Investment Bank to Pay $920 Million Because of Weak Internal Controls
A large investment bank agreed to pay over $920 Million in penalties to settle charges that it violated the Sarbanes-Oxley Act by failing to maintain a system of internal accounting controls that ensures correct financial statements. The regulators charge that the firm discovered problems in its valuation control group after uncovering huge losses in its credit derivatives portfolio. The regulators assert that the valuation control group was not sufficiently independent of portfolio managers. They also criticize the valuation control group as “woefully ineffective” and under-resourced. The firm failed to report the internal control problems to the Audit Committee and failed to take timely action even though it had knowledge that valuations were over-stated.
OUR TAKE: Although this case comes under Sarbanes-Oxley, the SEC borrowed this same concept of adequate internal controls when it wrote the compliance rules (38a-1; 206(4)-7). Senior managers should read this case to get an understanding of how loose controls can cause very big problems. Firms should also note that the respondent had to admit several difficult facts to settle this action.