Competitive Viability, Accountability and

Record Keeping:

A Theoretical and Empirical Exploration Using A

Case Study of Jamaican Commercial Bank Failures

By

Victoria Louise Lemieux

Thesis submitted in partial fulfdment of the requirements for the

Degree of Doctorate of Philosophy in the Faculty of Arts of the

University of London

University College London

November 2001
 Abstract of Thesis

This study seeksto explore the relationshipsamong

competitive viability,

accountability and record keeping in private sector entities. Theserelationshipsare

explored both theoretically and empirically using a casestudy of Jamaican

commercialbank failures. The study builds upon earlier researchon the relationship

between record keeping and public sector reform initiatives in Africa, which found

that poor record keeping hasunderminedthe successof theseinitiatives. The study

to
aims show how poor record keeping similarly can underminethe competitive

viability of private sector entities and thereby economicdevelopmentinitiatives

dependenton the private sector. The study employsa GroundedTheory-based

methodology using data on Jamaican bank

commercial failures to develop a

theoretical argumentfor linkagesamongcompetitiveviability, accountabilityand

record keeping. The study arguesthat effective records accountabilitiesand controls

are critical to the operation of accountabilitysystemsthat provide the basisfor

internal control and sound decision-makingin private sector entities. When

accountability systemsare weakenedbecauseof ineffective record keeping,

is
management unableto accessinformation neededto maintain operationalcontrol

and make sound decisions. This leavesthe business

weakenedand vulnerableto

collapse. The study illustrates this dynamicwith referenceto the failure of several

Jamaicancommercialbanks, showing how an absenceof effective records controls

underminedthe quality and availability of accountingand information

management in

these banks which, in turn, weakenedthe systemsof accountabilitythat the banks'

directors, managersand supervisorsrelied upon to manageand control the banksI

i
balancesheetsand businessrisks. The study concludesby drawing out general

lessons
management from the experienceof the failed banks and offering policies and

strategiesto strengthenrecords accountabilitiesand controls.

ii
 Preface

It is now axiomatic to say that we live in an information economyand that knowledge

is a strategic resource. Nevertheless,the causesof information related problems

within organisationsoften are misunderstood,being basedmore on receivedwisdom

than empirical evidence.

In my over fifteen years of experienceas a professionalarchivist/recordsmanager

in in
working a wide range of organisations severaldifferent countries,I have seen

a of
many case mistaken diagnosisof information problems. Often the prescriptions

for theseproblemsare equally misdirected- costly technologicalsolutions and

for
corporate reorganisations, example- that fail to solvethe underlying problem

becauseof the original misdiagnosis.

Many times, through close involvement in specific cases,I havebeenableto seethat

s information related problems originate with poor record keeping

an organisation

practices and thus how, by introducing better record keeping systemsand controls, the

be solved. It also has been possiblefor me to seethe deleterious

problems could

bottom lines of unresolvedinformation problemsor ineffective

effects on corporate

solutions.

In essence,these professionalobservationsare what initially interestedme in

conducting a study on the linkages among competitive viability, accountability and

keeping. I to explore a situatlon in which corporate 1

competitive
record wanted

issue. This would allow me to determineif poor record keeping could

viability was at

iii
be implicated and, in this way, to hard
gather some evidenceto support or nullify my

professionalworking hypothesesabout the relationshipsamongthesethree

phenomena. The Jamaicanfinancial crisis and the collapseof severalindigenous

commercial banks in the 1990spresentedme with an opportunity to explore these

ideas.

In addition, through my consulting work for the InternationalRecordsManagement

Trust, I have beeninvolved in severalpublic sector reform initiatives. My

work on
behalf of the Trust has entailedimproving record keeping systemsand
controls to

enablegovernmentsto operate more efficiently and effectively in support of good

governanceand economic development. As a result of this work, I beganto see

linkages betweenthe role of good record keeping in promoting efficiency and

effectivenessin governmentadminIstrationand its role in the efficient and effective

operation of private sector entities. I also saw that developmentagenciesand

governmentsincreasinglyviewed the private sector as an engineof economicgrowth

and surmisedthat, if the private sector sufferedfrom the samerecord keepinginduced

information problems as found in the public sector, economicgrowth and

developmentcould be thwarted. Again, I wanted an opporturnty to explore these

ideas in a more systematic way.

The opportunity to do so arosewhen the Jamaicanfinancial crisis occurred. At the

time I was University Archivist for the University of the West Indies and basedin

Kingston, Jamaica. It occurred to me, as I watched the financial crisis unfold, that

these bank collapsesoffered a unique opportunity to study the relationshipsamong

competitive viability, accountability and record keeping. Thus was born this study.

iv
No work of this nature is ever really the product of a singleindividual, however.

There are many peoplewithout whom this study would neverhavebeencompleted,

and to -whom I therefore owe a debt of gratitude.

First, I would Eketo thank my thesis supervisorsat University CollegeLondon: NEss

Elizabeth Shepherd,ProfessorJohn McIlwaine and Mr. Geoffrey Yeo. It is an

understatementto saythat their guidancethroughout the researchingand writing

processwas invaluable.

I owe a debt of gratitude also to Dr. Anne Thurston, ORE., of the International

Records ManagementTrust, who encouragedme to undertakethis study and hasbeen

a source of inspiration to me in many ways, not the least of which becauseof her

pioneering researchon the subject of accountability and record keepingin developing

I
countries. must also thank Stephney Ferguson, University Librarian, University of

the West Indies, for her support and encouragement.

I would also like to extendmy appreciationto Shirley Tyndall, Financial Secretary,

Ministry of Financeand Planning, Governmentof Jamaica,and Patrick Hylton,

Managing Director, Financial Sector Adjustment Company (FINSAC) Limited.

Without their interest and support of my researchtopic and their wiffingnessto open

doors for me this study simply would not have beenpossible. Let me also take this

opportunity to thank the many individuals in Jamaicaand the UK who, for reasonsof

confidentiality, cannot be namedbut who took the time to meet with me and share

their experiencesand ideas.

V
Many individuals helped me in particular
ways throughout the course of this study.

Dr. Odette Parry must be acknowledgedfor sharingher

methodologicalknowledge as

an experiencedresearcherand for recommendingthe QSR*NUDIST software. I also

thank Dr. Phillipe Aghion, Professor of Economics,Harvard University, and Dr.

Wilberne Persaud,Lecturer in Economics at the University of the West Indies, both of

whom sharedideas and pointed me in the direction of valuablesources. I also thank

Dr. Persaudfor his careful reading of severaldraft chaptersof this thesis,which led to

marked improvementsin both content and style. Mr. Robert Till also assistedin

improving this thesisby bringing his over 23 yearsof experiencein the banking sector

in Australia and S.E. Asia to the review of severaldraft chapters. Mr. Frank Coffey

of Barclay's Records Services be

must acknowledged,aswell, for his valuable

comments on Appendix 8. Thanks also go to archival colleagues Dr. Tom Nesmith

and Mr. Verne Harris for inspiring and discussingideasrelatedto this study. Mr.

Edwin Green (Archivist), NEssSaraKinsey (Deputy Archivist) and NfissRachel

Huskinson (Assistant Archivist) at the HSBC Archives; Mr. Henry Gillet (Archivist)

and Miss SarahNfillard (Deputy Archivist) at the Bank of England Archives; Mr.

John Orbefl (Archivist) and Mr. Mark Emmerson(Deputy RecordsManager) ING

Barings; and Mr. Phil Cullingworth of Barclay's Records Servicesmust all be

thanked for sharing archival expertiseand knowledge of record keeping in a banking

environment. Ms. Kath Begley (Librarian) and Mr. Howard Picton (Deputy Manager)

at the Bank of England Information Centre and NEssCora Robinson(Librarian) at the

Bank of Jamaicaalso most kindly assistedme with locating and copying documents

to my study. In addition, NEssPatricia Barrett must be thanked profusely for

related

vi
diligently undertaking many hours of administrativesupport work during the course

of my research,in particular the painstakingtranscription of taped interviews.

I must also acknowledgethe support of two institutions, namely,the University of the

West Indies for agreeingto give me leave for study purposesand the School of

Graduate Studies,University College London, for financial support enablingme to

acquire the QSR*NUDIST qualitative researchsoftware usedin the preparationof

this study.

Every researchstudentneedssupport and friendship during what can seema very

long "row to hoe." My thanks in this regard go to archival colleaguesLaura NEHar,

Tom Nesmith, David Leonard, Brian Speirs, Terry Cook, Verne Harris, JoAnn

Georges; Sonia Black; Sharon-AlexanderGooding; and the whole Mvff "crew". I

must also thank my fellow researchstudentsNancy McGovern and Ana da Cuhnafor

throughout
camaraderieand encouragement the researchand writing of this thesis.

Odette Parry, Gareth Wyn Jones,Florence and Andrew Pearson,Lynn Coleman,

Fiona Gowen, David Morrison, Martin Batton, and Noella Costabilemust also be

thanked for their support and friendship. I also thank Lucy for
Gildersleeves her

kindnessand for providing the roof over my head during nystaysin London. Last

but certainly not least, I thank my family Patrick, Carolyn, Charlotte and Trish
-

Kingsford - for both emotional and financial sustenance.

vii
 Table of Contents

Abstract
Preface

Chapter One: Introduction

............................................................. I
Part I

Chapter Two.- Competitive Viability and Accountability

Mapping the Relationship -
............................................................. 39
Chapter Three- Accountability and Record Keeping
-
Mapping the Relationship 80
.............................................................
Chapter Four: Competitive Viability, Accountability
and
Record Keeping The Public Sector Analogy 116
- .....................................

Part H

Chapter Five: Competitive Viability, Internal Control and Accountability in the

Banking Industry 151

Chapter Six: The Jamaican Financial Crisis

-
Explaining the Collapse of Jamaica's Indigenous
Commercial Banks 187
.......................................................................
Chapter Seven:Implicating Poor Record Keeping in the
Failure of Jamaica'sIndigenous CommercialBanks 223
................................
Chapter Eight. Explaining Record Keeping
in Failed Jamaican Commercial Banks 268
................................................
ChapterNine: Record Keeping in Failed Jamaican
CommercialBanks - Its Impact on the Effectivenessof Bank
Supervision,Intervention and Rehabilitation 315
.........................................

Chapter Ten: Lessons From Experience and

Future Directions 345
..........................................................................

Appendices 391
.................................................................................
Bibliography 446
...............................................................................

viii
Chapter One: Introduction

Background to the Study

One of the ainis of science is to discover relationships among phenomena

previously

thought to be unconnected. It is in that spirit that this study amis to establishthe linkages

among competitive viability, accountability and record keeping. It also has a normative

ami, which is to draw out lessonsIn order to create better policy and strategy for the

managementof organtsational records and information.

The existence of a causal chain of linkages among competitive viability, accountability and

record keeping may seem a preposterous proposition given typical conceptuahsationsof

record keeping as a low level clerical function usually associatedwith the mundanetask of

filing. After all, how could bad filing possibly be responsiblefor the failure of a business?

However, this study argues that the relationship is not as preposterous as at first glance it

may seem-

I
The study seeksto illustrate linkages among competitive
viability, accountability and

record keeping both theoretically and empirically by drawing

upon data from Jamaican

commercial bank failures. For the past several years the Jamaicanfinancial sector has been

in a state of crisis. Like dominoes, that favourite Jamaicanpastime, one after another

banks and other financial institutions have suffered collapse

or near collapse, startMigwith

the demise of the Blaise financial entities in 1995. Sad as this situation has beenfor the

country, the collapse of all of Jamaica's indigenous commercial banks, save one very small

one, has afforded a unique opportunity to explore the relationshipsamong competitive

viabihty, accountabihty and record keepmg.

Jamaicapresents an ideal site for a casestudy on the relationshipsamong these three

phenomena becauseof the availability of data on both healthy and failed commercial banks

operating under the sameexternal conditions. As such, the events of the Jamaican

fmancial crisis offer a num-laboratory from which to seehow record keepmg may have

been implicated in weaknessesthat led to the collapse of severalbanks. The assumptionis

that knowledge gained from a study of local experienceand conditions in Jamaicacan be

extracted to learn something of value that, hopefully, will not only help strengthenthe

Jamaicanfinancial sector but also strengthen financial sectors in other countries, and

perhaps even other types of businessenterprises.

The collapse of the Jamaicanfinancial sector has had devastatingeffects on the local

economy and society. Against the background of human misery brought on by hard

2
 from the financial crisis, Jamaicanpeople have
economic realities arisiMng sought answers

to why the financial sector collapse occurred. Conunentatorsat the time have tended to

give two reasons. Members and supporters of the opposition JamaicaLabour Party (JLP)

have pointed their fingers at the Government of Jamaica'smacroeconomic

policy. The

Government, on the other hand, has pointed a finger of blamesquarelyat the owners and

managersof the failed financial institutions, citing managementmcompetenceand

dishonesty as the root cause of the sector's coUapse.The Government's arguments

suggest that the collapse of so many Jamaicanbanks was the result of a crisis of

accountabihty In bankmg management.

This study examinesthe Government's claim that internal managementpractices were at

the root of the Jamaicanfinancial sector's problems. That being said, it would be difficult,

and perhaps even futile, to to

attempt identify a single causeof the failure of so many

Jamaicanbanks. Banking failures take place in the context of complex financial systemsin

which many variables interact in different ways. Although analystsagree that internal

managementpractices are an important factor in bank failures, macroeconomic instability

and banking regulation are also important potential causes. Rather than attempt to draw a

definitiVeconclusionabout the causesof problemsin the banking

Jamaican sector,this

study explores the relationship between two areas of internal in

management Jamaican

commercial banks, namely, record keeping and accountability, and their relationship to the

of the banks. The basic argument being advancedis that both

competitive viabihty

deliberately and unintentionally poor record keeping by directors, managersand

3
employees of the failed Jamaicancommercial banks contributed to a lack of accountability

in and on the part of the banks. Lack of accountability, in turn, led to poor risk

management,facilitated fraudulent activities, and prevented proper tracking of the banks'

financial positions. As a result, these banks

ultimately becameweakenedand vulnerable to

coUapse.

Purpose of the Study

Broadly speaking, this study alms to provide greater insight into the nature of

organisational information related problems. More specifically, however, the purpose of

this study is twofold. First, it amis to establishthat there exists a causalcham of

relationships among competitive viability, accountability and record keeping in the

Jamaicancommercial banking sector in particular and in commercial enterprisesin general.

The study aims to show, using a casestudy of Jamaicancommercial banking, how record

keeping affects the ability of commercial enterprisesand their regulators to obtain

information required as inputs for the effectiVe operation of accountabifity systemsand, in

turn, how accountability systemssupport internal control and effective decision making m

an enterprise, both of which this study maintains are critical to continuing competitive

The the study is to draw out lessons

management from the
viability. second aim of

failed Jamaican commercial banks that also may be applicable to other

experiencesof

'banksand commercial enterprises and, on the basis of those managementlessons,to

recommend record keeping policies and strategiesthat support the effective operation of

4
accountability systemsand thereby support competitive viability.

Objectives of the Study

This case study of the Jamaicancommercial banking sector is used to explore the

relationshipsamongcompetitiveviability, accountabilityand recordkeepingin commercial

enterprises. The study critically examinestwo main areasof the Jamaicancommercial

bankmg sector:

Banking operations, specifically record keeping and accountability systems

in selectedJamaican commercial banks

Banking supervision
11 and rehabilitation, specifically the Bank of Jama*--"-
lCa a
use of records in the fulfilment, of its supervisory function and the Financial
Sector Adjustment Company (FINSAC) Limited's use of records In the
intervention and rehabilitation of failed Jamaicancommercial banks

These areas are exammedm order to gather empirical data to establishthat the effective

operation of the banks' own internal and the Bank of Jamaica's systemsof accountability

were dependent on the availability of quality inforniatiOn, which, in turn, requires banks to

ensure proper record keeping practices.

The study has three mam objectives:

To define the relationships among record keeping, accountability and

competitive viability in commercial banking

5
 To establish clearly that accountability function
systemscannot effectively
without deliberate and systematic accountabilities and controls over record
keeping processes

To recommend best practices for managingrecords

in support of
accountabflity systems.

Limitations of the Study

This study does not aim to explain what causedthe collapse of the Jamaicanfinancial

sector. Rather, its to

purpose vs show how record keeping is impticated as a factor

contributIng to the dynamics,

of the banks' fadures. The argument ISthat weak record

keeping contributes to information failures that undernunethe effective operation of

to
accountability systemsneeded monitor and control risk exposure, bank balancesheets

and fraud. When accountability systemsfalL competitive viability is compromised and

failure can occur.

In making the casethat effective accountability and control of record keeping processesis

a precondition for the availability of the information by

required managers,directors,

to
shareholdersand regulators support internal control and sound declsion-makmg,the

study does not focus on a detailed evaluation of the effectivenessof Jamaicancommercial

banks' managementor supervisory practices and their use of infon-nation. To undertake

such an evaluation would have been outside this researcher'sarea of expertise. Rather,

the evaluation of the banks' systems focuses on the effectivenessof their record keeping

6
practices 'in delivering the information required to support existing managementand

supervisory accountabilities and controls.

In undertakmigthis evaluation,the needfor empiricaldetail demandedthat the researchbe

broadly case study based. The depth neededfor the casestudy approach restricted the

number of sites that could be covered. Both the casestudy approach and the study's

focus on only the Jamaicanexperienceraise a question about the degreeto which

generalisations can be made from the empirical data. In this regard, the following

observation by B. H. Spicer about casestudy researchis relevant:

the objectiveof explanatorycaseresearchis not to draw inferencesto some

...
larger population basedon sampleevidence,but ratherto generalizebackto
theory. In this sensegeneralizationfrom casestudiesproceedsin a way that is
to
analogous generalization from An
experiments. attemptis madeto matchthe
pattern of observationmadein the case back to those by
suggested theory.
Replicationmay be soughtby studyingsetsof similarand dissimilarcases.If these
additional casesyield patterns of evidence which match back to theoreticalpatterns
I
then it is possibleto build supportfor the generalizabilityof the theory.

Thus, it is argued that some generahsationsto other banks and other types of conunercial

enterprises will be possible from the results of this casestudy.

