recognized that punishing Ross for his mistake would likely result in other people working hard to hide any errors. Dalio saw that would cost his business a lot more in the long run. At his firm, Bridgewater, Dalio and Ross created an error log where errors were tracked and addressed. Instead of people getting into trouble for making mistakes, they would get into trouble when they didn’t report mistakes.

With Leeson (and Barings Bank) and Dalio in mind and the different outcomes that have resulted from their approaches to dealing with mistakes is very telling. One person brought down the second oldest merchant bank and the other has what is considered to be the fifth most important private company in the United States. Some things to keep in mind when considering how to manage responses to errors in your business:

  • Create an environment where everyone is comfortable reporting errors that they have made. Be explicit with this, both in what you say and how you respond.
  • When you discover a mistake, take the time to look, with your team, into how this mistake might have been avoided or recognized and resolved earlier. An example is, with a missed trade, it is likely that Dalio and his team looked at the process and sought to put in checks to make sure that there were others aware of the trade, checking to make sure the trade was made and having a way to check in with Ross to make sure he had not forgotten.
  • Review your systems to see where there are checks and balances and if especially important areas are not put on one person. Make sure that someone else is checking – we all make mistakes and that is why there is a checking system. Not to make us feel bad about ourselves but in recognition of our humanness.
  • Have open discussions about errors and get input from all levels on how to avoid or detect errors. At the leadership level, you may come up with a system, but you may find that staff find that process cumbersome, don’t stick with it and errors can go undetected for a while. And if an error has not even been detected, it can’t be reported.

These are just a few things to think about but the most important part is creating an environment that is open to communication, not just about success, but about the things that have gone wrong. You should think about making the environment open for the hard conversations the priority because it is simple to report and celebrate success but failure and error are what kill our business. With that in mind, are there situations that you have found yourself in where either you or someone on your team made a mistake? How did you respond, how did others respond, and how did things turn out?

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Gimme A Break!

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It almost seems a long time ago, but November and December had a great series of holidays that, for some, were leveraged into a week or two of time off. From the conversations that I have had with strangers in elevators, not a single person wished they could have just stayed in the office and worked. The only gripe was the weather (for those of us in the Northeast). Everyone needs time off to recharge and those who tell us otherwise are lying to themselves or to us.

However, for those bosses who don’t care about whether or not their workers are worn out, just as long as they show up, there is a reason to give time off that benefits them – security. You would not believe how many stories I have come across, of fraud perpetrated by employees who rarely took time off and , if they did, it was only ever for a couple of days at a time. The bosses loved them because they were so diligent and always there when anything was needed. It also turned out that these same employees were diligently stealing from their employers. because they were always in the office, they were able to make sure that people didn’t poke around in their work too much. Because they were always in, they were able to steer people away if anyone seemed to be getting close to discovering their scheme. Because they were always the face in the office, they were able to gain the trust of their employers. In this way, they were able to keep watch over their fraud schemes and keep them going on for a long time. I have lost count of the number of times I have heard about how shocked people were when a fraudster was exposed because of how diligent and ever-present that person was.

In theory, it is an admirable thing to have a worker who so loves coming into work that they won’t even take paid time off. However, when you think about it, why wouldn’t someone want to take time off that they are being paid to take? I don’t know about you but I do not have conversations where employees go on about how much they prefer being at work over spending time with loved ones, how much they love their daily commute and wouldn’t trade it for anything, or how they wish that weekends and days off would be abolished so they could spend more time at work. With this in mind, employees who do not want to take time off should be viewed with skepticism.

It is important that employers take advantage of the time off given, in order to perform fraud prevention and detection activities. This is mostly achieved by having another employee do the work of the vacationing employee. This is particularly important if the employee has a financial role or access to assets. A few examples of tasks that should be performed in an employee’s absence are:

  • reconciling the bank accounts;
  • receiving and opening mail, especially correspondence from banks and vendors
  • receiving and processing inventory;
  • disbursing checks.

Nobody likes to do someone else’s work, and that is a plus for a fraudster. But, doing someone else’s work has gotten many a fraudster caught (and often highlights errors and weaknesses). Bank reconciliations have been found to contain fictitious reconciling items. Checking the mail has revealed bank accounts that employees secretly opened and used to divert company funds for their own benefit. A check of vendor statements and payments has revealed payments being made to fake vendors. A lot of benefits are gained by employers when they give their workers time off and use that time to have their peers do the vacationers’ work. Several authorities, including the Federal Deposit Insurance Corporation (FDIC) and the SEC recommend that banks and investment advisors, among others, adopt mandatory two-week vacation policies as a safeguard against fraud. This is an approach that other types of businesses should also consider adopting. Several companies have adopted this policy of a two consecutive weeks off. This gives sufficient time to have other employees perform the tasks of their vacationing colleagues.

