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The conflict between finance and risk is laid bare by an HBOS whistleblower.
John Zhu, CFO Europe Magazine
March 2, 2009
What began as a routine bout of bank-bashing spiralled into a major political scandal in the UK last month. The catalyst was a memo submitted to a parliamentary committee by Paul Moore, former head of regulatory risk at a UK-based bank, HBOS.
Accusing his former employer of ignoring warnings about reckless lending practices, many of Moore's gripes were aimed at the then-CFO Mike Ellis, to whom he reported. Moore also criticised James Crosby, the CEO who dismissed the risk manager in 2005.
"You sacked your group risk fellow for the warnings he gave you," scolded an MP to former HBOS directors during a two-day inquiry last month. HBOS was sold to rival Lloyds TSB last year, and the group recently announced a £10 billion (€11.3 billion) annual loss.
After warning the board of impending disaster, Moore claimed he was "prevented from having this properly [documented in minutes] by the CFO." He also claimed that the CFO "strongly reprimanded" him for requesting a reporting line to the audit committee.
While denying any wrongdoing, former CEO Crosby, who became deputy director of the Financial Services Authority (FSA), the UK market regulator, after leaving HBOS, resigned shortly after Moore's memo came to light. A close confidante of Gordon Brown, the move led to the prime minister's own grilling by opposition MPs.
The FSA tried to distance itself by noting that Moore's claims were "fully investigated by KPMG and the FSA." Further muddying the waters, KPMG's report included interviews with former colleagues who described Moore as "ranging from prickly to ranting."
The substance of Moore's arguments are not controversial, says Charles Demoulin, a partner at investor-services firm Deminor. To keep managers within "the risk boundaries set by the board," directors deserve a "clear line of communication" to the risk function, he says. One way to safeguard this is through internal audit, adds Jackie Cain of the Institute of Internal Auditors. What's more, "a good CFO is one who wants to be challenged by the CRO or internal audit once in a while," she says.