Analyzing the NAB Scandal: A Case Study on Corporate Governance

This case study delves into the National Australia Bank (NAB) scandal of 2004, where unauthorized foreign currency derivatives trading resulted in significant losses. The report examines the effectiveness of the board, problematic aspects of corporate governance such as lack of unity, accountability, and transparency, and the over-reliance of the Principal Board Audit Committee (PBAC) on internal audits. It outlines steps NAB could have taken to improve corporate governance, including formalizing roles, emphasizing ethics, and conducting regular evaluations. The report further discusses the impact of PBAC's auditing approach between 1999 and 2004 and the underlying reasons for continuous trading scandals in banks, such as lack of integrity and oversight. It concludes by emphasizing the importance of integrity, thorough auditing, and proactive board involvement in financial institutions. Desklib provides access to similar case studies and solved assignments for students.

Running Head: NAB SCANDAL REPORT 1
CORPORATE GOVERNANCE AND ETHICS
STUDENT’S NAME
COURSE
UNIVERSITY
DATE

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EXECUTIVE SUMMARY
This report has addressed the issues in corporate and governance for NAB. It has outlined on
how significant it is for the board of directors to participate in the running of the organization
and avoid putting the entire trust to the management. The report has also outlined how important
it is for the external auditor to cross examine the organization and confirm whether all the issues
have been tackled appropriately rather than relying on the feedback from the management

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Table of Contents
INTRODUCTION.....................................................................................................................................4
THE EFFECTIVENESS OF THE BOARD AT NAB............................................................................5
OTHER ASPECTS OF CORPORATE GOVERNANCE THAT WERE PROBLEMATIC..............6
Things to be done to improve corporate governance in NAB................................................................8
RELIANCE OF THE PBAC ON INTERNAL AUDIT........................................................................10
The impact of PBAC’S approach to auditing to the company from 1999 to 2004..............................11
REASONS FOR CONTINUOUS TRADING SCANDALS IN BANKS..............................................12
CONCLUSION........................................................................................................................................13
References................................................................................................................................................14

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INTRODUCTION
According to Carnegie (2016) corporate governance and ethics practice is vital for the success of
any organization. It guides the activities within the enterprise and the management has the
corporate responsibility for ensuring that the codes of ethics are adhered to within the
organization. According to Batten, Lončarski, & Szilagyi (2018) good governance comes with
proper implementation of the formulated policies within the organization. Policies such as
performance appraisal policy, recruitment policy, auditing policy and compensation policy have
to be adhered for the success of the organization and the management should ignore any
procedure for work as speculated in the policy. Lack of efficient auditing practices is what led to
a big financial loss to the NAB which is a clear indication of how important it is to adhere to all
the company policies.
Leaders have a role to enhance the success of the organization. They should be ethical in all their
dealings with the company and not take an advantage of any situation like what they did at NAB
by being dishonest and stole from the company(Fallon & Cooper, 2015) Good leadership is built
on the foundation of ethics and governance. This report is going to discuss the NAB scandal in
details and outline effectively the violation of corporate governance and ethics practice by the
NAB.

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THE EFFECTIVENESS OF THE BOARD AT NAB
According to Harris (2017) the board at NAB remains ultimately responsible for all the
fraudulent actions of the company due to negligence in the auditing department of the
organization. There are various key indicators for the efficiency of the performance of the
company such as the total shareholder return, cost efficiency ratios and the share price among
others which had really decreased with a 19.7% as compared to the initial years. This was one of
the clear signs that something was not right within the bank. It is evident that NAB’s
management and the entire board lacked adequate accountability over transactions at the bank,
there were also ineffective auditing practices and procedures within the bank which led to the
breach of the integrity of the internal control structures of the bank(Liu, 2017).This resulted to a
big financial loss for the bank which had a major impact on Australian economy since banks are
usually the key foundations of the economy of any nation and poor performance usually have a
major impact to the economic performance of the nation. The financial loss by the bank resulted
to a significant reduction of its valuation in the market and loss of credibility in the market. The
loss by the bank resulted to the fall of its share price on the Australian stock exchange by 30%
for a period of nine months in 2004. According to Rogers, Wong& Nelson (2017)It further led to
the erosion of trust among the investors which was a clear indication of poor corporate
governance by the board for failing to formulate strategies to revive the company five years later
after the scandal.

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OTHER ASPECTS OF CORPORATE GOVERNANCE THAT WERE PROBLEMATIC
Lack of unity among the members of the board
The members were not committed to a clear direction in relation to the financial performance of
the bank(Montague, Larkin & Burgess,2016). They never held meetings to review on the
performance of bank. It is usually a good corporate governance practice for leaders to meet and
review the general performance of the company.
They did not adhere to the laws and principles of corporate governance
The board was not effective in monitoring the books of accounts which would have enabled
them to identify the fraudulent activities that were been progressed by some of the leaders in the
company.
Lack of accountability
The board should have held the financial manager liable for any financial discrepancies in the
bank which would have made him keen and discover any unusual act in relation to the financial
performance of the bank.
Great focus on Personal agendas
The board of management concentrated on their personal prospective leaving a few greedy
individuals to run the bank which finally led to financial loss by the bank. This was in deed a
poor act of corporate governance by the board.

