Tuesday, February 05, 2008

Lagarde Report Emphasizes Enhanced Internal Controls

A report by the French Finance Minister on the operational loss of 4.9 million euros at a global financial institution identified a number of internal control issues that could have been decisive in light of information provided by the company. The report released by Finance Minister Christine Lagarde also emphasized the importance of clarifying the relationship between regulators and governments in this type of situation that could have consequences for the stability of the financial system.

In an effort to enhance internal controls, the report suggested making better identification of internal fraud an integral part of internal controls. The report also urged the strengthening of the constraints on credit institutions in the implementation of operational risk. Importantly, the Lagarde report recommended the full engagement of management in controlling risks through the creation of committees dedicated to the supervision of risk control and internal controls. Finally, the report called for the development of international standards of risk management and internal controls that can be applied to all the players.

The financial institution in question issued a statement indicating that the internal controls that were successfully circumvented by the fraud are being remediated to enable the detection and prevention of fraud. The financial institution also noted that the Lagarde report does not call into question the systems used to manage market risk.