[Extract from the conclusion of the Bank Of England Report on the Collapse of Barings]

EXTERNAL AUDITORS

13.44

For the 15 month period ended 31 December 1993, there were realised
and unrealised losses from the trading activities of BFS for that
period which we assess to have been in the region of a sterling
equivalent of about £19 million. The reported profits of BFS,
however, were of a sterling equivalent of about £9 million. These
profits, as reported, then flowed through to the group profits of
Barings. We have not been permitted access to the working papers
of the then auditors of BFS, D&T Singapore, and we have not been
able to interview any of the relevant personnel engaged in the
audit for that period or the preceding year. We do not,
therefore, know what records, explanations and details were
provided to them by BFS. In the event, it is now apparent from the
reality of Leeson's trading activities that the profits from
the activities of BFS must have been materially misstated.

13.45

C&L Singapore undertook the audit of BFS for the year ended 31
December 1994. Its audit of BFS had substantially been completed by
the time of the collapse. On 3 February 1995 C&L Singapore
provided to C&L London (who were, and had for some years been, the
auditors of Barings plc and others of its subsidiaries) an Audit
Report to the Directors of Barings plc, with consolidation
schedules for BFS for the year ended 31 December 1994, which,
without qualification, C&L Singapore stated were presented fairly
for the purposes of the audit of the consolidated financial
statements of Barings plc. A first stage of the subsequent events
review for BFS was signed by C&L Singapore on 23 February 1995,
which gave confirmation to C&L London that no events had occurred
subsequent to the year end which would affect C&L London's signing
of the Group accounts, subject to the finalisation of the bonus
provision.  

13.46

It is not established if C&L Singapore were ever provided with a
copy of the internal audit report of James Baker. An Audit Strategy
Memorandum prepared by C&L Singapore in November 1994 stated that
no major issues were raised by the internal auditors from London
during their visit in August 1994. In the absence of detailed
comments from C&L Singapore we cannot properly assess the basis
for that statement. 

13.47

C&L Singapore performed an assessment of BFS's control environment
as part of their audit planning, which was completed in November
1994. This concluded that the control environment within BFS was
satisfactory. C&L Singapore resolved, as recorded in the Audit
Strategy Memorandum, that given the high volume of trades and
adequate internal controls a controls-based audit would be done; but
that balance sheet trade items would be validated by confirmations,
as there were only four clients. Since we have not been permitted
access to the work papers of C&L Singapore, for the reasons given in
paragraph 1.74, and have not been able to interview any of their
personnel engaged in the audit, we do not know the basis on which
their conclusion as to internal controls was reached. This conclusion
was, on the face of it, not readily compatible with the fact that
there was a lack of segregation between front and back office; and
this was so whether or not C&L Singapore had seen the internal audit
report, or knew that its principal recommendations had not been
implemented. 

13.48

At the time of the collapse of Barings the audit for the year ended
31 December 1994 of Barings plc and BSL by C&L London was well
advanced. However, there was a number of important audit matters
which had not by then been completed by C&L London which included:
agreement of subsidiaries' financial statements and the signature
of a working copy of the Group financial statements (scheduled for
10 March 1995); the subsequent events review in London; and the
auditors' management letter. 

13.49

C&L London adopted an audit approach to BSL which was based on the
examination and testing of the internal controls in operation. This
work included an assessment of the controls in relation to
payments of margin. C&L London assessed the control environment to
be good. Where such an approach is adopted, adequate testing of
the effectiveness of controls which are in place should be
performed. As we have concluded, Barings' controls with regard
to the payments of margin from BSL and BSLL to BFS were deficient
in that BSL could not verify the information provided and was
confused as to whether the payments were for client trading or
house trading; did not reconcile the payments to underlying client
records; and did not assess the credit implication of such
payments.

13.50

We do not consider that C&L London performed sufficient tests to
satisfy themselves that the controls over payments of margin and
the associated accounting balances were operating effectively. In
their testing, in December 1994, of the controls of the Futures
and Options Settlements Department, managed by Granger, they
undertook insufficient compliance testing and relied inappropriately
on their perception of Granger's experience. Such testing as took
place involved observing her department's handling of funding
requests during an interim audit visit, with no analysis and
without proper scoping of the sample being tested; in consequence,
there was no effective test of funding requests from, or margin
payments to, BFS. 

13.51

We accept that C&L London might have queried the very high level of
funding of BFS by BSL which occurred in January and February 1995
during the course of its subsequent events review (which it had not 
concluded by 23 February 1995). Nevertheless, we consider that, had
C&L London carried out more thorough tests on the effectiveness of
the controls in place with regard to payments for margin at the time
of their controls testing, it is likely that the inadequate support
for the funding requests from BFS would have been revealed at that
stage, and the amounts paid which could not be reconciled to
individual client balances identified.  

13.52

As noted above, we have not been permitted access to the working
papers of C&L Singapore and have not been able to interview any of
their personnel engaged in the audit. We are thus unable to
express any conclusion as to the sufficiency of the steps taken by
C&L Singapore with regard to the matter of the SLK receivable - it
was, in fact, C&L Singapore who first queried the entry relating to
the SLK receivable - or with regard to the confirmations
purportedly emanating from Ron Baker in London and from SLK, or
the purported summary of transactions through BFS's Citibank
account. Nor do we know what explanations were given to C&L
Singapore by the management of BFS.

13.53

C&L London were aware of the matter of the SLK receivable and were
aware that varying explanations for it had been given. They took
the report of C&L Singapore of 3 February 1995 and explanations of
management to be confirmation that the outstanding audit issue, so
far as it affected the audit of financial statements, relating to
the receivable had been resolved. They did not themselves at that
stage inquire further with a view to resolving the conflicting
explanations of which they were aware.

13.54

The conflict between the explanations which had been given about
the transaction (most notably as to whether or not BSL had been a
counterparty) was not resolved by the comments of Broadhurst at
the meeting with C&L London on 9 February 1995. Although C&L
London were told by C&L Singapore on 2 February 1995 that the sum
involved had been paid, even so the whole transaction, on whatever
version of events was put forward, was unusual. It involved a very
large sum, and raised a serious question as to the validity of the
controls, by reference to which the audit had, to a considerable
extent, been conducted. Moreover, Broadhurst had, as noted above,
requested C&L London that reference to the SLK receivable be
excluded from the management letter relating to BFS. C&L London
rightly left that to the decision of C&L Singapore; but it was an
unusual request in itself and one which should have indicated to
C&L London that management believed that there were very
unsatisfactory aspects involved in the issue of the SLK
receivable. 

13.55

Accordingly, we consider that the matter required further
investigation by C&L London before the conclusion of the audit
process. However, by 23 February 1995 C&L London had not completed
their audit. As noted above, the signing of a working copy of the
financial statements was planned for 10 March 1995; and the group
subsequent events review in London and the management letter had
not been finalised. We consider that C&L London were entitled,
having had discussions with management in the early part of
February 1995, to proceed at that stage on the footing that the
money had been paid, as reported to them by C&L Singapore on 2
February 1995. While we think that C&L in London would have been
fully justified in insisting on more detailed explanations at that
stage, we conclude that it would be a judgement of hindsight to
say that they positively should have done so then: and they were
entitled to leave the matter for a later stage of the audit
process.