The case study research itself was limited by such practical issuesas gammg accessto

Jamaican commercial banks willing to participate in the study, to supervisory officials at

Within the banks, it

the Bank of Jamaicaand to FINSAC officials. each of commercial

to achieve an identical level of accessdue prunarily to differences M the

was not possible

of the banks (eg, in a foreign-owned bank an interview with a non-

management structures

7
executivedirector was not possibleas the bank hasno local boardof directors)andto the

availability of persons fillmg specific positions within the managementstructure at the time

of the field research. Only limited accesswas possible to one of the viable commercial

banks,as permissionwas deniedto conduct interviewswith the bank's Jamaican

staff of

operations. Data, therefore, were drawn from interviews with staff of the foreign parent

company of the bank. Although the researchplan included conducting interviews with

Bank of Jamaicasupervisory authorities, this proved to be impossible. Instead, the Bank

agreed only to respond in writing to a linlited number of questions(seeAppendix 1). In

light of the Bank of Jamaica's refusal to agree to interviews and to releaserelevant

information, the discussion on the relationship between record keeping and Bank of

Jamaicasupervisory practices is not as comprehensiveas it might have been if the

interviews had been granted.

Significance of the Study

This study builds upon and extends researchon the relationshipsamong economic

development through good governance, public sector reform initiatives in Africa and

keepMg, discussedm detail m chapter four of this study. The results of researchby
record

Justus Wamukoya and Pino Akotia on the relationship between record keeping and

development through good governance in Africa show how governments have

economic

been unable to achieve the accountability neededto properly manageor reform their

8
affairs when information is not available or easily accessible,a problem which these

researchersattribute to poor record 2

keepmg. The authors of these studies show how

when records are not controlled properly, vital information neededfor decision-makmg,

the detectionof fraud, and the protection of citizens' rights is unavailable.They also show

how donor support to governments has tended to neglect or worsen records control

systems In the public sector, thereby deepening government information problems.

intecordsand their managementhave remained a neglectedarea of public sector reform

programmes despite the fact that realisatiOnof reform programme objectiVesdependson

efficient record keeping systems,often beyond what existing systemsare able to proVide.

Donors have taken for granted the availability of accurate and reliable records. Further,

donors' misistenceon running parallel systemsfor their own projects and computerising

without first ensuring that source data are complete and reliable has underminedthe

3 The authors of these studies

recording and reporting systemsof recipient governments.

make a strong case that good record keeping is necessatyto build accountability systems

that strengthen governance in developing countries.

This study alms to make a contribution by showing how the relationshipsamong

competitive viability, accountability and record keeping of private sector enterprises

mirror those among economic development through good governance,accountability and

keeping discussed by Wamukoya and Akotia. it

essence, is a project to insert
record as -In

keeping into ideas about the dynamics of corporate failure in general and
record

bank failure in particular. This will be an iniportant contribution given that

conunercial

9
banksand other commercialenterprisesare
essentialto both nationaland international

econornic processes,particularly in developing country contexts.

It might not have been so important to understand the dynamics bank faflure
of evenjust

over a decade ago when only a few countries *inLatmi America had experiencedany major

collapses; now, however, bank failure has become a global epidemic. According to Morris

Goldstein, 67 banking systemshave encountered crises

since 1980, and 52 of these have
been in developing countries.4 All of these collapseshave dearly.' As
cost taxpayers

t-N
-.-
Gerard Caprio has noted, "When large fiscal bills have to be repaid, they destabili
Ii can ize

the best laid macroeconomic programs. " which clearly poses econoMICchallengesfor
..
developed and developing countries alike and places banking criseshigh on the public

6
policy agenda.

Understanding and preventing bank failures ISparticularly IMPortant in the context of

developing countries, like Jamaica,for two reasons. First, developmentpolicies and

strategies now aim at stimulating economic growth by reducing the overall siZeof the

its
public sector and involvement in the economy while simultaneouslyincreasingthe role

of the in
private sector econoMICdevelopment. The financial sector plays an unportant

role m these economic development for

plans as a mechanism the allocation of capital

to
needed support local businessenterprise and foster econoMic growth The World Bank

World Development Report for 1998/99 states that researchconfirms that countries with

more developed fmancial mstitutions grow faster, and those with weak

10
ones are more likely to experience financial crises. Second in lower income countries,
,
"almost all financial intermediation. is accomplished through the banking system.,7A
..

weak banking system in developing countries can derail plans to achieve niacroecononuc

stability. It is thus critical that in lower income countries banks, as the primary financial

intermediaries, remain competitively viable.' In recognition of this fact the International

Monetary Fund has now placed banking issueson its macroeconomicadjustment

9
programme agencla.

Current analysesof banking failures recognise the role of imperfect information in markets

as being a factor bank 10 Nevertheless, focus

in collapses. the of thesetheories is on the

absenceof good quality information in credit markets (le, lack of creditor information

about borrowers' ability to repay loans) and in bank runs (ie, depositors' lack of

information about the safety of their deposits and their ability to make withdrawals on

demand). Little attention hasbeengiVento imperfectinformationor informationgaps

within the banks themselvesas being a factor in bank failures. Moreover, there has been

no explicit recognition of a link between the problem of Imperfect information and banks'

internal record keeping practices. The aim of this study, therefore, is to present evidence

to support the view that organisational record keeping be

practices can a significant factor

internal information gaps that undermine accountability and internal control and thereby
in

contribute to the dynamics of bank coflapses.

II
Hypothesis and Analytical Framework

OwMig to the qualitatiVe, Grounded Theory-based researchmethodology used in this study

(discussedmore fully in the following section), the study did not begin with a set of

researchhypothesesto be proven, as would be the usual procedure in a quantitative

researchproject. Rather, the study began with a general proposition - that there was a

causal chain of relationships among record keeping, accountability and competitive

viability - and a set of more specific assumptionsand ideasreflecting these relationships.

These assumptionsand ideas derived from literature on record keeping and social

accountability and were framed from the perspective of those in the field of banking and

banking supervision. As such, it was anticipated that many would be proven false. The

assumptionswere as f6flows:

Banking Operations - Records Availability and Use in Fraud Prevention, Risk

Management and Assessmentof Financial Position

The necessaryinformation is availableto managerisks, prevent fraud and

accurately assessa bank's financial position

Bank shareholders,directors, managersand supervisorsknow what

informatiOn they need

Shareholders, directors, managersand supervisorsuse records for decision-

making, to manage risks, assesstheir financial position and monitor
banking practices

Banks In good financial standing have better record keeping practices than
those that have failed in
or are poor financial health

Banks with foreign connections have accessto more information about the
importance of good record keeping and good record keeping systemsthan
local banks and therefore have better record keeping practices

12
 Complete financial transactions can be tracked
easily through records (this
bears particularly on banks' ability to detect fraud)

Due to tight regulatory control, banking

administrative structure matches
the typical "'machinebureaucracy" (hierarchical, with highly
structured
vertical flows of information) and consequentlyinformation often reaches
the executive level of the organisation too slowly or too digested form
in a
to be of use

Internal accountability systemsare clearly defmed,

well-documented and
specify the types of records that must be kept to sustainthem

13'ankingOperations Attitudes to Records Use

- andManagement

Shareholders,directors and bank managersunderstandthe

importance of
good information managementpractices and, in particular, good record
keeping in terms of establishingaccountability to manage
risks, prevent
fraud and monitor their financial position

KeepMigrecords is not an issue as bank managersand employeeswill

automatically want records to be kept that document their actions and
decisions

No special systemsneed to be put In place to ensurethat, once

documented, information about actions and decisionsis maintainedin a
retrievableand reliableform

Attitudes and approachesto accountability and record keeping are the

sameat all levels of the organisational hierarchy

Introduction of automated technology, that is more computers,will

automatically solve information problems for commercial banks and their
regulators

Useful information is seenas being 'inautomated form, while the term

records connotes useful hardcopy papers. Similarly, information
managementISseenin terms of computensation and something of value to
the strategic position of the orgarnsation, while records managementis seen
as being primarily to do with filing

13
BJan
-- king Operations Training ofBanking Professionals
-

Training of banking professionals influences

attitudes and approachesto
the use and managementof information and records in banking
operations
Training of banking professionalscovers management
control systemsand
their relation to information management

Banking Operations Information and RecordsManagement Practices

-

Responsibility and authority for record keeping is clearly designatedand

documented

File control and trackmig procedureshave beenarticulated and documented

Guidelineson the creation,maintenance,

useand dispositionof records
havebeenarticulatedand documented

Correspondence is delivered, actioned and filed promptly

Incidents of rMsfiling are low

Incidents of file loss are low

Information flows with easethrough the organisation

Officers appropriately share relevant information and information systems

support such sharing

Valuable information can easily be retrieved from one integrated source M

one medium

Poor or unethical organisational cultures spawn poor or unethical record

keeping subcultures. Alternatively, poor and unethical record keeping is a
sign of poor or unethical organisational cultures

for all aspects of record keepmigis clearly defined and

Responsibility
documented, both at the managementand operational level

The organisational structure is designedwith a clear distmictionbetween

specialist record keeping staff and users

designedso that at the operational level

The orgarusational structure I*LS

14
 a separationbetweenrecord keeping,custodyof assetsand system
there i*Ls
design

Systemsand procedures are M place to prevent unauthorised accessto

record stores

Disaster preparednessand recovery plans are clearly defined and

documented

Banking Operations - Information and Records Management Practices

-
Technology Use (eg, in Transaction Processing, Gathering and Analysis of
Customer Information and Credit Histories, in Approval Processes,in Audit
Trails, etc)

Introduction of computer technology is focused on the allocative aspectsof

information and records (te, information as resourceto improve the overall
efficiency and effectivenessof the business),not on the authoritative
aspects of information and records (le, information as evidenceof business
transactions in support of internal managementcontrol and accountability)

New computer systemshave been introduced as separateprojects and as a

result there LSlittle coordination between them

Officials create and managerecords in electronic form according to their

own practices

Computer systems, particularly Management Information Systems, are

linked to the paper-based records from which their data are drawn so that
the data may be easily verified

Personal user security systemshave been established

Apppropriate input, processIng and output controls have been clearly

, documented
establishedand

In the area of banking supervision, the study examinedthese assumptions-

Banking Supervision Records Availability and Use

-

The necessary information to

is available monitor commercial banking
operations to the extent required under Jamaicanlaw

Bank inspectors/supervisors/auditorsexperienceproblems M accessMigthe

15
 necessaryinformation to monitor commercial banks

Existing Jamaicanlaw, in providing a firamework for the supervision of

commercial banks, is sufficiently explicit on the subject of sourcesof
infon-nation to support effective supervision

Banking Supervision - Attitudes to Records Use andManagement

Bank MiSpectors/supervisors/auditorsare aware of the ]Importanceof good

internal information managementpractices, particularly good record
keeping, in commercial banks in terms of managingrisks, preventing fraud
and monitoring the banks' financial status

Banking Supervision - Training of Supervision Professionals

Training of banking supervisory professionalsinfluencesattitudes and

approaches to the use and managementof information and records In
banking operations

Training of banking superviSoryprofessionalscovers managementcontrol

systemsand their relation to information management

These assumptionsprovided a framework to explore the posited relationshipsamong

competitive viability, accountability and record keeping according to the methodology

the section. Ultimately, this process resulted in the formulation of the

outlined in next

the study, which is that record keeping practices in commercial

central argument of

be in order to support both the internal and social

enterprises must controlled carefully

form the basis of effective internal control and decision making

accountabilities that

necessaryto continuing competitive viability.

16
Research Methods

The research conducted for this study can be divided into three
phases. The study

commenced with a review of relevant literature. One of the primary purposes of the

literature review was to gain an orientation to the subject matter

with a view to developing

a list of assumptions about record keeping practices and their role in accountability and

competitive viabihty within the commercial banking sector in Jamaica.

This phasewas followed by exploratory field researchconducted on UK-based banking

enterprises. The airn of the exploratory field researchwas threefold. First, the research

provided valuable background information supplementalto the literature review, which

fed into the process of developing initial ideasabout the relationshipsamong record

keeping, accountability and competitive viability in commercial banking. This turned out

to be particularly iMPortant becauseliterature specifically about banking records and

record keeping is sparse. Second, it to

offered a useful opportunity pilot test the initial

assumptions derived from the literature review and, where necessary, to modify or add to

them in advance of the main fieldwork. Finally, it provided a source of data from which to

draw comparisons with the Jamaican data.

The next phase of the research project entailed conducting field researchin Jamaican

banking enterprises *inorder to gather detailed qualitative data about the

commercial

17
relationships among competitive viability, accountability and record keeping. For the

purposes of determining whether record keeping practices differ between banks that

performed weH durmg the fmancial crisis and those that fafled, the study exammedrecord

keeping practices in both competitively viable banks and those that

collapsed. Further, to

deterrmnewhetherthere were differencesIn record keepingpracticesbetweenlocal banks

and those that have foreign connections (le, local subsidiariesof foreign banks), the study

also exammedthe record keeping practices of banks in both groups. During the field

research, data were gathered prlrmrily from iterviews with directors, managersand other

officals of both vable and failed Jamaicancommercial banks, FINSAC officials, and

forensic auditors as weH as from surveys of records and records managementsystemsin

both viable and failed Jamaicanconunercialbanks.

The field research also entailed gathering information from the examination of official

reports and other forms of documentation. These sources included Jamaicanstatutes

relating to banking supervision and financial reporting; Bank of Jamaicainternal

documentationrelatM*gto bank inspection;annualreports of variousJamaicancommercial

banks and enterprises; Government of Jamaicareports on the financial sector coflapseand

the work of FINSAC; and relevant newspaper articles. Choice of data sourceswas

deternuned by two factors. Since this study aims to build and expand on studies by

Warnukoya and Akotia, it was thought that it would be appropriate to use similar

and data sources. Second, the methods and data sources employed in
qualitative methods

the studies by Wamukoya and Akotia are the most common used in records

18
managementstudies."

The interviews consisted of a series of highly structured,

open-endedquestionsdeveloped

to elicit responsesthat would provide data related to the assumptionsoutlined in the

previous section. These questions appear at Appendix I of this study and the hst of

assumptions to which they were matched appears as Appendix 4. Open-ended questions

were preferred over closed questions to give the interview subjectsscope to introduce

new themes and issues. In order to determine whether attitudes and approachesto record

keeping, accountability and the competitive viability of the banksvaried by level within the

orgarnsational hierarchy, interviews were conducted with senior managers,nuddle

managersand line managers. Where the interview subject had no objection (in most

cases), interviews were tape-recorded for later transcription. Transcriptions and notes of

interviews were entered into and managedusing QSR NUD*IST qualitative data

managementsoftware. Use of this software provided an important advantagein managing

the data generated by the study and permitted rapid generation, testing and revision of "if-

then" relationshipsand evidenceof linkagesto producemorerobust theory. This may not

have been possible using manual methods of analysis.Use of this software is discussedin

greater detafl In Appendix 2.

A data collection instrument was developed to guide the surveying of records and record

keeping practices conducted as part of this study. The data coffection instrument

of a series of questions answered by the researcherduring on-site

consisted

19
investigations. QuestionsInCludedon the surveyfonn also were keyedto the initial

assumptions of the study (see Appendix 4). The survey instrument appearsat Appendix 3.

Throughout, the study employed qualitative researchmethods informed by Grounded

Theory. Grounded Theory was developed in the 1960sby two sociologists, Barney

Glaser and Anselm Strauss and is a methodology particularly well suited to generating

new theory. 12 Glaser defines Grounded Theory as ".

--a general methodology of analysis

linked with data collection that uses a systematically applied set of methods [author's

to
emphasis] generate an inductive theory ""
about a substantivearea. In Grounded

Theory research, data collection, analysis and theory have a reciprocal and iterative

relationship. 14 The applied set of methods used in this study is discussedin Appendix 2.

"
A rangeof researchmethodscould havebeenchosen. Qualitativeresearchmethods

informed by Grounded Theory were chosen over and above quantitative methods (le,

stawtically analysed survey data) for a number of reasons. First, many researchersnow

in
criticise the value of quantitative methods, particularly accounting research,and

advocate the use of qualitative methods, such as case studies, in which theory and

interact reflexively.16 Second,

as there is no pre-existingtheory on the
observation

among the three main objects of analysis in this study (record keeping,
relationships

and competitive viability), Grounded Theory presenteda good fit. Lee

accountability

20
Parker and Bet Roffey write: grounded theory "...
IS oriented towards identifying and

articulating overarching concepts and their causal linkages as explanationsof patterned

behaviour." 17 Another significant benefit Grounded Theory it

of ISthat perrnits the use of

multiPle data sources. Parker and Roffey note that "Grounded theory. admits a greater
..
range of data sources [than ethnomethodology and ethnography], *includingnaturally

occurring verbal exchanges,interviews, reports, minutes of meetings, correspondenceand

18
so on."

Organisation of the Study

The study is organised into two broad sections. The first section estabhshesthe

theoretical linkagesamongrecord keeping,accountabilityand competitiveviability.

Chapter two maps the relationship between two of these core concepts: competitive

viability and accountability. It defines competitive viability and accountability, showing

how these are integrafly linked. Chapter three then rnapsthe relationship between

accountability and record keeping, arguing that accountability is dependenton a variety of

to
records operate effectively and that the manner of record keeping determineswhether

the quality of these records will be sufficient to meet accountability requirements. Chapter

four draws an analogy between the relationships among economic development,public

sector reform and record keeping and the relationships among competitive viability,

accountability and record keeping. The chapter also usesresearchon public sector reform

and record keeping in Africa as evidence of the plausibility of the theoretical framework

21
outlined in chapters two and three.

The second section of this study focuses on the commercial banking

sector in general and

record keeping, accountability and competitive viability in the Jamaicancommercial

banking sector in particular. It begins in Chapter five

with a discussionof commercial

banking operations and the role of accountability systems

in managingand monitoring

risks, assessig financial position and preventing fraud. Chapter six moves to a discussion

of the Jamaicanfinancial crisis, exploring exogenousand endogenous

factorscontributing

to commercial bank collapses and concluding that weaknessesM the banks' systemsof

accountability can be implicated. Chapter sevengoes on to explore poor information and

communication as a cause of the banks' weak accountability systems,arguing that these

weaknesseswere the result of the banks' recordscreationandkeepingpracticesand

illustrating the effect of these practices on management11

s ability to monitor and manage

the banks' financial positions and risk exposures. Chapter eight then explores the reasons

underlying the banks' records creation and keeping practices.,making the casethat these

practices were the result of an absenceof clear bank-wide accountabilities and controls

over record creation and keeping that, ultimately, encouragedthe banks' officials to create

and keep records according to personal values, beliefs and norms not always In tune with

to
what was required produce the quality of information neededto support effective

operation of the banks' systems of accountabihty. Chapter to

rune goes on examine how

the banks' record creation and keeping practices also undernunedthe work of banking

supervisors and FINSAC officials, thereby also affecting social accountability.

