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Covering Up Trading Losses: Opportunity-Cost Accounting as an Internal Control Mechanism

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Author Info
Edward J. Kane
Kimberly DeTrask
Abstract

This paper analyzes the methods of loss concealment used by rogue traders in the Barings and Daiwa scandals. The analysis clarifies how and why these firms' top managers and home-country regulators deserve blame for allowing cumulative losses to become so large. The central point is that information systems that focus exclusively on cash flows tempt amoral traders to build credits that generate a high level of accounting profits. Constructing opportunity-cost measures of profit imposes additional restraints on reporting activity. These restraints make it easier for higher-ups, auditors, and regulators to identify the true sources of accounting profit and to challenge counterfeit earnings.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6823.

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Date of creation: Dec 1998
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Publication status: published as (Retitled "Breakdown of Accounting at Barings and Daiwa: Benefits of Using Opportunity Cost Measures for Trading Activity") Pacific Basin Finance Journal, Vol. 7 (August 1999): 203-228.
Handle: RePEc:nbr:nberwo:6823

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G2 - Financial Economics - - Financial Institutions and Services
G3 - Financial Economics - - Corporate Finance and Governance

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  1. Hogan, W.P., 1996. "The Barings Collapse: Explanations and Implications," Papers 235, Sydney - Department of Economics.
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This page was last updated on 2008-5-17.

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