FRM Part II · FRM Exam Part II · Risk Governance
A trading desk head also approves the reconciliation of the desk's own profit and loss and reports operational incidents only when he judges them material. Which governance weakness is most directly illustrated?
The scenario shows weak segregation of duties and poor incident escalation. One person both generates and approves reconciliations and decides what to report, so independent control is lost and the second line and board lack reliable information about operational risk events.
- AExcess independence of the second line
- BInadequate segregation of duties and weak incident escalation, undermining the first line's accountability and the independence of controlCorrect
- COver-reliance on external auditors
- DExcess board involvement in risk appetite
Explanation
The same person performs and approves control activity, so segregation of duties fails. Discretion over incident reporting weakens escalation and transparency. Sound frameworks require clear reporting criteria applied consistently, with independent review.
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