No Excuses: Managing Operational Risk

Headlines about high-profile white-collar criminals sometimes mask underlying weakness in business controls and risk management. This book excerpt looks behind the curtain.

By Dennis Dickstein and Robert Flast

September 16, 2009 — CSO —

This article is excerpted from No Excuses: A Business Process Approach to Managing Operational Risk by Dennis Dickstein and Robert Flast.

Surviving a Series of Unfortunate Events

As we left the twentieth century and welcomed the beginning of the twenty-first, the world economy appeared to be in greater shape than ever before. Things were probably going well for you, too.You had an enjoyable job, working for a first-rate company. Every day you looked forward to your commute. On any given morning, you would make your way downstairs to your front door to be the first to take the morning's newspaper. Opening the paper, you would read the headlines. Let's take a look at the following news headlines and consider how much you or your company's board members would like to see headlines like these about the first-rate company for which you worked:

• Exxon Takes a Spill in Alaska
  Newsday April 2, 1989
• Heads Roll at Showa Shell
  The Independent—London February 26, 1993
• Kidder Scandal Rocks Wall Street
  The Plain Dealer April 19, 1994
• NASDAQ: An Embarrassment of Embarrassments
  BusinessWeek November 7, 1994
• A Big Bank Goes Belly Up
  Los Angeles Times February 28,1995
• How Many Other Barings Are There?
  Wall Street Journal February 28, 1995
• Boss Resigns as More Daiwa Losses Emerge
  South China Morning Post October 10, 1995
• Enron Falls—With a Whimper
  Miami Herald January 16, 2002
• Andersen, Enron Get Federal Review
  Washington Post January 26, 2002
• Allied Irish Plunges after Suspected Fraud
  Reuters News February 2, 2002
• MCI Expected to Pay Massive Fine in SEC Deal
  Wall Street Journal May 19, 2003
• Citigroup Private Banks Kicked Out of Japan
  New York Times September 20, 2004
• Prudential to Pay Restitution and Fines of $ 600 Million
  Deseret Morning News August 29, 2006

Note that these headlines not only point to the financial impact on companies, but also have consequences beyond their earnings—from the personal to the greater community. Many people, especially those never involved in any wrongdoing, have been hurt and even ruined. Aside from resulting in headline news and adversely affecting a variety of industries and thousands of people, these obviously independent and unfortunate events have something else in common. Let us examine one of the more famous cases to help us better understand this unique commonality.

Crime of the Century

On February 26, 1995, Barings Bank, the oldest bank in Great Britain, was unable to meet its funding requirements and was declared bankrupt. Barings was founded in 1762, helped finance the Napoleonic Wars, the Louisiana Purchase, and the Erie Canal, and 233 years later, on March 3, 1995, the Dutch Bank, ING, bought it for a total of £1.00. How did something like this happen? Virtually all of the stories about this subject blame one man: Nick Leeson. These stories, often told and retold, are virtually the same.

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