Tuesday, February 16, 2010

Limits to managerial control

Man's ingenuity to circumvent rules and regulations is unlimited. Correspondingly, managerial control exercised in corporates is quite limited. This truth is brought out frequently by what is disclosed by companies. There are ofcourse many more instances of failure of control which are not brought to light.

Wipro, the third largest software exporter in India, has now admitted that an employee has been embezzling the company's funds for the last three years by misusing / stealing others' passwords. (The employee whose name is not disclosed has since committed suicide.) Loss to the company is around Rs.20 crore. (I wonder why the company refers to the loss in terms of dollars only : $4 million. The fraudster was working in company's headquarters in a department called "Controllership" ! Good control !) The company claims it has recovered nearly half the defalcated amount as if recovery attenuates the seriousness of control failure.

Wipro is not an isolated example. We know what happened to Barings courtesy a rogue trader called Nick Leeson way back in 1995. More recently, in January 2008, the French bank , Societe Generale, was put to immense loss by another rogue trader named Jerome Kerviel. The irony here was that this bank is supposed to be very strong in risk management practices. There are countless examples of employee frauds, minor and major, in Indian banks as well.

We will be scared to death if we realise the potential for frauds in our banks. It is not rare to find officers in a typical Indian bank sharing details of their password with their colleagues in order not to inconvenience customer transactions when they are momentarily away from the branch for whatever reason. Most employees are oblivious of possible disastrous consequences of this (mal)practice.

Not infrequently, we come across instances where safety locker lessees in banks complain of loss of articles from the lockers. There have been cases of dishonest employees keeping duplicates of customer keys. Again, the control system is not foolproof. Given the massive potential for such mishaps, it is indeed surprising that frauds are not more common.

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