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

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  • 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.

Suggested Citation

  • Edward J. Kane & Kimberly DeTrask, 1998. "Covering Up Trading Losses: Opportunity-Cost Accounting as an Internal Control Mechanism," NBER Working Papers 6823, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:6823
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    References listed on IDEAS

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    1. repec:syd:wpaper:235 is not listed on IDEAS
    2. W.P. Hogan, 1996. "The Barings Collapse: Explanations And Implications," Economic Papers, The Economic Society of Australia, vol. 15(3), pages 1-27, September.
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    1. Kornert, Jan, 2003. "The Barings crises of 1890 and 1995: causes, courses, consequences and the danger of domino effects," Journal of International Financial Markets, Institutions and Money, Elsevier, vol. 13(3), pages 187-209, July.
    2. Kane, Edward J. & DeTrask, Kimberly, 1999. "Breakdown of accounting controls at Barings and Daiwa: Benefits of using opportunity-cost measures for trading activity," Pacific-Basin Finance Journal, Elsevier, vol. 7(3-4), pages 203-228, August.

    More about this item

    JEL classification:

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

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