22
The study concludes with a chapter that summariseshow the Jamaican
empirical data

illustrates the theoretical relationships among competitive viability, accountability and

record keeping outhned in chapters two and three and, drawing upon the Jamaican

experience, makes a number of recommendations concernedwith strengtheningrecord

keepM'gpractices and the use of records in accountabflity

systems.

Exchange Rate Calculations

Throughout this study numerous referencesare madeto Jamaicandoflar amounts. As the

Jamaicandollar is not a commonly traded international currency, in order to giVe the

reader an appreciation of the value of the Jamaicanamounts they are indicated M US

dollars as well. However, during the Jamaicanfinancial crisis, the Jamaicandollar suffered

rapid devaluation in relation to the US dollar and, indeed, continues to decreasein value.

Thus, for the sake of simphcity, m most casesthis study usesa standardrate of $J40:$USI

to calculate US dollar equivalencies,,a rate that obtained roughly throughout 1999.'9

However, where this figure ryughtpresent a rmsleadmgview of the value of a loss or an

asset, an historically accurate exchangerate has been used. In such cases,the actual rate

of exchange used to calculate the US dollar equivalency is indicated next to the Jamaican

doflar amount.

Review of Related Literature

23
Literature from a wide range of disciplines was reviewed throughout this study. The

purpose of this review is not to discuss all of the literature but to give the reader a senseof

the approach taken in conducting the literature review. In addition, the review presentsa

discussion of the most influential works and how they relate to the developmentof the

central themes of this study. Chapters two through five will discussthese works in much

greater depth.

Critical to the idea that there exist relationships among competitive viability, accountability

and record keeping has been the body of literature on the relationship between public

accountability and record keepmg that has emergedover the last decade. This literature

grew out of Canadian archivist Terry Eastwood's 1989 Australian Society of Archivists'

conference presentation calling for archivists to "spirit an understandingof archives as

v'20
Carsenalsof democratic accountability and continUity. Eastwood's paper was followed

by a series of articles and research papers that linked accountability with records and

information management,subsequentlypublished in 1992 in Sue McKemmish and Frank

Archival Documents: Providing Accountability Through 21

Recordkeeping.
Upward's

In 1996 Justus Wamukoya presented the first researchexploring hnks between public

initiatives developing countries and record keeping M his doctoral

sector reform in

Kenya.22
dissertation on records managementand administrative reform programmes in

Warnukoya's study was of major significance becauseit was the first such study to place

24
discussion of the relationship between record keepmig
and accountability In the context of

literature on development econormcsand adn-finistrationthereby

indicating that poor

record keeping had negative repercussionsfor the competitive

viability and econormc

development of a country. His study was followed by the 1997 doctoral dissertation
of
Pino Akotia on the managementof public sector financial records and their implications

for good goverment in Ghana, showing once again how poor records
managementcan
23
undermine public sector reform. More recently, the International Records Management

Trust has conducted research into the relationship between good governanceand record

keeping. 24 Like Wamukoya and Akotia's research, its study of the managementof public

sector financial records In sub-SaharanAfrica shows how poor record keeping practices

undermm*eaccountabihty and pubfic sector management. Chapter four arguesthat this

body of research lends empirical support to the central argument of this study.

Development policies, particularly those of the World Bank, that place increasing

in
emphasison the role of the private sector economic developmentstimulated an interest

in exploring whether the way in which poor record keeping underminedaccountability and

public sector reform similarly undermined accountability and private sector competitive

viability. Works such as Beatriz Armendariz de Aghion and Francisco Ferreira's survey of

the 1980s literature on the Third World Debt Crisis, Paul Mosley's general overview of

the World Bank and International Monetary Fund's structural adjustment programmes and

Howard Stem's look at structural adjustment in Aftica as well as World Bank publications

were all useful In tracing this trend toward greater reliance on the private sector as an

25
engine of econornic growth for developing 25
countries. Of particular interest is the

1998/99 World Bank World Development Report becauseof its clear

attention to the

private sector as an engine of economic development, its focus on financial institutions

such as banks as private sector entities of particular importance to growth and

development In Third World countries, and its recognition of infon-nation

problems as

barriersto the successof developmentinitiatives.26 However,as will be discussedin

chapter four, despite linking failures In development initiatives with information problems,

the report still does not identify poor record keeping in private sector entities as a source

of such problems, which this study contends is a gap in the World Bank's analysisand

its to
weakens overall approach solving information related problems that stifle economic

development.

In citing information problems as a barrier to successin developmentinitiatives, the World

Bank report draws on a well-defined body of econornIctheory that links market

imperfections with information related transaction costs. This body of theory has

influenced formation of the theoretical framework of this study. The argument that poor

record keeping contributes to information related problems that undermine accountability

and competitive viability in private sector entities rests upon the underlying argument that

but also the way in which a firm operatesplays an

not only external market conditions

important role in its continuing competitive viability and that internal information related

can create operating inefficiencies in a firm which undernune its competitive

problems

Support for this line of thinking is found in the writings of econornic and
position.

26
organisational theorists influenced by the ideas of decision theorist Herbert Simon, in

particular the "new institutional economics" (NIE) theorists, whose ideas have been well

surnmarisedma colIection of papers edited by John Haff iSs,JanetHunter, and Colin Ni

Lewis entitled 7-heNew Institutional Economics and Third World Development,

and in

the writings of econonllC and organisational theorist Roy Radner, who focuses on the

operational inefficiencies that arise from information related problems in large, hierarchical

27
orgarnsations. Like the World Bank report, although these writers recogrusethat

information related problems create operational inefficiencies In organisationsand

markets, they do not attribute informatiOn problems to poor record keeping.

Nevertheless, this study airns to show that poor record keepmg is a source of such

information related problems and, furthermore, that these problems undermme

accountability and competitive viability in private businessenterprises.

Aa noted previously, a decision was taken to employ a Grounded Theory-basedapproach

using a case study of Jamaican commercial bank failures to explore the possible linkages

among competitive viability, accountability and record keeping. Works such as W.

Lawrence Neuman's Social Research Methods provided a useful overview of the range of

29 Other works, such as Christopher Humphrey and Robert

methodological possibilities.

W. Scapens', "Theories and Case Studies of Organizational accounting practices:

Limitation or Liberation? " and JaneBroadbent and Richard Laughlin's, "Developing

research: an example informed by a Habermasian "

approach, influenced the
empirical

direction taken in this study by illustrating an evident trend away from

methodological

27
more quantitative approaches in accounting researchtoward more qualitative empirical

29
studies. In terms of the Grounded Theory approach, B. Glaser's Basics of Grounded

Theory Analysis provided a general guide to the

methodology while Lee D. Parker and

Bet H. Roffey, "Back to the drawing Board: revisiting grounded theory

and the everyday
30
accountant's and manager's reality" offered a useful applied exampleof the method
.
Harold Garfinkel's Studies in EthnomethodoloT was also useful In shapmgthe

methodological approach employed m the study."

The decision to use a case study of Jamaicancommercial bank failures to explore the

relationships among competitive viability, accountability and record keeping necessitated

an extensive review of the hterature on banking. Works such as ShelaghHeffernan's

Modem Banking in Theory and Practice; Geoffrey Lipscombe and Keith Pond's book on

the busmessof banking; Joel Bessis' Risk-Management in Banking, Mervyn King's book

on back office functions in banking;and numerouspapersproducedby the Basle

Committee on Banking SuperviSiOnall provided valuable general information about the

32
busmessof banking. Background informationabout bankingin developingcountry

drawn from Chris Baltrop and Diana McNaughton's publications on banking

contexts was

developing countries; Wilbert 0. Bascom's book on bank and

management
institutions in

developing financial markets and Howard Palmer's Bank Risk Analysis in

supervision in

Emerging M 33
arketS.

A review of literature related to the causesof bank failures was i

important to the process

28
of analysmg what banking experts understand about competitive viability III banking. In

this regard, a series of papers edited by Gerard Capi-10Jr. entitled Preventing Bank Crises:

Lessonsfrom Recent Global Bank Failures proved

an invaluable source for as wide range

of perspectives on the causesof bank failures and numerouscasestudies of bank failures

in different 34
countries. R- GlennHubbard'sFinancial Markets and Financial Criseswas
35
also a useful source. Common causescited as leading to bank failures Included:

macroeconomic instability; excessiveexposureto a single sector; poor assetmanagement;

inappropriate or ineffective governance, managementand mcentive structures; lack of

internal control mechanisms;fraud; a decline in franchisevalue; weaknessesIn the

regulatory framework; and regulatory forbearance. A review of this literature revealed

that cited causesof bank failures tended to be related to either exogenousfactors, such as

the macroeconomic environment and bank regulation, or those that were endogenous,

such as managementfailure to control various types of risks, poor credit risk management

being among the most common of problems.

A number of works on the field of banking pointed to the importance of information and

bank balance sheetsand risks and lent support to the thesis

communication in managing

that operational problems in organsatiOns can be linked to information related problems.

Among these works were several papers in Ray Kinsella's Internal Control in Banking

Basle Committee on Banking Supervision's papers on a framework for evaluating

and the

internal control in banking, enhancing bank transparencyand operational risk

36 The literature on banking in developing countries suggestedthat relatively

management.

29
poor quality accounting and managementinformation often contributes to operatmg

problems In banks In these countries. As a rule, however, this literature did not link the

availability of good quality accounting and managementinformation with good record

keeping practices. The Basle Committee's

paper on internal control is the only one of

these works to associatethe avoidance of information related problems with the needto

establish record keeping controls; but, even so, it does so in a very limited way - record

keepmg is conceptualisedas being synonymouswith records retention

scheduling. This

view is not so far from that of records managerNan HeldenbrandMorrisette whose book

Setting Up a Bank Records Management Program largely concentrateson issuesof

37
records retention scheduling. Nevertheless,this study arguesfor a much broader

conceptualisation of record keeping in the banking context and the types of controls

for
necessary the production of quality records, a conceptualisationencompassingall

aspects of the creation and keeping of records III different media.

In advance of conducting the field research,a review also was carried out of literature on

accountability including the relatedareasof corporate f

governance, jinanci
iaI and

managementaccounting and auditing. This literature provided a sharperpicture of

accountability and a clearer understanding of its operation in the context of the casestudy

banking. Keith Hoskin's "The 'awful idea of accountability':

setting, namely, commercial

into the measurementof "

objects, links the rise of accountability in
inscribing people

businesssettings with the need to prevent internal control problems and poor decision

that businessfailures, as does Alfred Chandler's The Visible Hand

making nught cause

30
and JamesBeruger's The Control Revolution 38 In contrast, Harold Garfinkel, In his
.
Studies in Ethnomethodology, views accountabflity as holding
organisationstogether not

by virtue of supportIng internal control and decISIonmaking but by beM9 the

virtue of

actual mechanismof social relations that gives rise to and perpetuatesorganisations.39

This study accepts both views, but places emphasison accountability's role in supporting

internal control and dedsion-making.

The works on accountabihty also brought into sharperfocus the differencesand

similarities between accountabihty in busmessversus goverment settings. While

accountability III each setting essentially functions according to the samemechanismsand

to
alms establish controL the interests which they serve are different: in the case of

accountability In businesssettings, the interests directors,

of shareholders, and managers

are primary while in democratic it

accountability is the public interest or a "collective

good". Nevertheless, accountability can serve the public good in the caseof private

industries in which the public has an interest. This is becauseaccountability provides an

effective basis for the internal control and efficient operation of such private sector

enterprises. Internal control and efficient operations are to

essential the attainment of

goals benefiting the common good, such as economic development. Due to the

banks to economies, in particular in developing countries, banking is an

importance of

industry in which accountability does serve both public and private interests.

Some of the literature its

on accountability chaflenges effectivenessas a tool.
management

31
In particular John Roberts in "From Discipline to Dialogue: Individualizing and

Socializing Forms of Accountability" argues against the traditional view that

accountability supports the competitiveness of a business 40

enterprise. He points out that

traditional, hierarchical forms of accountability can result in mdividualismg behaviour that

is counterproductrve in a businessenvironment that demandsa team-oriented approacli

Roberts calls for less formal "lateraF' forms of accountability and trust to replace more

traditional accountability relationships. This study takes the view that in a setting

by
characterised rapid external and organisational changethere be
may insufficient tune to

build trust relationships and that, therefore, formal accountabilities still will be necessary

to achieving internal control, sound decision making and competitive viability.

The accountability literature also touches on the significance of the account - the point at

which accountability and record keeping intersect - in the accountability relationship,

viewing accounts as critical to the operation of accountability. The literature points to

growing support for the idea, influenced by post-modernist thinking, that accounts are

socially produced "re-presentations" of organisational transactions. This View challenges

the traditional view of accounts as objective reflections of reality. Chief among these

works in terms of its influence on the ideas presented in this study is Joni I Young's

"Getting the Accounting 'Right': Accounting and the Savingsand Loan Crisis" which

Mustrates how definitions of "right" accounting and accounting numbers shifted with the

32
interests and policies of bank regulators.41

Recent archival theory also reflects the trend in the literature toward viewmg the account

as a socially produced representation. Among the writings drawn upon to develop the

ideasIn this study are Brien Brothman's, "Orders of Value: Probingthe TheoretiCalTerms

of Archival Practice" and "'Declining Derrida': Integrity, Tensegrity, and the Preservation

of Archives from Deconstruction, " Tom Nesmith's review of Trevor Livelton's Archival

Theory, Records and the Public and Verne Harris' Exploring Archives: An Introduction

to Archival Ideas and Practice in South AMca. 42 These writers all seethe archival record

not as objective evidence of facts but as text, that is, socially and technologically produced

accounts of "reality". As such, they view the social and technological meansof

msCription, transnussionand contextualization as weH as subsequentreadings of the

record throughout its life span as shaping the record's ultunate meanmg. This study also

draws upon social theory, particularly Ernile Durkheium'sstudy of threats to the social

stability of industrial society and the ideas of conflict theorists such as Ian Carib, to flesh

out the ways In which different interests M record creation and keeping wiff influence the

meanmg of a record over time in a manner that may not be intentional nor supportive of

broader organtsational goals and requirements.43 In the final analysis,this study accepts

Brien Brothman's argument that record keeping accountabilities and controls are essential

to controlling social and technological influences and interests as well as preventing a

natural deconstruction in the meaning of records over time, though it is acknowledged that

33
even best record keeping practices cannot definitively control the meaning of accounts.44

Conclusion

This chapter has introduced the purpose of this study, which is to explore the relationships

among competitive viability, accountability and record keeping both theoretically and

empirically using a casestudy of Jamaicancommercial bank failures, and then to learn

managementlessonsfrom what is discovered about the relationships among these three

phenomena. The expectation is that the results of this study will reveal that the

relationshipsare similar to those shown by researchconductedon the relationshipbetween

record keeping and public sector reform In Africa, that is, that poor record keeping

underminesaccountability and, by extension, competitive viability. This is thought to be

significant becauseof the increasing emphasisplaced on private sector entities, In

particular banks, Mieconomic development initiatives as well as because,though

acknowledgmg that information problems contribute to orgamsationaland market

ineffiCiencies,current theories do not attribute these to

problems poor record keeping. If

poor record keepmg Lsa source of such problems - as this study argues- then record

keeping must be improved if organtsational and market inefficiencies are to be prevented

or corrected. In developing this argument, this study now turns to presentmga theoretlcal
C--
.
framework linking competitive viability, accountability and record keeping.

34
End Notes

B.H. Spicer, "The Resurgenceof Cost and ManagementAccounting: A Review SomeRecent

of
Developmentsin Practice,Theoriesand CaseResearchMethods," ManagementAccounting Research3
(1992): 13.

2 Pino Timothy Akotia, "The Management Public SectorFinancialRecords:The Implications

of for Good
Government," unpublishedPhD thesis,Facultyof Arts, University of London, 1997
and JustusMuranga
Wamukoya,"RecordsManagementand AdministrativeReform ProgrammesM Kenya"
unpublishedPhD
thesis,Faculty of Arts, University of London, 1996.

3 InternationalRecordsManagementTrust, "Guidelinesfor Public SectorField Nfissions:Strengthening

Accountability by ManagingRecordedEvidence" G-ondon:lRN4T December,1998).
,
4 Morris Goldsteln,The Casefor
an International Banking Standard (WashiVon, D.C.: Institute for
InternationalEconornlCs,1997), 4.

5For example,the US
savuagsand loan cnsis costAmencan taxpayerssome$US150-180billion [seeGerard
Caprio, Jr. et al, eds., PreventingBank Crises: LessonsftOmRecentGlobal Bank Failures (WashingtorD. C:
The World Bank, 1998),x].

GerardCapno, Jr, x.

7 World Bank, World DevelopmentReport 1998199:Knowledgefor Development(NY: Oxford University

Press,1998), 81.

World DevelopmentReport, 83.

9 See Karin Lissakers, "The Role

of the International Monetary Fund," Preventing Bank Crises: Lessonsftom
Recent Global Bank Failures, Gerard Caprio Jr. et al, eds. (Washington, D. C.: The World Bank, 1998), 29.

10 See World Development Report Charles W. Calomiris Gary Gorton, "The Origins of Banking
and and
Panics: Models, Facts and Bank Regulation, " FinancialMarkets and Financial Crises, Glenn R. Hubbard, ed-
(Chicago: University of Chicago Press, 1991), 109-174.

"See Ira Penn Records Management Handbook, 2ndEditiOn (Aldershot: Gower, 1994), 59-60 and
et al.
E.A. Parker, "Developing the Prograninie, " in P. Ernmerson, ed., How to Manage Your Records (Carnbridge:
ICSA, 1989), 24-39.

