Breakdowns in internal controls in bank trading information systems: The case of the fraud at Société Générale

Abstract

The purpose of this paper is to examine the failure to detect breakdowns in internal controls in a major bank's trading information systems related to a fraud perpetuated by a mid-level derivatives trader. Specifically, this paper examines the events uncovered at Société Générale, a large French bank, in January 2008. The paper addresses the question whether the apparent breakdowns in internal controls were caused by the fraudulent activities of a single trader acting alone or whether there may have been a certain level of acceptance of these activities on the part of the bank hierarchy as long as the trader was making a profit. The conclusion of the paper is that bank management may have overlooked overrides of internal controls over bank trading information systems during periods when risky trading practices resulted in profits, but that management quickly took action to correct the internal control overrides when the trading practices led to losses, thus re-emphasizing the crucial importance of tone at the top in the internal control environment. The paper will also address current and future potential research which may have prevented the fraud at Société Générale.