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Lack of effective communication
There was inadequate feedback in relation to the performance of the company. The board
assumed that everything was just right within the bank when in deed there were chaos.
Lack of transparency of operations
The books of accounts were handled by a single person hence alterations were easily made in
relation to the foreign exchange transactions in the bank. The bank was closed one hour late
where fake transactions were formulated.
Lack of risk assessment
The board failed to conduct the risk assessment for various departments. This would have
enabled it to insure itself against the fraudulent act of the employees and most probably it would
have been compensated after suffering such a big loss.

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Things to be done to improve corporate governance in NAB
The board should do the following to improve the corporate governance in NAB.
Formalizing its roles and functions
The board should formalize its functions and make it known in the entire organization. This is
very important because nobody will question its orders especially when it requests for detailed
auditing reports for the books of accounts.
Creating an emphasis on the code of ethics and conduct in the bank
The board of management must enlight all the employees on the significance of being honest to
the organization. The bank used to be closed late than the stipulated time which was against the
code of conduct for the organization since the one hour extension provided room for fraudulent
activities by some of the leaders in the bank.
Regular annual evaluation by an independent body
The board of management would have engage a serious external body in the auditing of the
books of accounts which shall be very efficient as compared to internal auditing that involved
fake report provided to PBAC who were not efficient enough.

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Regular oversight of the functions by various departments
The board of management should schedule the oversight process where each department have to
submit their performance reports for verifications and statistical records formulated to determine
the position of the bank at any given time in relation to its performance. This is important
because it shall enable the board to detect a slight change in the performance of the bank and
precautionary measures can be taken to rescue the bank from the worst financial risk.

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RELIANCE OF THE PBAC ON INTERNAL AUDIT
The Principal Board Audit Committee made a very big mistake by relying on the internal Audit
in the process of screening the firm’s control issues in the year 2003. This is because the
management took an advantage of the trust that the board had on them and assigned a very low
rating to the internal audit when in real sense the bank was suffering a huge financial loss which
went un noticed for over a long period of time. The management proved un trust worthy through
its acts of failing to submit the external auditor report to the board which automatically meant
that the management was hiding a very crucial information from the board.
PBAC should not only have reviewed issues with a ‘3-star’ rating and above but should have
also reviewed even the small issues so as to ascertain where the real problem was. PBAC should
have aimed to make NAB a hundred percent perfect in its internal operations by ensuring there
were no issues within the bank.

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The impact of PBAC’S approach to auditing to the company from 1999 to 2004
In May 1999 the internal audit report gave the emerging issues a rating of 3. This implied that
there were several serious matters which required an immediate action from the managing
director with the entire Board Audit Committee. PBAC made a big mistake by trusting the
management and in 2000 it published a report that the weaknesses identified in 1999 had been
dealt with by the management without full approval with made the management to continue with
their fraudulent activities within the Bank(McIlroy, 2018). In the year 2001, the auditing report
provided by PBAC provided an adequate rating which implied that everything was in good
condition in relation to foreign exchange business together with various currency options which
was a fake report from the management. During the same year, PBAC identified two-3- star
issues which were related to the various currency options where breaches occurred and further
more incorrect VaR numbers were produced during transactions but PBAC never raised a
concern about it since the management promised to deal with the issue. Nothing was done about
because the daily limit breaches in transactions were not explained by the management and the
incorrect VaR was related to the lack of use of volatility smile which were just a pack of excuses
by the management to satisfy the concern of PBAC which never bothered to determine whether
they claims were genuine. The head of internal Audit came up with a new rating system for the

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setbacks where all the issues that ranged between A$5 to A$ 30 million were rated 3-star which
was initially rated as from A$1 to A$30 which reduced the number of issues in the bank from 70
to 21 without providing a new rating report to PBAC who thought the Bank was faring well until
the worst happened in 2004.
REASONS FOR CONTINUOUS TRADING SCANDALS IN BANKS
Banks are continuously facing trading scandals not because they are too complex to govern and
manage but it is due to the following reasons:
LACK OF INTEGRITY
Managers are not honest and they use various means to steal from the bank which in the long run
lands the bank to the financial loss
LACK OF ADEQUATE AUDITING PRACTICES
There are poor auditing practices in most of the banks where internal auditing is heavily
considered than the external auditing and in most cases the internal auditing report is usually
manipulated to suit the need of the few individuals within the bank who have got ill motives.
LACK OF OVERSIGHT BY THE BOARD
In most cases the board of the directors delegate all the responsibilities to the managers without
adequate monitoring their activities which makes the managers to take advantage of the trust
they have been bestowed by the board