12Lee D. Parker and Bet H. Roffey, "Back to the Drawing Board: Revisiting Grounded Theory and the
Everyday Accountant's and Manager's Reality. " Accounting, Auditing & Accountability Journal 10 (1997):
213.

13B. Glaser, Basics of Grounded Aeory Analysis (Ivfill Valley, CA: Sociology Press, 1992), 16.

" Parker and Roffey, 214.

15Richard Laughlin hasdevelopeda schemeof classificationfor approachesto empirical researchwork based

35
on threemain defining characteristics:1) levels of prior theonsation,2) level of theoreticalnatureof the
methodsand 3) level of emphasisgiven to critique of statusquo and needfor change.According to Parker
Roffey, the groundedtheoryapproachfits into the low and
prior theorisationandmedium-lowlevel of theoretical
nature of methodscategory[seeParker and Roffey, 21-218].

16The
methodologicalshift from quantitativeto qualitativemethods,particularly In accountingresearch,
reflects a larger shift M the view of accounting. In the 1960s,researchersviewedaccountingas objective,
neutral and rational. However,In the 1980s,influencedby social theoristssuchasFoucault,Latour, Marx,
Adorno, Braverman,Habermas,Giddens,Weber andDerrida, researchersbeganto
challengethe earlier view
of accounting,seeingit rather as socially, culturally andpolitically determined[for more on this theme,see
ChristopherHumphreyandRobert W. Scapens,"Theories and CaseStudies OrganizationalAccounting
of
Practices:Limitation or Liberation?" Accounting, Auditing &Accountability Journal 9,6 (1996):86-106].
17
Parker andRoffey, 217.
18
Parker andRoffey, 218

19Bank
of Jamaica, Statistical Digest (Kingston, JA: Bank of Jamaica, December 2000). The actual average
rate throughout 1999 was actually 39.33 according to the Statistical Digest.

20Sue McKernrnish
and Frank Upward, "Introduction, " Archival Documents: Providing Accountability
Through Recordkeeping, Sue McKenunish and Frank Upward, eds. (Melbourne: Ancora Press, 1993), 2.

21
Ibid.
22
Wamukoyapassim.
23
Akotia passim
.
24Kimberley Barata,Piers Cam andAnne Thurston."Accountability
andPublic SectorManagement:The
Managementof FinancialRecordsin Sub-SaharanAfrica: A Final Report" (London:InternationalRecords
ManagementTrust, 1998).

25Beatriz Armendariz de Aghion Francisco Ferreira, "The World Bank and the Analysis of International
and
Debt Crisis, " The New Institutional Economics and Third World Development, John Harriss, Janet Hunter and
Cohn M. Lewis, eds. (London: Routledge, 1995), 221-226; Paul Mosley, "Structural Adjustment: A General
Overview, 1980-9, " Current Issues in DevelopmentEconomics, V. N. Balasubramanyam and SanjayaLall,
eds. (London: MacMillan Education Ltd, 1991),223-253; Howard Stem, "Institutional Theories and Structural
Adjustment M Africa, " The New Institutional Economics and Third World Development, John Harriss, Janet
Hunter and Cohn M. Lewis, eds. (London: Routledge, 1995), 109-132; The World Bank, A Governance
4pproach to Civil Service Reform in Sub-Saharan Aftica: Improving Effectiveness and Efficiency
.
(Washington, D. C.: The World Bank, 1983).

26 World Development Report passim.

27JohnHarriss, JanetHunter and Colin M. Lewis, eds.,TheNewInstitutional Economicsand Third World

Development (London:Routledge,1995) and Roy Radner,"Hierarchy The Economicsof Managing," Journal
ofEconomic Literature 30 (September 1992): 1384-1404.

28W. LawrenceNeuwmanSocialResearch Methods: Qualitative and QuantitativeApproaches(Needham

Heights, Massechusetts.:Allyn & Bacon, 2000).

36
29 Humphrey
and Scapenspassim and Broadbentand Laughlinpassim.
30Glaser
passim and Parker andRoffeypassim.

31Harold Garfinkel, Studiesin Ethnomethodology(Cambridge:Polity Press,1984).

32ShellaghHeffernan,Modern Banking in Theory

and Practice (New York, N. Y.: JohnWiley & Sons,1996);
GeoffreyLipscornbeandKeith Pond,Banking: TheBusiness,3rded. (Loughborough:Loughborough
University Banking Centre, 1998); Joel Bessis,RiskManagement in Banking (West Sussex:JohnWiley &
Sons,1998); Mervyn King, Back Office & Beyond: A Guide to Procedures,SettlementsandRisk in Financial
Markets (Cambridge:Gilmour Drummon Publishing, 1999);BasleCommitteeon Banking Supervision,"Core
Principles for Effective Banking Supervision," (Basle:Basle Committeeon Banking Supervision,September,
1997);Basle CoMMI e on Banking Supervision,"EnhancingBank Transparency:Public Disclosureand
SupervisoryInformation that PromoteSafetyand Soundnessin Banking Systems"(Basle:Basle Committeeon
Banking Supervision,September,1998);Basle Committeeon Banking Supervision,"Frameworkfor the
Evaluationof Internal Control Systems"(Basle:Basle Comrnitteeon Banking Supervision,January,1998); and
Basle Committeeon Banking Supervision,"Operational Risk Management"(Basle:BasleCommitteeon
Banking Supervision, September, 1998).

33Diana MeNaughton, Banking Institutions in Developing Markets,

vol. I (Washington, D. C.: World Bank,
1992); Chris J. Barltrop and Diana MeNaughton, Banking Institutions in Developing Mar*ets, vol. 2
(Washington, D. C.: World Bank, 1992); Wilbert 0. Bascom, BankManagement and Supervision in
Developing FinancialMarkets (London: MacMillan Press, 1997); Howard Palmer, Bank Risk Analysis in
Emerging Markets (London: Euromoney Publications, 1998).

34Gerard Capno Jr.

passim.

35R. Glem Hubbard, ed-,FinancialMarkets and Financial Crises (Chicago,University of ChicagoPress,

1991).

36Ray Kinsella, ed.Internal Controls in Banking (Chichester:JohnWiley & Sons,1995):BasleCommitteeon

" "EnhancingBank
Banking Supervision,"Framework for the Evaluationof InternalControl Systems,
Transparency"and "Operational Risk Management"passim.

37Basle Committeeon Banking Supervision,"Framework for the Evaluationof Internal Control Systems,
" 4,
17-18 andNan Heldenbrand.Morrissette,Setting Up a Bank RecordsManagementProgram (Westport
Comecticut: Quorwn Books, 1993)

38 Keith Hoskin, "The 'awful idea of accountability': inscribing people into the measurementof objects"
Accountability: Power, Ethos and Technologies ofManaging, Rolland Munro and Jan Mouritsen, eds.
(London: International Thompson Business Press, 1996); Alfted Chandler Jr, The Visible Hand: The
Managerial Revolution in American Business (Cambridge, Massechusetts:The Belknap Press of Harvard
University Press, 1977); JamesBerager, The Control Revolution (Cambridge, Massechusetts:Harvard
University Press, 1986).

Garfinkel passim.

40
Robertspassim
.

37
41Joni J. Young, "Getting the Accounting 'Right': Accounting and the SavmgsandLoan Chsis" Accounting,
Organizations and Society 20.1 (1995): 55-80. Seealso note 15.

42Brien Brothman,"Orders Value: Probing the TheoreticalTerms Archival Practice"Archivaria 32

of of
(Spring 1991): 78-100; Brien Brothman,"'Declining Derrida': Integrity, Tensegrity,andthe Preservationof
Archives from Deconstruction"Archivaria 48 (Spring 1999): 64-88; Tom Nesmith, "Still Fuzzy,But More
Accurate: SomeThoughtson the 'Ghosts' of Archival Theory" Archivaria 47 (Spring 1998): 136-150;Verne
Hams, Exploring Archives: An Introduction to Archival Ideas and Practice in SouthAftica, 2nded. (Pretoria:
National Archives of SouthAfrica, 2000).

43Thesesocial theoristsare discussedin M. HaralainbosandM. Holborn, Sociology: Themesand

Perspectives(London:Harper-Collins, 1996) and The University of the West Indies,Introduction to
Sociology: Reader,vol. I (Bridgetown,Barbados,University of the WestIndies, 1998).

44Brothmar"'Decliir Derrida"'passim.

38
Chapter Two: Competitive Viability Accountability Mapping
and - the
Relationship

Introduction

This study seeksto establisha chain of links amongcompetitiveviability,

accountability and record keeping in the context of private sectorbusinessentities.

The purpose of this chapter and the one that follows is to map out a theoretical

relationship betweenthesethree phenomena. As discussedin the introduction, the

study adopts a Grounded Theory-basedmethodologicalapproach. As such,the

theoretical frarnework presentedin this chapter and the next beganwith the

assumptionsand broad in
orienting conceptsoutlined chapterone. Mapping of

the theoretical relationshipsamong competitive viability, accountabilityand

record keeping progressedas the field researchdata were gathered,analysedand

then related to the work of many theorists from fields as diverseas economics,

sociology, computer science, accounting, literary criticism and archives

administration. In this the

sense, theoretical framework in
presented this and the

following chapterboth draws inductively upon the field researchdata and

39
provi es a framework for analysisand discussionof thesedata in later chapters.

Defining Competitive Viability

What makesa businessentity competitively viable? To remainviable to survive

-

-a firm must operate efficiently. Optimally efficient operation occurs when firms

use all of their availableresourcesand technologyto producewith the least

1
amount of waste the products or servicesthat customersmost want. Firms that

operate most efficiently, that is to say those with high productivity, will have a

comparativemarket advantageand therefore will be the most competitive. Firms

that do not operate efficiently will be relatively disadvantagedand less

in
competitive, and extremecaseswill become 2
non-viable. Competitive viability

therefore meansthe ability of a firm to operatewith sufficient efficiencyto avoid

failure and ensuresurvival in a competitive market.

This study avoids attempting to measuredegreesof competitiveness,instead

focusing on viability, becauseof the conceptualdifficulties associatedwith

measuringa firm's overall or relative productivity. For instance,as economists

Phillipe Aghion and Peter Howitt observe,if we measurethe output of hospital

servicesin terms of the number of patient days spentin hospital, when one

hospital introduces a new computer assistedsurgicalprocedurethat increasesthe

hospital's efficiency by curing people in fewer daysit can actually seemas if the

hospital is less productive.3 Similarly, analyststypically

more efficient use

profitability as a comparativemeasureof productivity, but this be

can misleading

40
as well. Investmentsin researchand developmentmay be for
necessary the firm

to continue to grow and remainviable and profitable over the long-term while
4
reducing short-term profitability. In other words, optimal efficiencyis not

by
always achieved short-term profit maximisation. Even assumingprofitability

accuratelyreflects productivity, however, there are many different methodsused

to measureprofitability eachof which results in a slightly different ranking of a

5
firm's relative market position. Thus, in order to avoid the analytical

to
complicationsassociatedwith attempting measuredegreesof competitiveness,

this study focuseson the basic question of survival in a competitivemarket place.

Using this approach,it is easierto determinewhether a firm is or is not

competitively viable. Those that are continue to exist. Those that are not fail.

According to the neo-classicaleconomicmodel, efficient operationof the firm

occurs almost effortlessly and naturally. As Kenneth Boulding has written of

generalequilibrium theory, the firm is "a strangebloodlesscreaturewithout a

balancesheet,without any visible capital structure, without debts,and engaged

apparentlyin the simultaneouspurchaseof inputs and saleof outputs at constant

"6
rates. In this economicmodel, the "invisible hand" of market forces operating

according to the law of supply and demand,achievesa balancebetweenwhat

(SUPPI Y). 7
consumerswant (demand)and what firms produce The market operates

perfectly and naturally to achieveequilibrium, and thereby efficient production.

The reasonis that firms are discouragedby the profit motive from using inputs

The market mechanismalso guides firms' output decisions.

wastefully.

a rise in the price of product becauseof high demandwill lead firms

theoretically,

41
to produce more of that product, and vice versa, thereby optimally balancing

demandand supply once more. Finally, the market

assists,through a price

system,in the distribution of goods among consumersin accordancewith their

tastesand preferencesthrough a seriesof voluntary exchanges.

If we acceptthis model, to remain competitively viable firms must

strike a balance
between supply and demandin a given market. However, there are factors
many

that causeimbalances. Thesefactors may either causea shift in demandor

8
supp Y. Typically, such factors as a change in the incomes of consumers, a

population change,a shift in consumerpreferences,and a shift in the price and

availability of related goods all affect the demandside of the equilibrium

9
equation. Conversely,shifts on the supply sideusually result from changesin the

size of the industry, technologicalprogress,changesin the price of production

inputs, and changesin the price of related products.10 When thesechangesoccur

they can destabilisea firm's competitive position.

The factors affecting market equilibrium and thus a firm's competitivenesscan be

divided into two broad categories: 1) exogenousand 2) endogenous.Exogenous

factors are those that originate outside the firm. A changein populationprovides

an example of an exogenous factor. Exogenous factors may have an impact on

either demand In
or supply. contrast, endogenousfactors originatewithin the firm

itself as a result of the strategiesand methodsof conductingbusiness

pursuedin

to
response exogenous factors. Consequently endogenous factors always affect

the supply side of the market equilibrium equation. Choice of marketsin which to

42
operate servesas an exampleof an endogenousfactor.

Though exogenousfactors are important, studiessuchasthe EuropeanBank for

Reconstructionand Development's examinationof economictransition in Central

and EasternEurope, the Baltic statesand the Conunonwealthof Independent

Statesalso have found that more important than the objective statusof these

factors are managers'perceptionsof them, as this will impact upon the decisions

in
they make managing their firms. 11Implicit in the findings of the ERBD study

is a rejection of the neo-classicalview of the firm as a "bloodlesscreature."'

Instead,the study seesmanagers'decisionsas crucial in the running of businesses.

Herbert Simon pioneeredthis approachto understandingorganisations,now

known as "the decision-making approach," in the 1940s to 1950s.12 flis work

inspired economistssuch as Ronald Coase,DouglasNorth and Oliver Williamson

to develop a new economicmodel that cameto be known as the New Institutional

13
Economics. From the perspective of this model, external factors are triggers for

the decisionsand actions that managerstake in running their businesses.The

in
environment which they operate forces managersto respondand adaptor see

their businessesbecomenon-viable. Adaptation may involve the developmentof

new products and services;the upgrading of existing products and services;

modification of existing or acquisition of new plant and equipment;the retraining

of existing or hiring of new employeesto meet new or upgradedproduct

requirements;the attraction of new customers;or changingthe business's

organisational structure. In short, managers must innovate. They may decide to

43
implement all or any numberof the above changesin order to
adaptto altered

market conditions, thus, to remain competitively viable.14

According to neo-classicaleconomictheory, premisedas it is the

on notion of

rationa economicactors operating in the context of perfect markets,managers'

decisionsshould be perfectly rational responsesto environmentalchanges,

and we

should expect them to respondin the samemannerall things being equal. In

contrast to the neo-classical theory, however, managers' choices are not always

rationa , that is to say, adaptiveor optimal given existing externalconditions,as

judged in terms of the goals of the firm. Indeed, Ronald Coasehaswritten that the

neo-classicalmodel "only lives in the minds of economistsbut not on earth."15

Why are managers' choices not always rational? Economic theory offers two

schoolsof thought in answerto this question. On the one hand,there is the

perspectiveof New Institutional Economics. This model startswithin the neo-

classicalframework, that is, the assumptionof scarcity and thereforeof

competition, but holds that market imperfectionsprevent the market from

it
operating as naturally should operate (ie, achievinggeneralequilibrium). One

such market imperfection is the cost associatedwith eachtransactionin the

marketplace. Oliver Williamson, a leading theorist of the New Institutional

Economics model, has developeda theory of what constitutestransactioncosts

basedon the work of Herbert Simon and Kenneth Arrow. Arrow arguedthat

market imperfectionsarise from the problem of information that

asymmetry, is,

and integrity of one to transaction is

when the motivations party a unknown,

44
transaction costs will rise. Simon arguedthat organisationsare never perfectly

rational becausetheir membershave limited information-processingabilities.

Members of an organisationusually have to act on the basisof incomplete

information about possiblecoursesof action and their consequences,

are ableto

explore only a limited number of alternativesrelating to any given decisionand

are unableto attach accuratevaluesto outcomes. Thus, Simon concludedthat, in

contrast to neo-classicaleconomictheory in which the individual is assumedto

make perfectly rational choices,individuals settle for "bounded rationality." 16

Information related limitations introduce transactioncosts. Williamson's thesisis

that suchproblemswork together to createthe transactioncoststhat makethe firm

necessary: "... what links opportunism and bounded is

rationality uncertainty

createdby both the cognitive limitations of corporationsand the unforeseen

disturbanceswhich create opportunities for one party to the exchangeto take

17
advantageof the other."

There is another school of thought the roots of which predatethe New

Institutional Economics model and which economistHoward Steintherefore calls

the Old Institutional Economics. This school rejectsthe neo-classicalnotion of

rational-maximisingself-seekingbehaviour and the naturalismof markets.

Instead, it holds that markets operatein specific historical and cultural contexts,

not according to universal principles. As such, the Old Institutional Econon-fics

views firms as less instrumental and more as "the habits and iroutinesthat allow

corporations to deal with the complexity of production and exchangeand to

develop expectationsof the future in "

a world of uncertainty. 18 According to this

45
model, the choicesof economic actors may not seemrational becausethey are

conditioned by actors' historical and cultural contexts.

The two schoolsof thought New and Old Institutional Economics are not
- -

mutually exclusiveas explanationsof why the choicesof economicactors are not

'9
always rational. Rather, they are complementary. Arrow's premise that

economic actors make choicesaccordingto their own motivations opensthe door

to a synthesisof thesetwo models in that individuals' motivations will bear the

stamp of their historical and cultural influences. A deeperexploration of the

conceptsof information asymmetryand boundedrationality that underpinthe

New Institutional Economics model will shedfurther light on this point.

