Risk, safeguards and Arbitrage

By Tanya Barman

ArbitrageThe film Arbitrage is a gripping tale of “high finance and low ethics” which has already done the rounds in the US and internationally and is coming soon to the UK.

Richard Gere plays a multi billionaire owner of a hedge fund that he’s about to sell for great profit to a major financial institution. However, he has cooked the books in order to cover an investment loss to avoid being arrested for fraud. Those amongst his staff who hadn't realised that the finance guys and the auditors have been paid off to "mislead others", include his super smart daughter, his chief information officer, who stands to not only lose her job but, because of her professional accreditation, any hope of getting another. A point she raises when confronting her father once the truth begins to leak out.

Take note - it often does.

The current CGMA innovation theme is Risk Management. To me this means having in place processes and safeguards to ensure that a business is not likely to face losses from adverse effects - be that through accidental, inefficient, incompetent, or, straightforward dishonest actions. Ensuring an operation is run ethically, on shared principles, therefore, would be key to both safeguarding the longer term success of the firm through minimizing risks.

It doesn't take a rocket scientist to figure every corporate scandal has at its root unethical behaviour and many corporate downfalls, even without the front-page scandal, are the result of poor management, weak reporting, and a lack of understanding of the business and the dynamics of the wider market. All these failings, from outright fraud, to a lack of objectivity and professionalism run counter to both CIMA and AICPA’s codes of ethics and the high standards CGMA designation holders should be working to.

The sophistication of risk management intensifies year on year with highly complex company structures, regulation, supply chains and partner relationships often across multiple borders and operations. Exactly because of these complexities linking risk closely to ethical practice and guidance has never been more important. It should never been seen as purely the remit of compliance or risk specialists to be wary of what lies “between the lines” or behind a “dream deal”. Every qualified accountant in business should have the broader knowledge and skills, together with their ethical commitment, to be able to recognise when something, in the words of a Libor case prosecutor "doesn't smell right".

Back to the movie. If only the protagonist had more carefully engaged in due-diligence in the off-shore investment, which turned politically nasty, and considered the longer term risks in cooking books –the far-reaching financial and personal repercussions of his actions would have been avoided. Or better still he should have had his daughter in charge. Instead of his ego. How best are you mitigating risk and optimizing real opportunities?