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BUINESS REPORT

Executive Summary

IntroductionThe scope of this report is to critically analyse and evaluate the account mapping process withinMorgan Stanley Bank International Limited MSBIL and to propose methods to streamline andimprove the process to ensure that the truth and fairness of the accounts are maintained. This willinvolve gaining an understanding of the loan approval process using a process flow diagram,understanding the key stakeholders of the process and drawing up a business case for possibleaction points to improve the process.

The reporting framework

Morgan Stanley Bank International Limited (MSBIL) is the European Lending arm of Morgan StanleyInternational Plc. It is incorporated in the United Kingdom with the purpose of providing Loans andadvances to clients. It has branches in Italy and Korea as well as a Chinese bank as a subsidiary. Beinga lending business incorporated in the UK, its main stakeholder from a reporting perspective is theBank of England and the Prudential Review Authority (formerly the FSA). This raises the issue ofreporting local UK GAAP as opposed to the US GAAP reporting followed by US incorporated entities.In order to assist in the local reporting process, MSBIL has its own reporting tool called Merlin. This isused by both the regulatory control team as well as Legal Entity Controllers to fulfil their monthly,quarterly and annual reporting responsibilities to the Bank of England, the management committee,the Board of Directors, The Audit committee and the PRA. Merlin uses information from the generalledger and matches this information with counterparty information from the product control andoperations team. This serves to enhance the data by providing an added layer of granularity to thereporting process. The system then carries out automatic eliminations between branches based onaccount and cost center information for UK GAAP purposes and uses appropriate FX rates totranslate balances from branches into GBP. The final output is an enhanced trial balance based onUK GAAP that can be used to produce the reports and which can be analysed in appropriate mannerby both the teams. Figure 1.1 shows a simple process flow diagram for the Merlin process.

The current process

On a daily basis, the Legal entity controllers are responsible for mapping out new products oraccount and cost center combinations to the respective line item on the face of the financialstatements.this is done during the information onsolidation phase (see Figure 1.1) The assumptionsbehind this process being that, being guardians of the firms accounts, that they are aware of theclassification from a financial reporting perspective. However, this causes a number of issues

Improper responsibility and accountability relationships:

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Responsibility, when used in business affairs, as referring to a sphere of duty or obligation assignedto a person by the nature of that persons position, function, or work. Vincent E. Barry, Moral Issuesin Business(Belmont, CA: Wadsworth, 1979). Geoff Hunt, accountability

Accountability is the readiness or preparedness to give an explanation or justification to relevant

others (stakeholders) for ones judgments, intentions, acts and omission when appropriately calledupon to do so.

Using the above definition, it is clear that currently the accountability and responsibility for productmapping lies within the legal entity control team. However, this poses problems from an internalcontrol and operational point of view. As the Legal entity controllers are responsible for booking

journals to these accounts, there is a risk of fraudulent activities taking place within the organisationdue to lack of segregation of duties. This could cause both reputational and financial damages to thefirm.

Operational Risk

The Legal Entity controllers are responsible for the external statutory reporting of the firm and assuch they are maintain a very high-level view of the overall business. They have insufficient newproduct information at their disposal. This raises the level of operational risk involved in themapping process as there is a risk of products being mapped incorrectly therefore affecting the truthand fairness of the financial statements. Moreover, the lack of a review process could increase therisk of errors going undetected. There is hence a need for a more business oriented approach with awell defined review structure.

Lack of documentation/ audit trail

As is evident from Figure 1.1. There is no documentation process involved during the mappingprocess and mappings are done an ad-hoc basis using judgement. This can cause issues particularlyduring employee turnover as what may be classified as an asset by one controller may be classifiedas Income by the other. Lack of documentation makes it impossible to check if proper formalprocedures were followed whilst mapping these accounts. Hence omitting the accountability aspectof the process.

Voluminous and manual work

Everyday, thousands of entries are passed through MSBIL. Some of them are to new account andcost center combinations as business complexity increases and new products enter the market.

From an operational perspective, the legal entity controllers are responsible for mapping productsthat they are not responsible for. This raises the risk of error in the mapping process

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