Competitive Viability, Information Asymmetry and Bounded Rationality

Information asymmetryand boundedrationality are information relatedproblems

that firms develop as they grow. The irony is that, although growth introduces

theseinformation related operating inefficiencies,it is necessaryfor a firm to

remain competitively viable in the long-term. This is becausethere are

diminishing returns to the accumulationof capital. In other words, if "you

continue to equip people with more and more of the same capital goods without

inventing new usesfor the capital, then a point will be reachedeventuallywhere

the extra capital goods become in

redundantexcept as spareparts the event of

multiple equipment failure, and where therefore the marginalproduct of capital is

,20 Thus, in order to avoid dissolution by diminishingreturns,

negligible.

46
managersoften pursuegrowth as a competitive businessstrategy.21 For example,

traditionally firms have sought to grow by diversifying into new geographic

markets or expandingthe range of products or servicesthat they offer.

However, growth as a competitive strategyleadsto an increasein the

numberof
decisionsto be madeand the number of transactionsfor
processing. In order to
handleincreasedthroughput, firms usually must take advantage the
of

productivity gainsthat can be achievedthrough decentralisationand

specl sation. It was Adam Smith, the founder of modem economics.,who first

identified that specialisationand division of labour could result in tremendous

22
productivity gains. Departmentalisation and specialisation increases

productivity becausefragmentationand boundingthe decision-makingprocess

can render work more manageable.

Thus, competitive strategiessuch as the introduction of new products and services

or the acquisition of new customersalso have a tendencyto producemore

hierarchical,decentralisedand specialisedorganisations.This is not to suggest

that all organisationsare hierarchical,nor that all the interactionsin an

organisationare hierarchical,decentrafisedor specialised,even if the formal

organisationchart suggeststhat this is the case. Indeed, the so-calledorganic

organisationalstructure which featureslateral forms of communicationand

limited amountsof specialisationhasbecomea favoured organisationalform.23

However, as economist Roy Radner notes, hierarchy, and we may extend this to

47
decentralisationand specialisation,is an important principle of organisation,both

in its prevalenceand in the prevalenceof attemptsto circumvent it. 24

Building on Simon's theory, Roy Radner arguesthat that there are three different

types of decentralisationin hierarchicalorganisationalstructures. Theseare-

decentralisationof information processing,decentralisationof information, and

decentralisationof incentives. Each of thesewill be discussedin turn.

First, there is decentralisationof what Radner refersto as "the processingof

, 2'
infonnation. As he writes-

Although managers in a firm have many different functions, one of their

most important functions is that of processing information. We might
think of the information processing part of the firm as one huge decision-
making machine, which takes signals from the environment and transforms
them into the actions to be taken by the "real workers. " Of course, as I
have already pointed out, every worker on an assembly-line or lathe, and
every salesperson in the field, makes many decisions every day that are not
precisely dictated by management ... The I
point am making here is that
in the modem corporation a large part of the information processing
activities are highly decentralized [author's i.
emphasis], e., assigned to a
large number of persons in the corporation who specialize in these
26
activities.

So, essentially,what Radner is speakingof when he refers to decentralisationof

information processingis the decentralisationof decision-makingthat leadsto

concomitant decentralisedtransaction in
processing a given organisation.

Second,Radner arguesthat large-scalebusinessentities experience

"decentralisationof information" becausedifferent decision in

makers a firm will

typically have access to different information. This is so because in a large firm in

48
which decision making and the taking of action is departmentalised
and

specialised,so too may be the storageof information about those decisionsand

actions. In other words, eachinformation processorcreates,and often possesses,

only information about his or her own decisionsand actions. This information

may representonly a portion of the total information about a singletransaction.

Radner, however, arguesthat the information limitations createdby

decentralisationof information are mitigated by the fact that different decisions

require different setsof data. He commentsthat it is for

not economical afl

decisionsand resultanttransactionsto be basedon the samedata or all the

firM. 27
information availableto the There is no needfor eachmemberto havefull

accessto information in to
order make effective decisions,as most decision

problems require a relatively small amount of information to make a fairly good

choice. Radner writes,

A small decision be
about the maintenanceof a machinecan madequite
well based on information local to the production unit; similarly, a good
decision about the order in which to visit customerscan be madeon the
basisof information local to the salesoffice. 28

He goes on to say that:

On the other hand, a decision to change the rate of production should be

based, in part, on information about conditions at other production units, as
demand for the product. But even in this
well as on information about
case, completely detailed information about all other production units and
is not really needed; certain aggregate measures will be
all sales units
29
adequate.

While managerswill not needto, indeed cannot, refer to all of an organisation's

in
information the making of a specific decision,relying insteadon aggregate

49
measuresor selectionsof information, the workers that producethe aggregate

measuresand selectionson which managersdependfor their decisionmaking still

need to know about and have somemechanismto pull together a view basedon

all relevant information. Thus, we must concludethat full information is needed,

although managersthemselvesmay require only selectionsor aggregationsof it

for decision-making. Furthermore, whatever mechanismis usedto selector

aggregatethe data must reasonablydraw upon a full view of all relevant

information if poor decision-makingis to be avoided. The inadvertent

overlooking of relevantinformation that is not easilyaccessiblecould lead to

misleadingselectionsor aggregationsof data that causepoor decisions.

This pulling together of fragmentedinformation is not easilydone and presentsa

to
seriouschaflenge organisations. As Michael Hammer and JamesChampyhave

written in their popular book Reengineering the Corporation: A Manifestofor

is that
BusinessRevolution, the problem with many contemporarybusinesses

departmentalisation,specialisationand routinisation create"functional silos" or

"stovepipes" built on narrow pieces of a process in which each person only

information
possesses about his or her part. Without somekind of coordinating

to
and integrating mechanismwithin an organisation pull together all the pieces,it

is very difficult for aggregations to reflect a full view of the organisation or for a

selection of data to consistof all information to

relevant a given decision. This,

Hammer and Champy argue, has led to contemporary performance problems in

companiessuch as a lack of customer focus, weak and

competitiveness the

to 30 Likewise, in their book on learning,

organisational Gilbert
inability change.

50
Probst and Bettina Bilchel discusshow "operational islands" in many

hierarchical, specialisedand routinised organisationsprevent managersfrom

having accessto all the information they needfor decisionmaking, which presents

a significant barrier to organisational 31

learning.

The questto overcomeproblems associatedwith the fragmentationof information

that occurs with decentralisationhasled expertsto recommendtwo main

remedies:1) corporate restructuring and 2) computerisation. It must be noted that

thesestrategieshave beenintroduced also to addressthe needto speedup

information processing within firms. The first remedy, restructuring, seeksto

redressthe fragmentation of information by reorganisingtransactionsand their

processors. For example,the multi-divisional organisationalstructure aroseas a

meansof resolving the information inefficienciesof its predecessororganisational

structure, the functionaUy organised firm. However, as Steve Thompson and

Mike Wright note in an article on the role of restructuringtransactionsin

corporate governance, many of the perceived advantagesof the multi-divisional

information have 32
structure in terms of resolving problems not materialised.

Information inefficienciesremain.

This begsthe question why restructuring the transactionsin hierarchical

organisations has had less than satisfactory results as a remedy to information

inefficiencies. Here it is posited that the reasonfor its failure is that all large

orgarusationsmust have some level of departmentalisation,

specialisationand

routirusation, even if reduced. Wheneverthesecharacteristicsare present,the

51
organisation unavoidablyexperiencesfragmentationof information as a natural

state. While it is true that certain organisationalstructuresreducethe level of

structural complexity (ie, those that "flatten" the organisationalhierarchy)and

therefore have a tendencyto amelioratethe problem of information fragmentation

by reducing its severity, no amount of tinkering with a large

organisation's

structure can ever do away with the problem of communicationcostscompletely

as long as more than one personin an organisationis responsiblefor transacting

its business.

Recently, organisationswith flattened structureshave gainedfavour as a solution

to reducing the fragmentationof information associatedwith the hierarchicalfirm.

In their book on endogenousgrowth theory,,Phiffipe Aghion and Peter Howitt

draw upon the work of P. Bolton and M. Dewatripont to provide a formalised

explanationof why flattening the organisational.structure reducesthe degreeto

which information is decentralisedwithin an organisationand thus also reduces

33
communicationand processingdelays.

While flatter organisationsarguablydo addresssomeof the information

inefficienciesof the hierarchicalorganisationalform, Aghion and Howitt also

make the point that "hierarchical structures appearto be better suited to firms

facing infrequent and/or predictableinnovation opportunities,to the extent that

they allow the organisationto take better advantageof the existenceof economies

of scalein direct information r)34

processing. In other words, there may be

instanceswhen a hierarchicalstructure is preferableto a flatter one. Moreover,

52
even assumingthat in a given context it is for
preferable an organisationto adopt

a flattened organisationalform, the costs of corporate restructuringmay be

prohibitively high. Thus, there remainsan incentive to explore solutionsto the

problemsof decentralisationof information within the hierarchicalorganisational

form that look beyond restructuring. If acceptablesolutionscanbe found it may

,
be possibleto "level the playing field," so to speak,betweenthe hierarchicaland

flatter organisationalforms. Moreover, the flattened organisationalform doesnot

do away with the problem of fragmentationof information completely,but merely

reducesit by reducing the number of processorsand moving them aroundwithin

the organisationalstructure. Apparently, then, evenin flatter organisations,there

to for
is a need explore strategies reducing the information inefficiencies

associatedwith the decentralisationof information.

The other commonly recommendedremedyto the information fragmentation

is
problem computerisation. Aside from the capacity to increase the efficiency of

transactionprocessing,managersoften view computersas bringing together

information from disparatesourcesand making it more accessible.For example,

in a recent article for Financial World, Bernard Hom writes of the importance for

bank competitivenessof harnessingcustomerinformation: "... in today's

"
competitive market, he states,"customer information must be so
managed, every

customer interface with the bank can be handledjust as if the bank'semployees

have full and personal knowledge of every customer.Given the size of the
- -

base and the number of transactionsand interactions,this is at the

customer
, 35
leading, edge of computer systemsdatabasemanagement.
C7

53
Yet, as in the caseof restructuring, computerisationas a solution to the

information inefficienciesof large, hierarchicalorganisations has

often proved to
be disappointing. Many organisationshave investedmillions in information

technology only to find that information is no more accessiblethan under previous

36
systems. This often is as a result of design,systemand software limitations that

prevent the interoperability of organisational computer systems. Many

computerisedsystemsoperate on different software and hardwareplatforms,

contain ormation in a variety of formats (eg, application specific files, PDF,

HTMEL, TIF, etc.) and store information on a variety of storage media (eg, hard

drive, floppy disk, CD-ROM, magnetic tape, etc.). Not all of these platforms,

formats and methodsof storagecan be seamlesslyand effectively integrated.

Even with the best planningtheselimitations often cannotbe overcome.

Consequently, they often prevent organisations from defragmenting their

information through the introduction of one organisational computer system or

several functionally integrated computer systems. Instead, organisations are

limited to severalcomputer systemsthat often do not communicatewell with one

another. As a result, the introduction of computerisationinto an organisation

rather ironically can causeadditional splintering of information because

information storagebecomesmore segmented(ie, must be stored in many

different computer systemsor is divided betweenmanualand computer storage

systems). For instance,the head of internal audit for one international financial

institution interviewed for this study noted that his companyhad as many as 100

different computer systemsuntil quite recently. Most of these did

systems not

54
shareinformation, thus preventingorganisationaldecisionmakersfrom easily

accessinginformation on which to basetheir 37

decisions.

While design,systemand software limitations may soon be swept away as a result

of new technological innovationsthereby reducing the additionalfragmentationof

information that computers often create, it is unlikely that computerisation alone,

if
even systems are My interoperable, in
can succeed eliminating information

fragmentationand its attendantproblems. This is becausesystemsthat specialise

in performing one type of function may be better designedand more flexible than

those generalsystemsdesignedto perform many different functions. Thus, there

may always be an incentive for organisations to invest in more specialised,

functionaRytargeted systems.Furthermore, the introduction of standards,suchas

communications protocols and systems interfaces, is unlikely to keep pace with

the rate of technological innovation. As a result, there always may be some initial

difficulty in interoperability among specialisedsystemsand therefore somelevel

of information decentralisationand fragmentation.

The above discussionis not meantto suggestthat restructuring and

computerisation should be discountedas solutions to the problemsassociated

with

the decentralisationof information but rather to illustrate their shortcomingsand

to suggest that organisations need to supplement these strategies with other

This study arguesthat organisationsshould look to a controlled and

remedies.

to record inscription, transmissionand contextualizationas

coordinated approach

solution to the information problems of large, hierarchicalfirms.

a complimentary

55
Computerscan be used as a tool to achievethis objective, as in the caseof

methodologiesof data warehousingwhich usescomputertechnologyto collect

and sharedata from a diversity 38

of systems. The subjectof controffing and

coordinating the inscription, transmissionand contextualizationof recorded

information is discussedfurther in the f6flowing chapter.

Returning to Radner's discussionof decentralisation,the third form of

71)

decentralisationthat he describesis "decentralisationof mcentives, which arises

becauseall membersof a firm will not have exactly the samegoal. The

decentralisationof incentivesrangesfrom memberswho are greedyand self-

interestedto simple and innocent disagreementsover what is best for a given firm.

Of course,the larger the number of employees,the greaterthe decentralisationof

incentives. Thus, it is easyto seehow growth, which requiresthat a firm take on a

greater number of employees,also introduces more uncertaintybecauseof greater

decentralisationof incentives. It is the-notion of decentralisationof incentivesthat

permits a synthesis of New Institutional and Old Institutional Economics, for

individuals' incentives,and by extensionthe choicesthey makebasedon those

incentives,are influenced, among other things, by the particular historical and

cultural context (both organisationaland social) of the individual.

The combination of decentralisationof information decentralisation

processing, of

information and decentralisationof incentiveswhich Radnerdescribesand which

accurately reflecting the state of large organisations, results

this study accepts as

in a paradox. That is, at the same time as a business entity must grow and expand

56
in order to stay competitive, its very growth and expansionsowsthe seedsof its

own deconstruction. This is becausedecentralisationand speciahsationcoupled

with the hiring of new employeesrequired to handleincreasedvolumesof

decisionsand transactionsleadsto operationalinefficiency.Radnerwrites-

I have arguedthat, in any but the smallestfirms, no one personhasall of

the information relevant to the firm's activities. It follows that no one
person can completely control all of those activities. This is so evenin
firms that are describedas highly "centralized." From this fundamental
observation,it follows that the individual membersof the firm will have
some freedom to choosetheir own actions. If in addition, there is some
divergenceamongthe members'goals or objectives,then one can expect
some inefficiencies in
to arise the firm's operations. 39

Thus, growth and innovation create a situation in which a principal is forced to

delegatedecisionsand actionsto a greater numberof agentsin order to keep pace

with rising throughput. The to

agents whom principals delegatedecisionsand

actions have their own incentivesthat may not be in harmonywith the goals of the

principal or the organisation,Furthermore, becauseinformation is also

decentrafisedthe principal lacks information with which to monitor the quality

is,
and appropriateness,that the outcomes,of the decisionsand actionstaken by

40
the agent. Lack of full information on the part of the principal may allow agents

to shirk their duties information 41

games. Information gamesinclude: 1)
or play

free-riding (incompletenessof information makesit difficult to assign

responsibility to individual agents for the occurrence of unsatisfactory

) 2) moral hazard (a failure to take decisionsand actionswith due

outcomeS42

diligence becausethere exists no incentive to do 3)

so) and adverseselection(poor

decisionsand actions crowd out high quality decisionsand actionsbecause

quality

the incentive systemrewards only averagequality decisionsand actionS43).

57
Moreover, evenwhen agentsdo not shirk their duties or play information games,

their decisionsand actionswill reflect their historical and cultural predilections.

These,if not in keepingwith organisationalvalues or goals, may causeoperational

inefficiencies.

Thus, as soon as the principal can no longer control the decisionsand actionsof

the agent, agentscan take decisionsand actions that are deliberatelyor

inadvertently detrimentalto the businessentity (eg, fraud), therebyundermining

internal control and the foundations of that businessentity. Moreover,

irrespectiveof whether an agent takes decisionsor actionsthat are at oddswith the

objectivesof the principal or the organisation,lack of full information about what

decisionsand actionsthe agent hastaken preventsthe principal fi7ommakingfully

informed decisionsas the basisof actionsto be taken in his or her own right.

The problems of information asymmetryand boundedrationality not only impact

upon managers' ability to control internal operations but also impact upon the

ability of a firm's owners and "governors" to control senior In

management.

theory, the ownership and corporate governanceof a firm influenceits decisions

and performance by appointing its managers and specifying its objectives,

incentive 44 The authority to hire or

management compensation and packages.

dismisssenior managementof a companyrests largely with shareholdersand

boards of directors. Owners' and boards' decisionsabout a finn's senior

will be influencedby the performanceinformation they receive. In

management

the context of decentralisedinformation processing,information and incentives,

58
the information receivedby the board may be inadequateto permit it to makethe

best decisionsabout senior managers. Setting asidepossibleincentivesfor

if
managers cover up poor performance, managersthemselveshave inadequate
to

information they are not in a position to report with any accuracy to owners and

boards. Moreover, owners and boards will face the sameproblemsthat managers

face in independentlyaccessingadequateinfonnation if they seea needto

supplementwhat senior managershave provided.

The sameconditions hold true for firms wherein there is sufficient public interest

to warrant externalregulation. Regulators establishrules that set operational

parametersdesignedto influence the range, type of decisionsand actionsthat

managerscan take to
so as ensurethat a given firm in
operates a mannerthat is in

keepingwith broader social interests. In order to ensurethat firms do operate

within established regulators

parameters, require information about the

performanceof a firm. If that information is inadequate,

regulatorswill be unable

to assessthe appropriatenessof a firm's decisionsand actionsand to protect the

public interest. In an environmentthat promotesgrowth and innovation (ie, an

increasein the number of firms to be regulatedor the types of products and

services requiring rules), regulators may find it increasingly difficult to obtain

adequateinformation to establishand maintain effective control.

Clearly, loss of organisationalcontrol, resulting from decentralisationof

information processing,decentralisationof information and decentralisationof

incentivespresentsa seriousthreat to the competitive viability of any business

59
entity and, more widely in the caseof regulated industries,to the public interest.

