UBS has revealed that internal controls were failing as far back as December last year, following an investigation into the US$2.3 billion loss wrought by alleged rogue trader Kweku Adoboli.
In a regulatory filings document submitted to the Securities and Exchange Commission (SEC), UBS has divulged that a control requiring bilateral confirmation with counterparties of trades within its investment bank’s equities business was not operating adequately. The control was supposed to apply to trades with settlement dates of greater than 15 days after trade date. When such trades were cancelled, rebooked or amended, the related monitoring control for validating these changes had ceased to operate effectively.
UBS declined to explain how the controls ceased to operate effectively.
The Swiss bank also admitted a breakdown of controls in the investment bank division’s equities and fixed income, and currencies and commodities businesses. Measures on the inter-desk reconciliation process designed to ensure that internal transactions were valid and accurately recorded – including controls over cancellations and amendments of internal trades that require supervisor review, intervention and resolution – did not operate effectively.
“We have taken and are taking measures to address these control deficiencies,” the bank said in a statement. “Investigations are ongoing and management may become aware of facts relating to the investment bank that cause it to broaden the scope of the findings and to take additional remedial measures.”
As a US-listed company, UBS is required to evaluate the effectiveness of its “internal control over financial reporting” and “disclosure controls and procedures” on an annual basis. After discovering Adoboli’s unauthorised trading activities, UBS said its management reviewed its control measures.
Even though UBS conceded its internal controls were not effective as far back as December 31, it insisted the reliability of the financial statements included in UBS’s 2010 annual report was intact.
Third quarter results for UBS showed its investment bank’s pre-tax losses sunk to CHF 650 million from CHF 406 million in Q3 2010, largely due to the CHF 1.8 billion losses relating to the rogue trader incident.
Since September, Adoboli has been remanded in custody until 20 October, facing fraud and false accounting charges.