There is another benefit to having others do the work of their coworkers, either when that employee is on vacation or by rotating tasks. This is increases the number of employees with knowledge of processes, with all the peculiarities a company will have that are not in the company manuals. I recently read a piece on TheInnerAuditor website about the dangers and risks involved when knowledge is held by one individual in a company. Invariably that person’s work is never checked (who would know how to) and no one ever knows when this special person makes an error or, even worse, is committing fraud. In addition to this, should this person quit, retire or fall ill, the company will find that has no idea how to do certain things or even where to find the information required for the task. This is because it has been easier to rely on this one brain trust than to learn what the trust knows. And the brain trust enjoys the power and authority given to them because they are always the smartest person in the room. I have written before about how notes on systems and processes may not include every single piece of information. Having others cycle through tasks is the best way to be sure that others know how to perform the tasks and that more than one person knows what is going on.

So, bosses, go ahead, give your employees a break, a real break. They will be happier and likely more productive for it and it will benefit your company. it will improve your chances of detecting and deterring fraud and it will help prevent errors. Finally, it will make sure that you don’t have to depend on one person to keep the business running.

And, workers, tell your bosses to give you lots of time off and remind them to, please, have someone do your work while you’re away. Assure them that you are not doing this for yourself. No, this is part of you looking out for their business.

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It’s A Good Hurt

This morning, after my run, I pulled out my yoga mat and foam roller and embarked on my post-run stretches. I am yet to come across a runner who looks forward to the stretching – most of us confess to not stretching enough. And as much as we deplore the stretching we tend to do that more often than the foam rolling. This is because, despite the benign name, the foam roller is an instrument of torture. When I have taken yoga classes, teachers have asked me if I am a runner. They ask this, not because my yoga skills are impressive, but because my leg muscles are so tight that touching my toes is a feat; it’s not a good look. These tight leg muscles are what I target with the foam roller. I am terrible at stretching because stretching after a run is mind-numbing tedium. I am atrocious at using my foam roller after a run because trying to loosen up my tight muscles after a run hurts like hell. However, if I don’t loosen up these muscles, I am setting myself up for injuries and pain that will keep me from running for a lot longer than it takes to suffer through the rolling.

The same is true of many aspects of an entity’s financial system. There are many controls that are recommended by accountants and auditors that may seem like overkill or painfully tedious. However, as I have explained in some of my posts regarding aspects of control systems, such as segregation of duties and double entry accounting, being proactive about creating and maintaining a robust financial control system goes a long way to keeping things from going horribly wrong in the future. I will be the first person to tell you that there are many parts of an accounting system that are not fun. For example, it would be so much easier to have checks come into a company and be dumped on an accountant’s desk and have that one accountant deal with recording the check in the books, depositing the check in the bank and then reconciling the bank statement at the end of the month. Way too many companies opt for the easier path and find many ways to justify their decisions – the accountant has been with them for years, the accountant is such a nice person and totally trustworthy and wouldn’t act in an unethical manner. It’s an easy path until the money is stolen and, more often than not, not recovered. Too many stories of beloved staff members who have turned out to be fraudsters and thieves should show people that a great personality is not an acceptable control measure. Way too many times, we discover that the friendly coworkers are able to perpetuate their crime for a long time because they just seem too good to be crooks.

Record-keeping can seem like such a drag. I mean, what fun is there is debits and credits and keep track of income statements and balance sheets. Oh, and don’t get me started on the headaches that a balance sheet that doesn’t balance can bring. Why would anyone want to keep track of order forms, receipts and other elements of an audit trail? When making an adjustment to the ledger, you know that you will totally remember why you processed the change, even ten years from now. You don’t need to provide backup or keep a record of why you made the change. You wouldn’t believe how often I hear this kind of talk from accountants. Six months later, practically none of them can explain a journal entry that doesn’t have backup and this is for the accountants that have not decided to move on to another company, leaving the person who has taken over their position completely in the dark. Especially since we live in an age when people are not married to one job for life, it is essential that anyone looking at a transaction can find out just about everything there is to know about the transaction without having to employ the services of a forensic accountant.