This begs the question of what to do as a remedyto this inherent organisational

danger? The avoidanceof decentralisationwould seemto be out of the question

becauseof the necessityfor firms to grow, expandand innovate in order to remain

competitive and becausedepartmentalisation,

specialisationand routinisation are

to
usually necessary support suchgrowth and innovation. Decentralisationof

information processingis a necessitybecauseit is that which brings the

productivity gains associatedwith departmentalisation

and specialisation;that is.,

departmentafisationand specialisationare decentralisation'sraison detre.

Similarly, humannature being what it is, decentralisationof incentivesis difficult,

if not impossible,to avoid, unlessone is ableto influenceindividuals' behaviour

through somemechanism. This brings the discussionto the subjectof

accountability, for it is by meansof accountabilitysystemsthat behaviours

ostensiblycan be influenced.

Accountability and Accountability Systems

Before turning to a discussionof how accountabilitysystemsalleviateinherent

problems of decentralisedorganisations,a brief discussionof accountabilityand

accountability systemsis in order. The literature defining and describing

45
interdisciplinary. Despite the diversedefinitions
accountability is extensiveand

descriptions of accountability, there exist certain commonalitiesin how it is

and
Accountability generally is pictured as having four
conceptualised.

interdependentdimensions:1) the "who" dimension,2) the "to whom" dimension

60
3) the "for what" dimensionand 4) the "how" dimension. That is to say,

accountability implies there is someoneto whom we (being the who) are

accountablefor something(the what) and mechanismsfor how we are accountable

(the processof accounting). For example,the Oxford English Dictionary defines

"accountability" as: "liability to give account of, and answerfor the dischargeof

duties or conduct."46 Thus, to be "accountable" meansto be answerablein some

way for somethingto someone. It requiresthat explanations,or accounts,of

be
something given and, on the basisof those accounts,that actionsor decisions

be judged for their merit againsta predefinedstandardof performance.

Accountability rests upon a relationshipbetweena giver of the account(the who)

and a receiver (the to whom). J.D. Stewart writes that this relationshipinvolves

"both the account and the holding to account, [and that it] canbe analysedas a

bond linking the one who accountsand is held to account,to the one who holds to

account. That bond can be defined by referenceto the personsor institutions who
-)747
are accountableand those to whom they are accountable.

Traditional definitions of accountability conceiveof this bond as existingbetween

a higher authority vestedwith the power of oversight and supervisionof a

subordinate. For example,the HarperCollins Dictionary ofAmerican

Governmentand Politics definesaccountabilityin one senseas. "The extent to

which one must answerto higher authority - legal or organizational- for one's

in society at large or within one's "48

organization. It is possibleto picture
actions

the traditional view of accountability in a corporate setting as a vertical tree in

61
which accountsmove up through the different hierarchicallevels of the

corporation: from the individual worker to management,from managementto the

board of directors and, mediatedthrough external auditors,from the board of

directors to shareholders.In addition, in caseswhere the corporation's activities

have a wider public impact, accountswill flow to regulatorswho serveas proxies

for the interestsof the wider society.

While the traditional view of hierarchicalaccountabilityrelationshipsis not

incorrect.,it must be acknowledgedthat this is not the only form in which

accountability exists. John Roberts writes of "socializing forms" of accountability

involving informal personal lateral networks and, similarly Kristian Kreiner

exploresnon-hierarchicalforms by
of accountabilitycharacterised mutuality and

lateral forms 49
of accountability. Clearly we must acknowledgeboth formal,

hierarchicaland lessformal, non-hierarchicalforms of accountabilityas well as

the possibility of someinterplay betweenboth modesof accountability.

For accountabilityto exist, then, there must be a bond of accountabilitybetween

one person and another. Furthermore, is

the personwho accountableoften is

subordinateto the person who receiVesthe account. There also must be a standard

to
of measurement which the accountablepersonis held and by which they are

judged by the receiver of the account. Finafly, be

there must a mechanismby

which the actions or decisionsof the accountableperson are communicatedto the

to whom they are that

accountable, is, there must be an account. These
person

62
four dimensionsworking interactively comprisewhat we shall refer to as an

accountabflity system.

Linking Competitive Viability and Accountability Systems

Having discussedaccountability and accountability systems,it is now possibleto

relate these to
concepts competitive viability. A review of the historical

developmentof formal, hierarchicalsystemsof accountabilityin the US reveals

that such systemscameabout as a meansof addressingthe problemsof large

decentralisedorganisations. It was in their capacityto preventthe natural loss of

control as organisationsdecentralisedand specialisedthat accountabilitysystems

supported the continuing competitive viability of bureaucraticorganisations

during America's Industrial Revolution.

Increasingwidespreadadoption of formal accountabilitysystemsin the world of

work occurred simultaneouslywith the rise of the modem businessenterprise,as

economist Alfred Chandlerhas outlined in Visible Hand with respectto

-The
US. 50
economic developmentsin the The modem businessenterprise,

characterisedby decentralisation became

and specialisation, increasingly

US from in to
the n-d-nineteenthcentury response a need for new
prevalent in the

methods of work coordination and control brought about by what economic

historian Jaines Beniger to

refers as a "crisis of control. " This crisis was the result

arising out of the Industrial Revolution. The growth that took

of new technologies

in US in the mid-nineteenthcentury spurred on by the technological

place the -

63
innovations of the Industrial Revolution required new control technologiesin
-

order to handleincreasedthroughput in material processing. According to

Beniger, this requirementgave rise to "the most important control technology" of

the age: bureaucracy,that is, organisationalforms that, amongother things, were

characterisedby more decentralisationand speciahsation.He notesthat:

"Although bureaucracyhad developedseveraltimes independentlyin ancient

civilizations, Weber was the first to seeit as the critical new machinery- new, at

least, in its generality and pervasiveness for control of the societal forces
-

by
unleashed the Industrial Revolution.

The increasingpervasivenessof accountability systemsalongsidethe rise of the

modem businessenterprisein the US was no coincidence:accountabilitywas

in to
necessary order maintain control over the new decentralised
organisational

structures, especially since ownership and management were now separate. In an

organisationalsetting comprisedof many hierarchicallevels wherein boards of

directors delegatedthe decisionsabout the operation of the firm to professional

managersand thesemanagersincreasinglydelegateddecisionsand actionsto

workers at lower levels of the firm's administrativehierarchy,there existeda need

to have somemeansfor boards to control managersand managersto maintain

discipline over workers. It was this needto which the men who devisedthe

modem formal and hierarchical organisationalaccountabilitysystems

" For example,Colonel Roswell Lee when he took commandof the

responded.

Springfield Armoury in 1815 in

centralisedauthority and responsibility the Office

of the Superintendent
and devisedand put into operation a set of controls that

64
 53
assuredaccountability for material and for the quality of the end product. The

introduction of thesepracticesinto the nineteenth-century

world of work led to a

transformation that subsequentlyresulted in the developmentof the modem

systemof work coordination and control through financial and management

54
accounting,reporting and auditing. Accountability systemsare, therefore,

inextricably a part of and linked to internal control in decentralised

and specialised

organisationalsettings.

How Accountability Systems Function to Maintain Organisational Control

and Support Competitive Viability

When they operate effectively, accountability systemsmake human performance

visible through processesof writing and examination. In making human

performancevisible, they permit the evaluationor grading of that performance

againstassignedmeasures. In this way, by capturing and quantifying human

performance,accountability systemswork to reducethe uncertaintyof lessprecise

The
methodsof assessment. is
point of examination,grading andwriting not only

to permit assessmentbut also to encourageperformancethat conformsto the

As
prescribedstandardsof assessment. Philip Tetlock writes: "... accountability

is a critical rule and norm enforcementmechanism The fact that people are
...

accountablefor their decisionsis an implicit or explicit constraintupon all

they undertake.,55 In this sense,

accountabilityis both a
consequentialacts

combination of the "is" (assessment

of performance)and "ought" (prescribing

that should be).56 The threat

what performance of someundesirableconsequence

of failing to achievethe prescribedlevel of performance(eg, humiliation,

65
expulsion from the organisation,etc) or a senseof responsibilityis, ostensibly,

what drives individuals to conform.

Figure I summariseshow accountability systemsfunction as feedback

mechanismsby which organisationalcontrol and coordination - and by extension.,

organisationalstability and viability - are achievedand maintained. In this

diagram, workers are shown as being one of the inputs of organisational

transformation systems,that is, systemsdesignedto perform the organisation's

operating functions. In a bureaucratic setting, transformation systemsexist at

each level of the organisationalhierarchy. Those involved in the decisionsand

actions that in
result transformationscomprisethe "who" aspectof accountability.

The "to whom" aspectis built into managementand control systemsin the form of

those who govern transformation systems. In a corporate setting, for example,

thesemight include the organisation'smanagement,its shareholders,and external

in
regulators organisationsundertaking activities that havea broader social

impact. Goals, standardsand organisationalnorms, shown as feedinginto

managementand control systemsat the top of the diagram,comprisean important

part of the "what" aspectof accountabilityas the measuresagainstwhich

individuals' actions and decisionsarejudged. Thesegoals, standardsand

organisationalnorms in turn will reflect broader societalgoals, standardsand

norms. The "how" dimensionis representedby the feedbackloop which carries

information about actions and decisionstaken by the peopleproducing outputs

(the "who" of accountability) to the systemgovernors (those "to whom" others

are accountable)and back to those producing outputs. This loop performs a

66
 function,
critical organisational. for it
without the organisation'sgovernorswould

be unableto detect and correct problems in actions and decisionstaken by those

within the organisation. Moreover, they would have no basisupon which to make

decisionsof their own.

Intemal Audit
Systems

Feedback Loop ( Measures) Feedback Loop (AcccOdnting

Mechanisms)

Culture and Rules (as influenced by societal culture and

Governance
Systems (internal
control /monitoring)

Feedback Loop Measures) Feedback Loop

Mechanisms)

I Transformation
Inputs(people/resources) Systems Outputs (products/services)

Fig. 1. The Accountability System

So critical has maintainingcontrol becometo the viability of organisationsthat

size now have an internal audit departmentwith responsibility

most of a certain

for ensuringthat internal control systemsoperateeffectively. Internal audit serves

67
as a sort of controller of the controllers. Figure I showshow internal audit

functions as the negativefeedbackmechanismthat maintainscontrol over an

organisation's managementand control systems,including accountabilitysystems.

It is by meansof internal audit that imbalancesand problemsin managementand

control systemsusually can be detectedand fixed. Once again,accountabilityis

critical to the operation of this negativefeedbackloop, as it providesthe conduit

for information about how well internal controls are functioning and the

effectivenessof decisionsand actions taken by the membersof the organisation.

Without this conduit, the regulators of businesssystemswould be lesslikely to

detect internal control issuesbefore seriousconsequences

begin to materialise.

With effective systemsof accountability, internal auditors can detectissuesin

advanceof the occurrenceof "life" threateningorganisationalproblemsand

thereby make corrections to internal controls before the organisation'soperations

becomeseriouslyimpaired.

Debating the Usefulness of Accountability Systems in Maintaining Internal

Control and Supporting Competitive Viability

While modem systemsof accountability were introduced into the business

environmentto help by
maintain organisationalcontrol constrainingand

monitoring workers' actions and decisions,there is somedebatein the literature as

to whether these systemsactually achievethis goal. Despite Tetlock's assertion

that accountability constrainsconsequential

acts, Katrine Kirk and JanMouritsen

point out that knowledge of being controlled through accountabilitymay cause

people to behave subversively. For example, they may try to evade discipline

68
through structuring the account so that it presentsa more favourablepicture of

performanceor by explaining,justifying and excusingperformanceas represented

in the accountingnumbersby challengingthe standardsby which they are

57
measured. The realisationthat membersof an organisationmay engagein

cccounter-disciplinary"tactics hasgiven rise to strategiessuchas standard

accountingproceduresaimed at limiting the ways in which accountablepersons

can manipulateaccountingfigures. Another strategyis evidentin more recent

managementtrends such as the developmentof organisationalvision statements,

team building and the like that seekto strengthenorganisationalculture so that the

individual internalisesorganisationalperformancestandards.Despitethe

introduction of strategiesto bolster the effectivenessof accountabilityin the face

of individuals' subversiveactions or to more closely align organisationaland

individual objectives,there is still no guaranteethat accountabilitywill succeedin

constrainingindividuals' acts.

Accountability also fails to achieveits goal if individuals are not concernedwith

adheringto prescribedstandardsof measure,which Kristian Kreiner suggestsmay

be
sometimes the case. Lack of concernwith meetingperformancetargetsmay

result if incentives or sanctionsfor failing to meet targets do not outweigh other

incentivesor motivations influencing the individual. For example,if an individual

to
seesan opportunity gain financially through fraud and also seesthat this act is

unlikely to be detectedor punished,the individual may have sufficient incentive

to
and motivation commit the fraudulent act despite organisationalpolicies and
it. 5'
societal laws that forbid However, this suggestssomeinherentweaknessin

69
the accountability system,sincein effective systems,individuals' actions are

detectedandjudged and appropriate consequences(ie, thosethat are likely to

encouragecertain behavioursand discourageothers) are metedout.

This study arguesthat accountability systemssupport the competitiveviability of

by
organisations counteractinginherent control problemsof decentralised

forms.
organisational However, might accountabilityactuallyunderminethe

competitivenessof a firm? John Roberts makesjust this case,arguingthat

traditional hierarchicalforms of accountability encourageworkers to developa

highly individualised(ie, selfish)mentality) defensivepatternsof communication

and a lack of wholeheartedcommitmentthat can threatencommercialsuccess

rather than enhanceit becausethe work of contemporarybusiness

enterprises
59
demandsand benefitsfrom collaboration and teamwork. He writes:

Against the backdrop of an intense, pervasive and highly complex

interdependence of action both within organizations, and between
organizations and the communities within which they operate, the
individualized mentality that is the condition and consequenceof
hierarchical forms of accountability seemssimply inadequate and
inappropriate. 60

However, Roberts does not go as far that

as to suggest accountabflitysystemsbe

that organisationsadopt more lateral

socialising, forms to
abandoned,merely

bring the "instrumental" and "moral" aspectsof accountabilityback into

This, Roberts argues,will better support competitiveviability because

alignment.

lateral forms of accountability promote the collaboration and teamwork so

to successin the current businessenvironment.

necessary

70
At times Roberts waxes a little too lyrical on the virtues of lateral forms of

accountability, suggestingthat these informal networks (.

potentiallyoffer

alternative sourcesof identity and most importantly in

confirm self a mannerthat
-).
)6 1
emphasizesthe interdependenceof self and other. Nevertheless,he does

acknowledgethat lateral forms of accountabilitycan suffer from their own

schismsand confficts, such as "... possibilitiesof deeppersonalanimositythat

can infect relationshipsbetween colleagues,or the local in

abuseof power the

form of favouritism, or victimization. The possibility of racial or sexualabuseor

other forms of 'scapegoating' in which a group can engage,or of group collusion

or corruption that can threaten its responsibilitiesto the wider organization.

Though probably not typical of lateral accountabilityrelationships,Robertsgives

theserather seriousorganisationalafflictions a passingnod. In the final analysis,

it is only possibleto concludethat both hierarchicaland lateral forms of

accountabilitymay have their "dark" sides. The sidethat manifestslikely depends

upon the valuesunderpinning human interaction within the organisation(ie,

whether acceptedvalues promote competition or cooperation),no matter if that

interaction is worker to co-worker as in lateral forms of accountabilityor worker

to managementas in hierarchical forms of accountability.

The writings of Roberts, Kirk and Mouritsen, and Kreiner aH that

suggest

systems are imperfect instruments for maintaining organisational

accountability

to another means of resolving the organisational dilemma caused

control and point

by decentralisation of information processing, information and incentives, that is:

63 if could simply trust the agents to whom they delegate authority

trUSt. principals

71
for decisionsand actionsthere would be no needto enforce organisational

discipline by meansof accountability. Relying on trust certainly would seemto

be a more humanistic,less instrumentalapproachto management.In fact, some

argue that formal 64

accountabilitymechanismsare symptomsof social decay.

Trust however, takes time to develop, and in a businessenvironmentthat

encouragesrapid growth and thus the hiring of many new workers with unknown

incentives, business survival may preclude the luxury of developing trust. That is

to say,by the time those relationshipshave developedmanagersmay havelost

control over operationsalready. So, it seemsthat, imperfect as it is, accountability

be
systemsmay a "necessaryevil" as a meansof behaviouralcontrol.

There is another reason why organisations cannot dispensewith accountability.

Accountability systemsalso serveas a crucial conduit of information, information

that is neededfor managersto make decisionsand take action and which may be

difficult to obtain in large, hierarchicalorganisationsdue to decentralisationof

information. As noted earlier in the discussion,flattening the organisation

hierarchy may reducedecentralisationof information and easeproblemsof

information accessibility,but this is not always an appropriateoption. Moreover,

the introduction of computers,often seenas a solution to the problem of

decentralisation of information, perversely may further fragment information

rather than bring it together it

and make more accessible.Accountability systems,

and the processof accountingby which they operate,serveas a meansof

channellinginformation in a hierarchicalorganisationacrossits spatial and

temporal barriers. That being said, however, accountsoften fail to transcend

72
thesebarriers with the result that essentialinformation doesnot flow to

organisationaldecision-makers. Understandingwhy this shouldbe so brings the

discussionto the relationshipbetween record keepingand accountability,which is

the subject of the next chapter.

Finally, accountability systemsmay be seenas being fundamentalto the

constitution and binding together of organisations. Socialtheorist GeorgeHerbert

Mead haswritten that it is the processof becomingconsciousof and answerable

for how others seeus that shapesthe personalityand constitutesthe individual's

"self -)65 Accountability castsback a reflection that the individual usesas a means
.
of self-examinationand identity formation. Harold Garfinkel writes that

accountability serves the same purpose for organisations:

Any setting organizes its activities to make its properties as an organized

environment of practical activities detectable, countable, recordable,
reportable, tell-a-story-aboutable, analyzable - in short, accountable.
Organized social arrangements consist of various methods for
accomplishing the accountability of a settings' organizational ways as a
concerted undertaking. Every claim by practitioners of effectiveness,
planfulness, or efficiency, and every consideration for
clarity, consistency,
demonstration, description, or relevance obtains its
adequate evidence,
[author's emphasis] from the corporate pursuit
character as aphenomenon
of this undertaking and from the ways in which various organizational
environments, by reason of their characteristics as organizations of
"sustain, " "facilitate ".resistl" etc. these methods for making
activities, '19 66
their affairs accountable-matters-for-afl-practical-purposes.

