BUSINESS OPINION: AIB is still trying to establish what happened and why. There is no evidence that the problems lay in the internal audit function of AIB group. However the Spollen affair - if we can call it that - speaks volumes about the culture that prevailed ay AIB at the time and its legacy may not be unrelated to the current crisis.
In 1997 one Anthony L Spollen wrote a short book called Corporate Fraud - The Danger From Within. Mr Spollen identifies in his book the sort of organisations that are most at risk from fraud. They are those that:
Have a domineering chief executive;
• Are reducing staff;
• Are introducing new technology;
• Are diversifying;
• Have a complex treasury function;
• Have a number of overseas locations;
• Are growing at a very fast rate;
• Are setting too demanding targets.
Hands up anyone who recognises a large Irish bank currently trying to ascertain the whereabouts of $750 million (€859.5 million) of its profits.
Hands up also anyone who remembers that Mr Spollen is none other than the former AIB internal auditor who parted company with the bank after a disagreement in the early 1990s.
Mr Spollen resigned after the bank ignored his concerns over the size of the bank's potential liability for Deposit Income Retention Tax which was not being collected on bogus non-resident accounts. He also expressed concerns about the arrangements put in place with the Revenue Commissioners which the banks subsequently relied upon as an amnesty.
It was the leaking in 1998 of Mr Spollen's report that set in train the events that led to the establishment of the Public Accounts Committee DIRT inquiry. His concerns were subsequently vindicated when the bank was forced to make a large settlement with the Revenue Commissioners
The irony of all this becomes even more delicious when you come to page 65 of Mr Spollen's book which is part of the chapter on major risk areas. According to Mr Spollen, these will generally be found:
• Where large volumes of money flow in or out;
• In non-traditional activities;
• In overseas locations;
• In treasury or in computer areas.
If Mr Spollen had set out to describe the two-man foreign exchange operation at Allfirst in Baltimore he could not have done a better job.
Mr Spollen then went on to discuss the risks associated with treasury operations in more detail.
"One area that warrants special attention is treasury. Many treasury functions are complicated by derivatives and continuous change in technology. Treasury has been at the heart of many big losses and problems all over the world. As long as companies continue to operate without effective controls and effective internal audit this is an area we will be hearing more about".
He then goes on to conclude: "All of the surveys of fraud show that very few directors and senior managers truly understand treasury functions. I believe that even fewer understand derivatives. With the vast volumes traded on the derivatives markets, there is huge scope for loss".
This is all very funny and more than a little embarrassing for AIB. But of course its does not mean that if Mr Spollen was still running the internal audit at AIB, the bank would not be in its current predicament.
The disagreement with his superiors about how the DIRT problem was being handled was just one of a number of run-ins that Spollen had with AIB. He previously clashed with Gerry Scanlan, the bank's chief executive in 1988 over an unsuccessful share placing. He wanted the problem reported to the Irish Stock Exchange, but was ignored.
By the time he left he had earned a reputation for being independent minded and stubborn. Just the sort of person you would have imagined the bank would be anxious to retain as internal auditor.
There is no doubt that AIB's corporate culture will come in for scrutiny over the coming weeks as the full details of what happened at Allfirst emerge. If the internal controls are found to have been wanting then heads can be expected to roll.
The bank could have done worse than asking Mr Spollen to be the "eminent person with standing and expertise in the financial services industry" who will report on the adequacy and scope of the internal review launched in the wake of the Allfirst fiasco.
Senior executives at Bank of Ireland are no doubt allowing themselves a wry smile or two over all this. With its Governor and its Court, the Bank of Ireland has always subtly differentiated itself from its arriviste country cousins in Ballsbridge.
But it is little more than tuppence ha'penny looking down on tuppence. Both banks have nearly met their Waterloos in the past through poor leadership.
Bank of Ireland got into terrible trouble in New England in the early 1990s and AIB's involvement with Insurance Corporation of Ireland nearly bankrupted it in 1980s.
AIB may have been the worst offender when it came to not policing non-resident accounts, but its peers hardly covered themselves in glory.
Bank of Ireland made a £30.5 million (€38.73 million) settlement with the Revenue Commissioners compared to AIB's £90.4 million. Ulster Bank paid £4.2 million.
National Irish Bank coughed up £5.25 million which pales into insignificance relative to its other problems
Things may have to change at AIB as a consequence of what happened at Allfirst, but it is not a time for the other Irish banks to be looking to their laurels.
