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Misuse of Derivatives: Considerations for Internal Control

In: Contemporary Issues in Finance: Current Challenges from Across Europe

Author

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  • Simon Grima
  • Frank Bezzina
  • Inna Romānova

Abstract

Derivatives are nowadays widely used globally both for speculative and hedging purposes. However, as experience shows, inadequate use of derivatives may cause severe problems and even bankruptcy of firms. Thus, it is essential to help organizations design a robust proactive governance and internal control structure, which will help to prevent new financial debacles and scandals when using derivatives. Taking into account the frequent use and the growing fraud caused by derivatives, the aim of the paper is to identify considerations for internal control important to ensure better governance of firms using derivatives. The main findings are based on an analysis of interviews that were conducted with experts directly or indirectly involved with derivatives from different European countries. The interviews were semistructured following the approach proposed by Patton (1990). An analysis of the data collected from the interviews was carried out using a thematic approach. The paper identifies and analyzes the main “sources” of derivatives misuse, including poor design and mis-categorization of instruments, convenience to blame derivatives, unsophisticated players, insufficient regulatory environment, poorly designed internal controls, inadequate communication, poor firm culture, etc. It also provides an extensive analysis of the main recommendation for internal control concerning awareness of derivatives design, the human aspects, regulations, communication, knowledge, and training. Sound internal controls could avoid new debacles without adding other restrictions to the market. Moreover, it provides recommendations for internal control important to ensure better governance of firms using derivatives.

Suggested Citation

  • Simon Grima & Frank Bezzina & Inna Romānova, 2016. "Misuse of Derivatives: Considerations for Internal Control," Contemporary Studies in Economic and Financial Analysis, in: Contemporary Issues in Finance: Current Challenges from Across Europe, volume 98, pages 49-62, Emerald Group Publishing Limited.
  • Handle: RePEc:eme:csefzz:s1569-375920160000098004
    DOI: 10.1108/S1569-375920160000098004
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    Citations

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    Cited by:

    1. Lara Scicluna & Sharon Seychell & Jonathan Spiteri & Simon Grima, 2019. "The Maltese Financial Services Industry’s Perception on the Regulators: An Empirical Analysis," European Research Studies Journal, European Research Studies Journal, vol. 0(1), pages 16-51.

    More about this item

    Keywords

    Derivative misuse; internal control; communication; firm culture; regulatory environment; G23; M42;
    All these keywords.

    JEL classification:

    • G23 - Financial Economics - - Financial Institutions and Services - - - Non-bank Financial Institutions; Financial Instruments; Institutional Investors
    • M42 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Accounting - - - Auditing

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