Through the processof accounting and accountability,the organisationevolves its

it
identity and takes shape. In holding the organisationtogether and, indeed,

it, systemsmust be seenas fundamental

to the ongoing
constituting accountability

therefore competitive viability of any businessenterprise.

existenceand

73
Conclusion

Tbschapter has presentedthe first part of a theoretical framework linking

competitive viability, accountability and record keeping. It hasarguedthat

competitive viability is the ability of a firm to operatewith sufficient efficiencyto

avoid failure and ensuresurvival in a competitive market. An organisation's

ability to operate efficiently, it hasbeen argued,naturally comesunder pressureas

it expandsand innovatesin order to maintain its competitiveposition. While

strategiesof decentralisingand specialisinghelp organisationsto processa greater

number of transactionsas they grow and expand,thesestrategiesalso lead to

information related problems- information asymmetryand boundedrationality -

that underminethe efficiency of organisationsby weakeningmanagers'ability to

control their businessoperationsand make effective decisions. Drawing upon the

historical developmentof formal accountabilitysystemsin the US, this chapter

has suggestedthat such systemsserveas critical mechanismsfor mitigating the

effects of information related problemsassociatedwith decentralisationand

specialisation. Having establisheda theoretical link betweencompetitiveviability

and accountability in this chapter, the discussionin the following chapterturns to

the relationship between accountability systemsand record keeping in order to

complete the theoretical framework.

74
End Notes

' William I Blaumol

and Alan S. Blinder, Economics: Principles and Policy (Fort Worth, TX The
Dryden Press Ltd., 1997), 59-60.

Blaumol and Blinder, 63-64.

3 P. Aghion and P. Howit Endogenous Growth Theory (Cambridge, Massechusetts:NUT Press,

1998), 268.

4 For example, in the "Schumpeterian" economic model, competitive

viability rests on growth and
innovation, innovation that requires investments in research and development. For a detailed
discussion of this theory, seeP. Aghion and P. Howitt passim.

5 For example, even though there are a number of global standardscommonly usedfor measuring
bank competitiveness, measuring bank competitiveness by profitability is problematic since there
are so many different ways to determine profitability. All of these measuresprovide different
answers to the question "who is the best? " These include (to name only a few): Q
measuring ratios
(the ratio of the market value of a firm to its book value); return on assets(the ratio of earnings to
total assets);return on equity (the ratio of earnings to total equity); equity capital-to-assetsratios;
value added; price-earnings ratios (the ratio of the firm's market share divided by the firm's
earnings per share); ratios of assets to outputs (eg, the services banks provide); and productivity.
Each has its relative advantagesand disadvantages. SeeShelagh Heffernan, Modern Banking in
Theory and Practice (West Sussex:John Wiley & Sons, 1996), 30-36 and 123-162 for a discussion
of the different ways of measuring bank productivity and competitiveness.

6 John Toye, "The New Institutional Economics and Its Implications for Development Theory,"
The New Institutional Economics and Third World Development, eds. John Harriss, JanetHunter
and Cohn M. Lewis (London: Routledge, 1995), 53

' Adam Smith first describedthe operation of a market systemas being led by an "invisible hand."
For a discussion of Smith's observations, seeBlaumol and Blinder, 62.

8BIaumol and Bhnder, 75.

Blaumol and Blinder, 76-78.

loBlaumol and Blinder, 80-82.

11European Bank for Reconstruction and Development, Transition Report 1999: Ten Yearsof
Transition (London: ERBD, 1999), 132. The study measuredenterprise performance in 3,000
in 20 countries of the region and assessedsuch indicators of performance as new
enterprises
product development and sales growth.

12SeeHerbert Simon, The New Science ofManagement Decision (NY, NY: Harper & Row, 1960).

13For a comparative analysis of the neo-classical and NEE models, seeAppendix 5 of this study

14
ERBD report, 132.

15Howard Stein, "Institutional Theories and Structural Adjustment in Africa, " The New
Economics and Third World Development, eds. John Harriss, Janet Hunter and Colin
institutional
M. Lewis (London: Routledge, 1995), 109

16Gareth Morgan, Images of Organization (New York: SagePublications, 1986), 8 1.

75
19 Stein, 124.

18 Stein, 124.

19Appendix 5 presents a comparative analysis of the neo-classical,New Institutional

and Old
Institutional economic models.

20Aghion and Howitt, 11

21
Ibid.

22 In The Wealth Nations, Smith the departmentalised

of made observations about and specialised
in
production process a pin factory: "One man draws out the wire, another straightens it, a third
it,
cuts and a fourth points it, a fifth grinds at it the top for receiving the head; to make the head
requires two or three distinct to
operations; put on it is a peculiar business, to whiten the pins is
is
another; it even a trade by itself to put them into the paper. " He goes on to write that "I have
seena small manufactory of this kind where ten men only were employed Those ten persons
...
could make among them upwards of forty-eight thousand in
pins a day But if they had all
...
wrought separately and independently they certainly could not each of them have made twenty,
... Random
perhaps not one pin in a day. " See Adam Smith, The Wealth ofMations (New York:
House, 1937), 4.
23
Aghion and Howitt, 462.

24Roy Radner, 'Therarchy: The Economics of Managing, " Journal o Economic Literature 30
(September 1992): 1383.
25
Radner, 1384
26
Radner, 1392-93.
27
Radner, 1384.
28
Radner, 1402
29
Radner, 1402.

30Nfichael Hammer and JamesChampy, Reengineering the Corporation: A Manifestofor Business

Revolution (NY, NY: HarperBusiness, 1993), 28.

31 Gilbert Probst, Bettina Bfichel, Organizational Learning -(HemelHamstead:Prentice Hall

and
Europe, 1997), 67-71.

32 Steve Thompson and Mike Wright, "Corporate Governance:The Role of Restructuring

Transactions" The Economic Journal 105 (May 1995): 680-703.

33Aghion and Howitt, 463.

34 465.
Agbion and Howitt,

35Bernard Horn, "Forward through customer focus," Financial World (August 1999): 2 1.

36For example, seeJim Breuer et al, "Why Information Technology Isn't Enough, " Forbes
(August 1999): special advertising supplement and also StephenFlowers, Software
Magazine

76
Failure: Management Failure Stories and Cautionary Tales (Chichester, UK: John
-Amazing
Wiley & Sons Ltd, 1996), which features a number of case studies of information
systemproject
failures.

" Subject B-7,

personal interview, London, England, March 11,1999.
38Robert Till, "Data Warehousing Methodology, "
upublished report, INFACT Australia Party
Ltd., 22 July, 1997.

39Radner, 1404.

40
Radner, 1384
41
Radner, 1404.
42
Radner, 1404.

4' Hal R. Varian. Intermediate Microeconomics. A Modern Approach (New York: W. W. Norton
-
&Company, 1999), 645-649.
44
ERBD report, 138.

4' A number of these

writings is cited in the bibliography of Kevin P. Kearns, Managingfor
,4ccountabifity (San Francisco, CA.: Jossey-Bass Inc., 1996).

46"Accountability, " The Oxford English Dictionary, 2dEd., Vol. 1.

47J.D. Stewart, "The Role of Information in Public Accountability, " Issues in Public Sector
Accounting, Anthony Hopwood and Cyril Tomkins eds. (Oxford: Philip Allen, 1984), 16.
48
Keams, 35.

49JOhnRoberts, "From Discipline to Dialogue: Individualizing and Socializing Forms of

Accountability, " Accountability: Power, Ethos and the Technologies ofManaging, Rolland Munro
and Jan Mouritsen eds. (Boston, Massechusetts:International Thomson Business Press, 1996), 50.
Kristian Kreiner, "Accountability on the move: the undecidable context of project formation, "
Accountability: Power, Ethos and the Technologies ofManaging, eds. Rolland Munro and Jan
Mouritsen (London: International Thompson Business Press, 1996), 100.

soSee Alfred Chandler, Jr., The Visible Hand., The Managerial Revolution in American Business
(Cambridge, Massechusetts:The Belknap Press of Harvard University Press, 1977).
51
Beniger, 6.

52According to Keith Hoskin, these men were not, as might be expected,businessmenbut ex-
cadets who had been influenced by pedagogic practices at the US Military Academy at West Point.
Hoskin maintains that the development of the noun form accountability and the beginning of a
pervasive use of accountability systems in bureaucratic organisations was linked to the writing,
grading and examining practices of elite eighteenth century institutions of higher education (eg,
Gottingen, Cambridge and Glasgow Universities). 52 As he writes:

These practices included: examination, as the formal testing of human activity,

quantification, the putting of numbers on the activity tested, and writing, in the senseof
producing an archive of activities, tests, results and judgements (author's emphasis).
[Hoskin, 267]

77
Elite eighteenth century educational institutions introduced the
new pedagogicpractices in order to
eliminate some of the uncertainty about which students should be considered"best" under fluid,
semi-oral systemsof examination. Hoskin maintains that writing, examining and grading seeped
into the practices of new institutional and economic forms,
such as modem government and
corporate business enterprises, as means of administrative coordination and control with the result
that "... prisons, schools, hospitals, factories, universities, statebureaucraciesand
corporate
oligopolies most resemble each other, as both the social world and the self becomemore and more
subject to a writing, grading and examining which together ensure the meticulous and continual
circulation of plans, examinations, reports, feedback and feed forward evaluations knowing me,
knowing you, in our respective truths. " [Hoskin, 265-2821. -

53As Alfted Chandler

explains: "Lee achieved control over production and accountability for work
in two ways. One was through careful inspection. Each worker placed his 'private
mark' on each
piece he made. After the assistant master armorer had inspected and passedthe piece, he put his
mark on it next to that of the worker. The supervisor also submitted a monthly off-icereport which
listed pieces passedand rejected The second method of control was through bookkeeping, that
...
is, by accounting for each transaction carried on within the enterprise involved in production
through the use of standard double-entry accounts." [Chandler, 73-74].

54
Chandler,266.

55Philip E. Tetlock, "Accountability: The Neglected Social Context Judgement

of and Choice,"
Research in Organizational Behaviour 7 (1985): 307, cited in Kreiner, 85.

56
Hoskin, 270-273.

57SeeJoni J. Young, "Getting the Accounting 'Right': Accounting

and the Savings and Loan
Crisis. " Accounting, Organizations and Society 20.1 (1995): 55-80 and Katrine Kirk, Katrine and
Jan Mouritsen, "Spaces of accountability in a multinational firm, " Accountability: Power, Ethos
and the Technologies ofManaging, Rolland Munro and Jan Mouritsen eds. (London: International
Thompson Business Press, 1996), 25 1.

58 Kreiner argues that individuals' lack of concern for meeting performance targets doesnot
necessarily have to have negative repercussionsfor an organization, as it would in the caseof
fraud; instead, she argues that it may spur additional interaction that circumvents the limitations of
a given situation. In this way, accountability becomesan "inspiring constraint" that promotes
dialogue as opposedto a hiniting one, as in Tetlock's conceptuahsation. SeeKreiner 98.
,
59Roberts,"From Discipline to Dialogue", 55.

60Roberts, "From Discipline to Dialogue", 56.

61Roberts, "From Discipline to Dialogue", 55.

" Roberts, "From Discipline to Dialogue", 5 1.

63Seealso Nfichael Power, "The Audit Society," 4ccounting as Social and Institutional Practice,
Anthony G. Hopwood and Peter Nfiller eds. (Cambridge: Cambridge, University Press, 1994), 299-
3 16. This paper, drawing on post-modernist sociological theory, arguesthat the audit function is as
much a social and economic construction as a technical It
practice. suggests that audit is emerging
as a principle of social organisation in the UK. The conditions of emergence for this audit society
are in transformations in public sector management and newly prominent ideals of quality,
and accountability. The audit society is theorised in four primary themes: new rhetoric
governance
of accountability and control; new obscurities in the name of transparency; a politics of regulatory

78
failure; and the construction of auditees. Audit is part of the new cosmeticsof risk in which newly
perceived dangers and risks can be minimised or neutralised through audit. Audit is a conservative
force in the senseof being a knowledge system which filters and appropriates environmental
disturbance under the norm of auditability, in the process displacing structures of trust. More
recently, Onora O'Neill has challenged the uscft&ess of accountability and advocateda return to
the philosophy of trust [See Onora O'Neill, "The Philosphy of Trust, " BBC, Radio 4, Reith
Lecture Series, http: //www, open2.net/trust/oneill on trust/oneill on trustl. accessedMay 17.,
20021.

64Seefor example, Roberts, "From Discipline to Dialogue" and Hoskin.

6' George Herbert Mead, Mind, Sefand Society, Vol. 1, edited by Charles W. Morris (Chicago:
University of Chicago Press, 1934).

66Harold Garfmkel, Studies in Ethnomethodology (Cambridge: Polity Press, 1984), 33-34.

79
Chapter Three: Accountability and Record Keeping - Mapping The
Relationship

Introduction

The previous chapter made the case that organisational growth, spurred on by the

requirementto innovate in order to remain competitively viable, often resultsin

somedegreeof decentralisationand specialisationin an organisation. In turn,

decentralisationleadsto a natural loss of organisationalcontrol due to the

problems of information asymmetryand boundedrationality. Formalised

accountability systemshave come into increasinguse as a remedyto the inherent

loss of control that accompaniesdecentralisationbecausethey facilitate the

internal control and decision-makingnecessaryto maintainorganisationalstability

as organisationsgrow and decentralisein order to remain competitivelyviable.

80
The Reliance of Accountability Systems upon Records

The effective operation of accountability systemsrelies upon the communication

of information. That is to say, communicationof information is the basisof

producing and reproducing the structures and proceduresof organisational

accountability systemsand the meansby which standardsof accountabilityare

conveyed. It is also the meansby which reports on actionsand decisions,on the

one hand, andjudgments on these actions and decisions,

on the other, are

exchangedbetween in
parties an accountabilityrelationship.

In relatively uncomplicatedorganisationalsettings,suchas smallowner-operated

businessenterprisesor singleunits of a large industrial conglomerate,information

to be by
needed support accountability can communicatedorally, suchas means

of one person telling anotherwhat they have accomplished.However, across

large, complex organisations the oral communication of information generally is

insufficient to maintain adequateaccountability and control over operations

becausethose who hold others to account are spatiallyand temporally at a

distancefrom those they hold to account. That is to say,workers may be

reporting to organisational.regulators (internal or external) fi7omwhich they are far

removed either physically- as when managersin branch offices are accountable

to managersat a head in
office - or structuraffy - as the caseof workers whose

accountability to senior is
management mediatedthrough severalorganisational

layers.

81
Spatial distancesintroduce temporal distancesas well. In other words, it takes

longer for accountsto reach organisationalcentresof regulation across

geographic

and organisationalspaces. Moreover, in large, relatively formal and complex

organisationsand social settings,the temporal distancebetweenthe momentwhen

an accountableperson takes an action or decisionand the momentwhen that

is
person held to account becomesincreasinglyattenuated.

Given the spatial and temporal distancesover which businessrules and accounts

must travel to support the operation of accountabilitysystemsin complex social

and organisationalsettings,sole relianceon oral forms of communicationcangive

rise to blockagesor unintendeddistortions in '

communicatedmeaning. As a

result, large, relatively formal and complex organisations rely upon written

to
communication supplementoral forms by virtue of its generallyaccepted

greater capacity for reliably communicating meaning over spatial and temporal

distances. Large, hierarchicalorganisationstherefore dependupon the

production, distribution and preservationof recorded information as a form of

communicationthat has greater potential to deliver authoritative information

about an organisation's operating rules and expectedstandardsas well as to

provide relatively trustworthy accountsof the actions and decisionsof accountable

persons.

The types of recorded information that support systemsof accountabilitycanbe

separatedinto two categoriesin keeping with the purposesthey serve: 1)

constitutive and 2) instrumental. That is to say,recorded information servesboth

as a meansof establishingthe structures and proceduresof accountability systems

82
(constitutive) and the meansby which accountability systemsoperate

(instrumental).

First of all. the framework of accountability systemsmust be constructedor

for 2
constituted as part of the systems governing an organisation. Systemsof

organisationalgovernance,or managementand control, set forth all of the various

dimensionsof accountability:who will be accountableto whom, for what and

how. The structure of accountability systems in large organisations is usually set

forth in written policies, procedures,directives, objectivesand relatedforms of

documentation.

Thesetypes of documentsalso provide a vital meansof communicatingan

for
organisation's operating standards production and internal control in that they

codify businessrules so that there is less confusion about how work within an

organisationis to be done. In internal

most cases, standardsand expectations

inform an organisation's rules of operation; however, in in

organisations which

there is a public interest external regulators may set standardsand expectations

that inform the organisation's businessrules. Without codification of the rules of

operation, confusion, inconsistencyor ambiguity expected

about, performance

levels can arise, leadingto operationalinefficienciesthat underminecompetitive

viability.

in
As discussed chapter two, accountability is intendedto serveboth to constrain

individual action as well as to measureand evaluateit. In the sameway, written

businessrules serveboth to constrain or guide the action of individuals as well as

83
provide a standardagainstwhich individuals' actions and decisionscan be

measuredandjudged. As such,these documentsprovide authoritative evidence

about an organisation'soperating rules and standards. This evidenceis crucial to

the effective operation of systemsof accountability. without it there is alwaysthe

possibility that individuals who fail to perform in accordancewith organisational

operating rules and standards,for examplethose involved in dishonestactivities,

can plead ignoranceof expectedlevels of performance. Thus, lack of evidence

that operating rules and standardshave beenclearly communicatedto all relevant

personscan render organisationalaccountability systemsineffectual.

Just as directions on actions and decisionsflow down the organisationalhierarchy

in bureaucraticsettingsin the form of policies, procedures,directivesand the like,

numericaland narrative accountsof actions and decisionsflow up through the

"chain of command" as part of the all-important feedbackprocessthat sustains

orgarnsationalcontrol and decision by

making meansof accountability.

