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FRM Part II · FRM Exam Part II · Case Study: Financial Crime and Fraud

A trading desk's head of operations also approves the booking of trades and signs off on the reconciliation of the desk's profit and loss. Over two years, a trader hides losses in fictitious offsetting positions that the head of operations never challenges. Which control weakness is most directly illustrated by this arrangement?

The key weakness is inadequate segregation of duties. When one person approves trade booking and also signs off P&L reconciliation, no independent party checks the trader's activity, so fictitious offsetting positions can hide losses undetected for a long time.

  1. AInadequate segregation of duties between front-office and control functionsCorrect
  2. BInsufficient diversification of the desk's trading strategies
  3. CExcessive reliance on external auditors for pricing
  4. DLack of a formal dividend policy for the desk

Explanation

Concentrating booking approval and P&L reconciliation in one person removes independent challenge, which lets fictitious positions persist. Segregation of duties is the classic failure in rogue trading cases. The other options have no bearing on concealment of losses.

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