A question of trust

The integrity and reliability of any organisation’s reporting structure are vital to its long term survival. All too often risk controls are lax or can even be ignored in the pursuit of profits.

It can also prove a false comfort to rely on the findings of the Auditors.

As we have seen some of the financial instruments employed by the banks were so complex that even their own architects could not fully understand the full implications.

Even with the most rigorous reporting procedures any company is still heavily reliant on the calibre of the people operating the business and recording each and every transaction diligently.

A prudent exercise for any organisation is to regularly assess and test the systems in place for monitoring risk both transactional and counter party to judge that they are fit for purpose.

Over reliance on “assurances” can become very costly as in the case of French bank Credit Agricole who this week revealed the damage inflicted by the bailout of Portuguese lender Banco Espirito Santo (BES), as it said profits had almost halved.

Credit Agricole said it has written off £563million – the entire value of its 14.6 per cent stake in BES.

The firm apologised to investors and claimed it had been ‘misled’ as it said profits fell to £770million in the second quarter, from £420million a year earlier.

Portugal is injecting almost £4billion to rescue its largest listed bank, founded by the Espirito Santo family, which last week reported a bigger than expected £2.8billion loss.

This wiped out its capital cushion and caused its shares to plummet by more than 75 per cent before the stock was suspended on Friday. The rescue means shareholders and junior bondholders will be wiped out.

Credit Agricole is the second biggest shareholder after the Espirito Santo parent company, which owns a 20 per cent stake.

The French bank’s chief executive Jean-Paul Chifflet said: ‘We can only regret having been misled by the family with which Credit Agricole was trying to create a true partnership to build the biggest private bank in Portugal.’ Shares in BES have fallen 89 per cent since June.