Internal Control Activities
An example of a lack of internal controls with a disastrous result was the bond trading loss in the
New York Office of Daiwa Bank in 1995. Over 11 years 30,000 unauthorized trades were made
resulting in a $1.1 billion loss (an average of $400,000 in losses for every trading day). Daiwa
allowed Toshihide Iguchi, a bond trader, to authorize sales, have custody of the bond assets, and
record these transactions.
As a novice trader, Iguchi misjudged the bond market, racking up a $200,000 loss. To raise cash
to pay Daiwa’s brokers, Iguchi would order Bankers Trust New York to sell bonds held in
Daiwa’s account. The statements from Banker’s Trust came to Iguchi who forged duplicates,
complete with bond numbers and maturity dates, to make it look as if Banker’s Trust still held
the bonds he had sold. When he confessed to his misdeeds, the Daiwa thought their bond account
was $4.6 billion when in fact only $3.5 billion was left.
Inadequate review of internal controls was also to blame. Daiwa’s internal auditors had reviewed
the New York branch several times since the fraud began, but Banker’s Trust was never
contacted for confirmation of Daiwa’s bank statements.If they had, Iguchi’s fraud would have
been exposed. Diawa’s external auditor never audited the New York branch.