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Conclusions
External Auditors
| 13.44 | For the 15 month period ended 31 December 1993, there were realised and unrealised losses from the trading activities of BFS for that period which we assess to have been in the region of a sterling equivalent of about £19 million. The reported profits of BFS, however, were of a sterling equivalent of about £9 million. These profits, as reported, then flowed through to the group profits of Barings. We have not been permitted access to the working papers of the then auditors of BFS, Deloitte & Touche Singapore, and we have not been able to interview any of the relevant personnel engaged in the audit for that period or the preceding year. We do not, therefore, know what records, explanations and details were provided to them by BFS. In the event, it is now apparent from the reality of Leeson's trading activities that the profits from the activities of BFS must have been materially misstated | | 13.45 | C&L Singapore undertook the audit of BFS for the year ended 31 December 1994. Its audit of BFS had substantially been completed by the time of the collapse. On 3 February 1995 C&L Singapore provided to C&L London (who were, and had for some years been, the auditors of Barings plc and others of its subsidiaries) an Audit Report to the Directors of Barings plc, with consolidation schedules for BFS for the year ended 31 December 1994, which, without qualification, C&L Singapore stated were presented fairly for the purposes of the audit of the consolidated financial statements of Barings plc. A first stage of the subsequent events review for BFS was signed by C&L Singapore on 23 February 1995, which gave confirmation to C&L London that no events had occurred subsequent to the year end which would affect C&L London's signing of the Group accounts, subject to the finalisation of the bonus provision. | | 13.46 | It is not established if C&L Singapore were ever provided with a copy of the internal audit report of James Baker. An Audit Strategy Memorandum prepared by C&L Singapore in November 1994 stated that no major issues were raised by the internal auditors from London during their visit in August 1994. In the absence of detailed comments from C&L Singapore we cannot properly assess the basis for that statement.
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| 13.47 | C&L Singapore performed an assessment of BFS's control environment as part of their audit planning, which was completed in November 1994. This concluded that the control environment within BFS was satisfactory. C&L Singapore resolved, as recorded in the Audit Strategy Memorandum, that given the high volume of trades and adequate internal controls a controls-based audit would be done; but that balance sheet trade items would be validated by confirmations, as there were only four clients. Since we have not been permitted access to the work papers of C&L Singapore, for the reasons given in paragraph 1.74, and have not been able to interview any of their personnel engaged in the audit, we do not know the basis on which their conclusion as to internal controls was reached. This conclusion was, on the face of it, not readily compatible with the fact that there was a lack of segregation between front and back office: and this was so whether or not C&L Singapore had seen the internal audit report, or knew that its principal recommendations had not been implemented.
| | 13.48 | At the time of the collapse of Barings the audit for the year ended 31 December 1994 of Barings plc and BSL by C&L London was well advanced. However, there was a number of important audit matters which had not by then been completed by C&L London which included: agreement of subsidiaries' financial statements and the signature of a working copy of the Group financial statements (scheduled for 10 March 1995); the subsequent events review in London; and the auditors' management letter.
| | 13.49 | C&L London adopted an audit approach to BSL which was based on the examination and testing of the internal controls in operation. This work included an assessment of the controls in relation to payments of margin. C&L London assessed the control environment to be good. Where such an approach is adopted, adequate testing of the effectiveness of controls which are in place should be performed. As we have concluded, Barings' controls with regard to the payments of margin from BSL and BSLL to BFS were deficient in that BSL could not verify the information provided, and was confused as to whether the payments were for client trading or house trading; did not reconcile the payments to underlying client records; and did not assess the credit implication of such payments. |
| 13.50 | We do not consider that C&L London performed sufficient tests to satisfy themselves that the controls over payments of margin and the associated accounting balances were operating effectively. In their testing, in December 1994, of the controls of the Futures and Options Settlements Department, managed by Granger, they undertook insufficient compliance testing and relied inappropriately on their perception of Granger's experience. Such testing as took place involved observing her department's handling of funding requests during an interim audit visit, with no analysis and without proper scoping of the sample being tested; in consequence, there was no effective test of funding requests from, or margin payments to, BFS. | | 13.51 | We accept that C&L London might have queried the very high level of funding of BFS by BSL which occurred in January and February 1995 during the course of its subsequent events review (which it had not concluded by 23 February 1995). Nevertheless, we consider that, had C&L London carried out more thorough tests on the effectiveness of the controls in place with regard to payments for margin at the time of their controls testing, it is likely that the inadequate support for the funding requests from BFS would have been revealed at that stage, and the amounts paid which could not be reconciled to individual client balances identified.
| | 13.52 | As noted above, we have not been permitted access to the working papers of C&L Singapore and have not been able to interview any of their personnel engaged in the audit. We are thus unable to express any conclusion as to the sufficiency of the steps taken by C&L Singapore with regard to the matter of the SLK receivable - it was, in fact, C&L Singapore who first queried the entry relating to the SLK receivable - or with regard to the confirmations purportedly emanating from Ron Baker in London and from SLK, or the purported summary of transactions through BFS's Citibank account. Nor do we know what explanations were given to C&L Singapore by the management of BFS.
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| 13.53 | C&L London were aware of the matter of the SLK receivable and were aware that varying explanations for it had been given. They took the report of C&L Singapore of 3 February 1995 and explanations of management to be confirmation that the outstanding audit issue, so far as it affected the audit of financial statements, relating to the receivable had been resolved. They did not themselves at that stage inquire further with a view to resolving the conflicting explanations of which they were aware. | | 13.54 | The conflict between the explanations which had been given about the transaction (most notably as to whether or not BSL had been a counterparty) was not resolved by the comments of Broadhurst at the meeting with C&L London on 9 February 1995. Although C&L London were told by C&L Singapore on 2 February 1995 that the sum involved had been paid, even so the whole transaction, on whatever version of events was put forward, was unusual. It involved a very large sum, and raised a serious question as to the validity of the controls, by reference to which the audit had, to a considerable extent, been conducted. Moreover, Broadhurst had, as noted above, requested C&L London that reference to the SLK receivable be excluded from the management letter relating to BFS. C&L London rightly left that to the decision of C&L Singapore; but it was an unusual request in itself and one which should have indicated to C&L London that management believed that there were very unsatisfactory aspects involved in the issue of the SLK receivable.
| | 13.55 | Accordingly, we consider that the matter required further investigation by C&L London before the conclusion of the audit process. However, by 23 February 1995 C&L London had not completed their audit. As noted above, the signing of a working copy of the financial statements was planned for 10 March 1995; and the group subsequent events review in London and the management letter had not been finalised. We consider that C&L London were entitled, having had discussions with management in the early part of February 1995, to proceed at that stage on the footing that the money had been paid, as reported to them by C&L Singapore on 2 February 1995. While we think that C&L in London would have been fully justified in insisting on more detailed explanations at that stage, we conclude that it would be a judgement of hindsight to say that they positively should have done so then: and they were entitled to leave the matter for a later stage of the audit process.
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