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Credit Suisse Control Failings; Corp. Reporting; More

Neil Baker | April 8, 2008

Credit Suisse has revealed that its investigation into the options mispricing that it disclosed last month has uncovered serious internal control failings.

The Zurich-based bank announced a $2.85 billion write-off on wrongly priced trading positions in February, just a week after unveiling full-year results that made no mention of any problem. At the time it said a routine internal review had picked up the mistakes, the implication being that its controls had worked.

The bank now says that the errors were “in part, the result of intentional misconduct by a small number of traders.” It has dismissed or suspended these employees. The review also found that “the controls put in place to prevent or detect this activity were not effective.”



Dougan

The bank is working on a series of remedial actions. These include moving the trading responsibility for this part of its business, enhancing control processes, making supervisory reviews more effective, and formalizing the procedures used to escalate control concerns. It is also improving the coordination between trading, product control, and risk management and giving each area more resources.

Brady Dougan, the group’s chief executive officer, said: “This incident is unacceptable and it does not represent the high standard of Credit Suisse. Our overall control framework remains sound. We are taking strong action to remediate and move forward.”


PwC: Corporate Reporting Too Compliance Focused

Corporate reporting is dominated by financial outputs and is too often seen as just regulatory compliance. That’s according to a new paper from PricewaterhouseCoopers, which has called for the development of a “new blueprint for a more holistic reporting framework.”

The position paper, published by the accountancy firm’s United Kingdom arm but representing its global view, says today’s corporate reporting model is “too financially orientated, too technically complex, omits many critical aspects of business information, and is subject to multiple regulatory requirements which are globally inconsistent.”

As a consequence, most companies fail to properly explain their strategy, the drivers of value, and the performance indicators critical to understanding their business, the firm argues.

The most critical change needed is a simplification of corporate reporting requirements, which should consider the complexity of the information that companies have to report, its relative value to readers of accounts, and the cost of producing it, the firm says.

The paper argues that high-quality corporate reporting requires change in four areas. First, a new reporting model should have a user-centric focus. “A real understanding of investors’ and other stakeholders’ needs should drive the reporting framework,” it says. This should reflect “the relevance and reliability of information, how it is used to assess performance and governance, and the cost/benefit of its preparation and audit.”

Second, corporate reporting should be principles based: “By avoiding a rigid rulebook, the risk of boiler-plate compliance, which can undermine information value, will be reduced,” it states.

Third, it should require reports that are easy to prepare: derived from internal management information and written in plain language.

And finally, corporate reporting should integrate financial and non-financial information and include information about the operating context. “More emphasis is needed on longer-term value creation with information hardwired into the reporting model on strategy, markets, executive remuneration, customers, innovation, people, and environmental impacts,” the firm says.

The firm calls on the G8 Finance Ministers, the World Bank, and the International Monetary Fund to jointly sponsor the development of the new framework.

For a copy of the PricewaterhouseCoopers paper, please see the box above, right.


FRC Looks to Ease Regulatory Burden

The United Kingdom’s corporate regulator, the Financial Reporting Council, is canvassing companies for ideas about how it could reduce its compliance demands and make its regulation more cost effective.

The FRC published a discussion paper asking for suggestions of regulatory requirements that it could scrap, simplify, or restrict, and those where it could make compliance easier or less expensive.

The regulator noted that in some areas there is not a lot it can do to ease the burden on companies, as many of the regulatory requirements concerning financial reporting and corporate governance come from UK or European Union law. But it said it is committed to making sure that regulation represents value for money.

The discussion paper can be downloaded from the box at right.


Trial Starts for Parmalat Bosses

Four years after the company revealed a $22 billion hole in its accounts and earned itself the unwanted moniker of “Europe's Enron,” the fraud allegations against senior executives of dairy company Parmalat have finally gone to trial in Italy.

Parmalat founder, Calisto Tanzi, and his former chief financial officer, Fausto Tonna, are on trial along with 22 of the company’s former executives. The charges include fraudulent bankruptcy and criminal association and carry a maximum 15 years in prison. In addition, the courts opened four related trials, meaning there are a total of 56 defendants.

The main trial is expected to be the largest in Italian judicial history and is likely to run for up to three years. It has already generated six million pages of documents with ten million expected; teams from the prosecution and defense have submitted depositions from 34,000 witnesses. The majority of these are small bondholders who lost their savings when Parmalat collapsed. Under Italian law, they are able to join the trial as civil complainants seeking damages.



Tanzi

And these are not the only Parmalat trials. There are others underway in Milan, where the Italian stock exchange is based. In one, Tanzi and two employees from Parmalat’s former auditor—the local arm of Grant Thornton—face charges of market rigging, false accounting, and misleading stock market regulators. In another, four international banks face charges for failing to have procedures in place that would have prevented the alleged fraud. Parmalat is also the subject of civil cases in the United States.

The company emerged from bankruptcy in 2005 and has refocused on its core dairy business.