A question of trust

As the various pressures increase on businesses the integrity of financial reporting has never been more crucial.

With companies and individuals desperate to achieve profit targets the potential for abuse may prove to be too much of a temptation.

It is important that systems are in place to prevent misreporting and in worse case scenarios fraud and these systems should be reviewed and rigorously checked.

It is hardly surprising that “independent” auditors who were called into Banks in Spain to verify the true value of the property portfolio now report that the Banks need an injection of that they will need up to 62bn Euros. Until a short time ago the market was only too willing to accept the Bank’s own value for its balance sheet “assets”.

Recent reports in respect of the LIBOR fixing scandal illustrate how vulnerable institutions are if their personnel choose or are allowed to camouflage the extent of their exposure to unanticipated market movements.

Fraud is not confined to any one business sector; yesterday the U.S. futures industry took its latest blow as Iowa-based broker PFGBest collapsed after regulators accused it of misappropriating customer funds for more than two years, dealing a new blow to trader trust just months after MF Global's demise.

The Commodity Futures Trading Commission (CFTC), which along with industry regulators had given a clean bill of health to dozens of brokers following spot checks in January, alleged that the firm's regulated Peregrine Financial Group (PFG) unit and its owner had defrauded customers and lied to regulators in order to hide a shortfall that now exceeds $200 million.

Despite the increased presence of computer modelling to monitor risk there is always the “human element” which has to be considered.

Nobody has devised a fail-safe system which affords 100% comfort but in many instances a closer objective scrutiny would have given sufficient warning to have averted a train wreck.