Societe Generale, France's second largest banking establishment, had long had a reputation for having poor internal controls. It is no wonder that a relatively inexperienced trader was able to take advantage of the bank's system of weak internal controls to exceed his trading limit and cause the bank to lose more than €4.9 billion. True / False.

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Business

Joey Howe

Yesterday, 13:26

Societe Generale, France's second largest banking establishment, had long had a reputation for having poor internal controls. It is no wonder that a relatively inexperienced trader was able to take advantage of the bank's system of weak internal controls to exceed his trading limit and cause the bank to lose more than €4.9 billion. True / False.

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Esperanza Nelson · Answer 1

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False

Explanation:

Overtrading is thereby caused when a trader or trading broker does not adhere to the limits of their strategy.

Internal control weaknesses have been defined by problems associated with incorrect recognition of revenue, lack of segregation of duties, timing problems surrounding end of period reporting, and noncompliance of accounting policies.

Lack of oversight by the company essentially gives employees or traders free reign to manage themselves and/or the company's finances. While this works fine for some, it can prove disastrous in other cases. This is especially true in investment banks, as lack of oversight can allow a rogue trader to run roughshod with the company's finances.

An illustration involves an investment bank that doesn't have a system of approvals or review for the transactions made by its traders, one could make a bad trade that loses a substantial amount of money and then try to make up for the loss by making increasingly high-risk, high-reward trades. Truly weak internal controls could allow this to continue for some time, only being discovered after millions of dollars have been lost.