Covering Up Trading Losses: Opportunity-Cost Accounting as an Internal Control Mechanism

34 Pages Posted: 18 Dec 1998 Last revised: 25 Aug 2022

See all articles by Edward J. Kane

Edward J. Kane

Boston College - Department of Finance; National Bureau of Economic Research (NBER)

Kimberly DeTrask

Boston College

Date Written: December 1998

Abstract

This paper analyzes the methods of loss concealment used by rogue traders in the Barings and Daiwa scandals. The analysis clarifies how and why these firms' top managers and home-country regulators deserve blame for allowing cumulative losses to become so large. The central point is that information systems that focus exclusively on cash flows tempt amoral traders to build credits that generate a high level of accounting profits. Constructing opportunity-cost measures of profit imposes additional restraints on reporting activity. These restraints make it easier for higher-ups, auditors, and regulators to identify the true sources of accounting profit and to challenge counterfeit earnings.

Suggested Citation

Kane, Edward J. and DeTrask, Kimberly, Covering Up Trading Losses: Opportunity-Cost Accounting as an Internal Control Mechanism (December 1998). NBER Working Paper No. w6823, Available at SSRN: https://ssrn.com/abstract=141400

Edward J. Kane (Contact Author)

Boston College - Department of Finance ( email )

Fulton Hall
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National Bureau of Economic Research (NBER)

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Kimberly DeTrask

Boston College ( email )

Fulton Hall
Chestnut Hill, MA 02467
United States

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