There are times when I start nodding off just at the thought of the some of the processes I need to go through. Sometimes I think – I don’t really need to check this; the accountant has done this a hundred times, so it is probably okay. But then I think about what might happen if I am incorrect. The thought of how much more I will have to do if I don’t perform the check and then have to clean up the mess afterward pushes me to suck it up and do things correctly the first time. When, on occasion, I find an error, I know that it’s good that I decided to do the right thing. Also, the fact that those in the finance department know that work is being reviewed and being given a look-over by others is a great deterrent to those tempted to engage in nefarious behavior. I also remind myself of this when my own work is being reviewed and my ego has to be reminded that even I can make mistakes and that, in the name of outputting a superior product, the checks on work are not only good but necessary.

Running a business is not all fun, games and glamour. There are times when the physically and mentally painful work must be done in order for the business to succeed and minimize errors and fraud. I groan in pain and have to will myself to remain diligent and not cheat on the foam rolling. The neighbors may wonder what is going on but I know that this is how I can minimize injuries and keep on running happy and healthy. Likewise, though I make less noise (at least, I think I make less noise) about some of the work that I have to do, I know that this is what must be done to keep the company happy and healthy. So, do what hurts – it’s good for you.

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I Trust You, But…

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Last Saturday, my husband showed off some of his work in an open studios event at Industry City. He did the lion’s share of the work but, on Friday evening, he asked me to come over and help him a little. He assigned me the job of placing 5×7 prints of some of his work in 5×7 frames. It sounds straightforward enough and I am sure that my husband trusts me and has great confidence in my abilities. Nevertheless, after I had framed a few photos, he came over and checked my work. It turned out that some of the photos were not quite centered in their frames. He handed them to me, offered me some tips on how best to center photos in frames, and asked me to redo them.

This reminded me of when I was a kid and my parents would check my homework. I know that they felt that I could do it. I know this because they would say things like, “You can do better than this; try again.”Most of the time the issue was that my handwriting was barely legible on a good day. Knowing that my work would be reviewed, on days when I was tempted to rush through my homework, maybe because I wanted to play or watch TV, I willed myself to slow down and get it done correctly the first time around. I did not want to get into trouble and I definitely did not want to have to do my homework over again.

Recently, I have been reading stories about people in charge of a business’s finances perpetuating fraud. These people carried on their shenanigans and were not caught until the businesses they were employees of were practically going under. You know why? Because no one ever checked their work. Ever. In the cases that I read, the business owners were all charmed by the charismatic and capable people that they hired to manage their finance departments. The business owners gave these managers unfettered access to the companies’ bank and credit accounts and, boy, did those managers take full advantage of this access. They opened new credit accounts, they maxed out existing accounts and they went shopping! These business owners only found out what was going on when purchases they were trying to make were declined because their accounts were wiped out. In every case, the owners had left the finances up to the managers that they had hired so that they could focus on operations. They seemed to forget that an essential part of a business is the money needed to run it. They did not keep tabs on where the money went after it came in.

Because none of us is infallible and because too many among us are not always honest, it is vital that work is checked by someone else. Depending on the size and complexity of an entity, there are various ways in which to incorporate checks into a system to prevent and detect error and fraud.

  • There must always be a review of another party’s work. In a very small business, this may mean that the business owner is periodically reviewing bank and credit card statements. It may mean that the business owner will check incoming mail on a random basis, to make sure that unauthorized statements have not been opened in the name of the business. In larger businesses, there should be processes where the work done by one employee is reviewed by another employee for error and misstatement.
  • Someone other than the person booking cash entries in the ledger should perform reconciliations of the bank and credit accounts. Reviews and reconciliations of payable and receivable accounts should also be performed.
  • Make sure that staff take vacations and that, while they are on vacation, someone else does their work. In this way if anything is amiss, a new pair of eyes may catch mistakes or other missteps that are being made. In addition to this, having someone else do the work also means that one person does not have exclusive knowledge of a process in a business. In this way, no employee is indispensable. Also, when more people understand a process, and employee is less likely to try hide fraud in the process.
  • If possible, move work around among employees, again, so that more people in a department have a greater understanding of what is going on. The saying is familiarity breeds contempt; it can also breed careless errors. People operating in autopilot can become too comfortable with the work that they are doing and make careless mistakes because they are not paying close enough attention to the work.

Check, check and check again. If people know that there are effective checks in a system, they are likely to be discouraged from trying to steal from an entity. If people know that their work will be checked, they are more likely to pay attention to details so that they don’t have to do the work over again. Even when I was frustrated because the photographs seemed to shift all by themselves when I tried to secure them in the frames, I growled, I complained, and I started over and over again until I got it right. You know why? Well, because I like to do a job well AND I didn’t want my husband handing the work back to me and calling me out on getting it wrong.

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