An exampledrawing upon the accounting done for an organisation'sfinancial

transactionsservesto illustrate the account production and communication

process that takes in

place the typical operation of organisational systems of

financial accountability. An organisation will create and receive many different

types of records in the processof transactingits financial for

business, example,

salesand purchasesinvoices; debit and credit notes for bank

returns,, deposit slips

and chequecounterfoils; receipts for cashpaid out and received;and

financial inf 3 What traditionally is

correspondencecontaining other ormation.

known as accounting for thesetransactionsbegins as they are grouped or

84
classifiedand enteredinto books of original entry, such as salesjournals,

purchasesjournals, return outwards journals, return inwardsjournals, cashbooks

and so on, in which eachtransactionthat hastaken place is recorded. The entries

in thesebooks of original entry then are posted to various accountsin double entry

ledgers,for examplesalesledgers,purchasesledgers,generalledgersand the like.

Periodically, the double entriesin eachof the ledgerswill be balancedresulting in

the production of a trial balance. Large organisationsalso may produce control

accountsor total accountsthat serveas a type of trial balancefor eachledger.

The processof balancingthe accountsservesto verify the accuracyof the books

of account, though it will not necessarilydetect all types of accountingerrors,

in
such as errors of omission recording a transaction. The correction of account

imbalancesmay require researchingindividual financialtransactions. It is

consideredextremely important that be

errors correctedas quickly as possible,as

any that go undetectedwill lead to inaccuraciesin the organisation'sbalancesheet

its
and may skew calculation of profits. The processof detectingand correcting

errors often entails returning to the source documentsto gather additional

information to discover the origin of a problem and therebymake corrections.

Once the source of the error is found, the error is correctedusing double entry

accounting procedures.

The trial balanceforms the basisfor preparationof the profit and loss account for

the period and, the

subsequently, balancesheetshowing the organisation's

liabilities, assetsand capital, which together form the final accountsof the

business. Production of the profit and loss accountand the balancesheetalso

85
requires the making of adjustmentsbefore computation of the final figures, such

as for bad debts and the depreciationof fixed assets,following

generallyaccepted

accounting principles. Thesefinal accountsprovide a basisfor management

decision-makingand are presentedto those to

whom the organisation'smanagers

and directors are accountable,for example,shareholdersand externalregulators.

In addition to the production of financial accountinginformation in the final

accounts, management may require and produce other managementaccounting

information for internal use, such as cashflow analyses,capital investment

forecasts,budget variancereports, excessivedebt tracking and similar types

of

presentationsor views of the accountsof the organisation'svariousbusiness

transactions. Suchreports aid in monitoring organisationalperformanceand

provide an additional basisfor decision-making.

As this exampleillustrates,the production and communicationof accounts

to
required support systemsof financial is
accountability a complexprocess. We

might think of this processas an accountingand accountabilitychain,in which the

creation of documentswhile transactingfinancial businessis the first fink in the

in
chain and eachsuccessiverecord produced accountingfor that financial

transaction another link. Using this analogy,it is easyto seehow one weak fink,

in
or a weakness one type of record, can affect all the others and, ultimately, break

the accountability chain.

86
Table 3-1: Types of Recorded information and How They Support Accountability
Systems

Class of Function Description of Function Documentary Form(s)

Constitutive Function Records and Communicatesthe Policies, proceduresand directives

structure and operating rules of the
accountability system

Instrumental Function Communicating operating Policies, proceduresand directives

standards (informed by legislation,
regulation, professional standards
and other relevant extemal
guidelines coupled with
documentedinternal management
practice and organisational goals
and objectives, etc.)

Instrumental Function Reporting on actions and decisions Recordsof businesstransactions

(the giving of an account) (Source documents)

Reports on actions and decisions

related to businesstransactions
produced using management
information and other reporting
systems

Instrumental Function Assessmentof actions and (Changesto) policies, procedures

decisions basedon accountsand and directives
instructions for corrective
measures,where appropriate

The abovetable showsthe types of documentaryforms typically associatedwith

and supporting the operation of accountability systems. Here it must be noted that

by certain archival definitions, policies, procedures,standardsand similar types of

information neededto support accountabilitysystemsdo not actually fall

recorded

the documentsknown as records. For example,in her study on

within classof

Diplomatics, Luciana Duranti, refers to these documents as literary sources

4
providing the basisof juridical sYstems. She reservesthe use of the term records

for those documentsthat constitute a juridical act or those that constitute written
5
of a juridical act that was completebefore being documented. That is5
evidence

87
use of the term records is limited to documentsthat effect and/or provide evidence

of an official transaction. in a similar vein, Australian archivistsFrank Upward

and Sue McKemmish define the "archival document" (a term they useto refer to

both records and archives)as fbHows.

The archival documentcan be conceptualizedas recorded

information arising from transactions. It is createdas a by-product
in
of social and organisationalactivity the courseof transacting
businessof any kind, whether by governments,businesses,
community organisationsor private individuals. It is therefore
defined by its contextuality and its transactionality. The
documentationof transactionsmay be in any storagemediaand is
increasinglyan electronic process.6

With definitions of the record traditionally emphasisingtransactionality,it is

to
possible argue that policies, proceduresand similar types of documentsare not

records becausethey establishthe terms and conditions of official transactionsbut

are not themselvesinvolved in or outcomesof those transactions. On the other

hand,traditional archival definitions of the record also focus on the record's

evidential quality. Thus, it is to

also possible arguethat suchdocumentsare

records becausethey provide evidenceconcerningthe terms and conditionsof

organisationaltransactions. In addition, standardrecords texts

management

typically cite the managementof policies, proceduresand directivesas being

7 Sincethesetypes of documentsare the

within the records manager'spurview.

concern of the records manager,it is to

possible argue that they shouldbe

in
included that classof documentsknown as records. In the final analysis,

however, it does not matter whether we describethesedocumentsas records,as

literary sourcesor as somethingelse. Their inclusion in the scopeof this study is

justified by the important role they in

play the constitution and operation of

accountability systems.

88
As in the caseof written businessrules, it is a matter of perspectiveasto whether

the types of recordedinfonnation generatedas a result of the typical financial

accountingprocessqualify as records. In the accountingliterature, the types of

documentsthat accountantsdescribeas source documentsare what by traditional

archival measureswould be consideredrecords, sincethey are documents

produced in the courseof carrying out particular financial transactionsand

8
provide evidence of those transactions. In accounting, on the other hand, the

record is the entry documentinga financial transactionin an organisation'sbooks

9 By definitions of the term record, however, these

of account. strict archival

entrieswould not qualify as a record. It is even dubiouswhether subsequent

managementand financial reports basedon an organisation'sbooks of account

would be by
consideredrecords archival standards. The archivist Hilary

Jenkinsonassertedthat records are unique becausethey are not createdin the

interest of or for the benefit of posterity. 10 Accounting reports, in comparison, are

to by
createdwith a mindfulnessand attention an audienceremoved spaceand

time from the transactionsto which the reports refer. This differencebetween

archival and accounting terminology is not simply a question of semantics.

Rather, it revealsthe important point that there is no asoluterecord, that the

of the record is dependent

upon an individual or
meaningand conceptualisation

group's perspectiveand context.

Taking this view, the important question becomesnot "what is "

a record? but

"how does this particular individual "

or group perceiveof a record? As archivist

Preben Mortensen writes, "the meaningof words and conceptsare not, as in the

89
Platonic tradition, securedby the sharedform of things to which we apply the

samename,but are a matter of the ways in which we use conceptsin practice.""

Why is Mortensen's viewpoint significant? It is becausethis viewpoint permits a

broader scopefor analysis,as it frees us from the limitations of traditional archival

or accounting conceptualisationsof the term that, becausethey do not encompass

certain documentaryforms, can limit understandingof the relationshipbetween

thesedocuments,the types of documentsthat archivistsor accountants

traditionally view as being records, and the operation of accountabilitysystemsin

particular settings. However, by also viewing thesedocumentsthrough the lens of

traditional archival and accounting conceptualisationsof the record, we are, at the

sametime, able to seethe limits of other discipline,group, or individual

understandingsof the relationship betweenthe creationand keepingof certain

forms of recorded information and the operation of accountabilitysystems. This

approachpermits an exploration of the relationshipbetweenfinancial

accountability and record keeping that goes beyondwhat is immediately

by
observable strictly adheringto either archival or accountingconceptualisations

the to underlying that

assumptions mask deep structures
of record uncover

beneaththe surfaceof organisationsas social systems,structureswith effects

be by those within these

which generallymay unobservedand unintended

organisations.

The Qualities Required of Records for Effective Accountabdity

that systemsof accountabilitydependfor their operation

It hasbeen established

the communication of business

organisational rules and standardsas well as
upon

90
accountsof actions and decisionsof accountablepersons. Thesesystemswill

only operate effectively if records - such as policies, proceduresand accounts-

possessthe characteristicsthat effectively communicatean organisation'sbusiness

its
rules and permit managementto seewhat they needto seeof their business

transactionsin order to hold organisationalactors to accountand make sound

decisions.

It is difficult to point to any definite set of qualitiesthat recordsmust possessin

order for accountability systemsto work effectively without referenceto a

particular context, though a number of qualities, suchastrustworthiness,

12
timeliness,relevance,and comparability, can be mentioned. Ratherthan there

being a number of standardcharacteristicswhich recordsmust alwayspossessin

the serviceof effective accountability,the purposeand context of the

accountability systemmust determinewhat qualities are required of the records

to
needed support it. As South African archivist Verne Hams statesin re ation to

"...
the use of records as evidenceof societalprocesses, the requirementsfor

91
 ,.)13
evidenceare specificto time and place In the samemanner,the
...
requirementsof records for accountability are specificto the purposeand context

of the accountability system.

For example,for the purposesof effective financial management,managers

of a
businessenterprisemay want to track their bad debts. In order to do
so, they will

needto communicatereliably how the organisationdefinesa bad debt and the

level of such debt that is acceptable. They also will rely on subordinatesto pull

together reports on the status of customer accountsin relation to the organisation's

definition of bad debt. In order to meet management'sinternal control and

decision-makingneeds,the organisation's bad debt reports will needto possess

certain characteristics. For instance, the reliability of the report may be

determinedby the extent of its comprehensiveness,

accurateness
and completeness

in depicting the statusof the organisation's customeraccountsin relation to

organisationaldefinitions of what constitutesbad debt. Bad debt reports also may

to
need presentinformation in a form that permits comparisonsover time so that

managerscan determinewhether the number of bad debtsis increasingor

decreasing in relation to organisational limits and past experience. Depending on

the level of risk, managersalso may needthesereports.to reflect daily, weekly,

monthly or quarterly bad debt positions, that is, whatevertime frame permits them

to take action to correct deviations from acceptablelevels of bad debt quickly

enough to avoid operating problems.

92
Though an organisation's managementmay require recordsto possesscertain

characteristicsin order to support effective accountability,most often the

identification of theserequirementsis not an explicit and consciousorganisational

exercise. Moreover, managersseldom explicitly and consciouslyidentify the

kinds of record keeping systemsthat wifl be required to actuaflyproducerecords

of the necessary quality. Rather, they generally assumethat such systemsare in

place. Oftentimes,these in
systemsare not place, and, as a result, the

organisation's record making and keeping fail

practices to producerecordsof the

quality needed to support organisational accountability systems.

The Trustworthiness of Records

The above noted problem is especiallyevident in relation to the quality of

trustworthiness. Trustworthinessis arguablyone of the most commonand

important qualities required of records for accountability purposes no matter what

it is taken for in
the organisational context. Ironically, a quality often granted

records.

As previously noted, records generallyare perceivedas having greater capacityto

and time and it is for this reason

convey intended meaningreliably acrossspace
in large, hierarchicalorganisationshas come to
that the giving of an account,

dependon the production, distribution and preservationof many forms of written

Generally, archival thinking on the relationshipbetweenrecords

communication.

rests on a belief that the usual of

circumstances record creation
and accountability

93
give assurancesof reliability and authenticity, and therefore of trustworthiness,
a
quality essentialto giving of and holding to account.

The ideasunderlying this belief are succinctly

expressedin the businessrecords

exception to the hearsayrule (ie, the rule of law that allows for the legal

admissibility of what would normally be consideredsecond-handinformation),

the origins of which signalledsociety's growing relianceon recordsin the

transaction of social and organisationalbusiness. Under this rule, courts

generally

acceptbusinessrecords as trustworthy evidenceof transactionsfor the following

reasons:

-Their form would have had to have been completeto affect the business
transactionfor which the record was created;

-The regular making of a particular record calls for accuracy;

-The record creator generally would have had no reasonat the time to
manipulate, substitute or falsify the record for somefuture, unthought
of purpose;
.1
-The business enterprisehad to have been relying on the record for its
business purposes, so would have noticed that the record was not
reliable or authenticif that were the case;and

-The record was createdunder a duty to an employer and therefore

is
there the risk of censureor disgrace if 14
errors are made.

A record createdin the normal courseof businessthatis contemporaneous

to the

to it
events which refers, for example a voucher, is therefore usually accorded a

level of documentary truthfulness. Even those recordsthat are not createdto

effect a businesstransactionbut are written up afterwardsas a record of an event

or transaction, such as minutes of a meeting or financial ledgers,if created

reasonablyclose to the eventsor transactionsto which they refer generallyare

to
considered reflect the documentarytruth.

94
To say that the courts, and by extension society, generaHyconsiderrecordsto be

trustworthy becausethey meet the above describedcriteria is not the sameas

sayingthat records are trustworthy and always meet thesecriteria, of course. A

record's documentarytruthfulness be
may challengedlegally through

demonstratingthe ways in which it fails to meet the criteria of the business

records exception to the hearsayrule. Thus, what we might want or require a

record to be (ie, trustworthy evidenceof a businesstransaction)shouldnot be

in
confusedwith what a record may, reality, be (ie, lessthan trustworthy evidence

of a businesstransaction). Deliberate or unintentional deviationsfrom the

conditions of record inscription that ensurereliability can meanthat recordsare

quite unreliable as evidenceof a businesstransaction.

Yet, traditional archival conceptualisationsof the record havefusedought with is

by suggestingthat reliability and authenticity are somehowinherentin an

immutablenature of the record, that is, they somehowdefineits recordness.

Archival theorist Hilary Jenkinsonarguedthat the impartiality of recordsarises

from the circumstancesof their creation as a meansof carrying out activities and

not as ends in themselvesand that, records

consequently, are "inherently.
.

capableof revealingthe truth about those activities" and bearing"authentic

testimony of the actions, processes,and procedureswhich brought them into being

15 MacNeil
Following Jenkinson'sline of thought, Canadianarchivist Heather
...,,

"To protect the value of records as evidence it is to

necessary preserve
writes ,

their originary [sic] qualities, that is, the qualities with which the records are

by the circumstancesof their creation, accumulation,and use in the

endowed

95
conduct of personalor organisationalactivity. Thesequalitiesinclude naturalness,

uniqueness,interrelatedness,authenticity, and impartiality.-16 Along similar fines,

the literature on accountinggenerallyportrays the preparationof accountsas a

neutral techniquethat does no more than objectively record and produce a "true

and fair" view of the results of organisational.activity. 17

Theseconceptualisationsreify records and accounts. They separaterecords and

accountsfrom the social and technologicalcontextsthat lead to their creationuntil

they are no longer recognisableas socially and technologicallyconstructedentities

but, instead,becomeimbued with an almost god-like power and objectivity.

However, the traditional archival and accountingviewpoints leavean important

it
questionunanswered:why should be necessaryto protect a quality that is

apparentlyalreadypart of the inherent nature of the record and the account? If,

thesequalities define records and accounts,then they shouldexist in them as a

natural state and needno protection. But clearly these in

qualities records and

do
accounts require "protection, " or rather, careful cultivation.18 Thus, insteadof

being immutable aspectsof the nature of records or accounts,impartiality and

authenticity are ideals. Like Plato's shadowimages,actual recordsand accounts

exist as pale and imperfect reflections. They are, however, no less recordsor

accounts.

In both the accounting and archival fields, there is a growing body of literature

influenced by philosopherssuch as Michel Foucault, Eirgen Habermas,Anthony

Giddens, and JacquesDerrida that offers a cntique of the view that records and

of organisationalactivity provide impartial and objective evidence.

accounts

96
Rather, authors of this body of literature clearly seerecords and accountsas social

and technological constructs.

Critiques of the traditional view of accountinghave focusedon explorationsof the

of
use accounting information in the production and reproduction of systemsof

orgamsationalaccountabilityto show how accountsare constructionsthat issue

and expressrelations of power. This revisionist view of accountingseesthe

function not as a set of practicesthat mirror organisationalreality but rather as

practicesthat shapeorganisationalreality, along the lines of Harold Garfinkel's

ideasdiscussedin the previous chapter. John Roberts writes, for examplethat "As

a vehicle for hierarchicalforms of accountability, accountinginformation appears

asjust one meansof negotiating and defining the significanceof events,as a

method for in
expressingand enforcing expectations,and as a resource the

enactment of particular power relations. "'9

Roberts goes on to explain that the way accountinginformation hasbeen

institutionalised as the most important, authoritative and telling meanswhereby

organisationalactivity is made visible ironically has renderedinvisible social and

technological influenceson the meaningof accountingrecords and given rise to

acceptanceof accounting information as objective numerical of

representations
20
facts. He states*

this invisibility lies in accountings [sic] capacity to present

...
information as if it were objective fact; the detail can be contested
but not its basic capacity to reflect the truth. Like the scientific
method it imitatesl the knowledge that accounting produces is
presented as somehow independent of the interests of those who
it. 21
produce and use

97
Recent accountingand archival researchreveals,however, that accountsand

records are anythingbut neutral, objective and disinterested.

Much of the literature critiquing accounting's claim to neutrality and objectivity

has focused on accounting standards,regulations and conventionsthat govern

accountingmeasurementand classificationand how theseconstruct accounting

"facts". Joni J. Young's article on the American savingsand loan crisis, for

example,discusses
how accounting standardsand regulationsreflectedchanging

political interests "

and objectivesof regulators.

Arguably, the tendencyto focus on the way in which accountingdata are

classified,aggregatedand presentedin accountingreports using interpretationsof

accounting standardsand regulations has led to two important gapsin

understandingaccountingrecords as social and technologicalconstructs. First, it

overlooks the in
ways which other aspectsof the complexprocessof accounting

construct the meaningof accountingrecords. Second,it leadsto a tendencyto

overestimatethe degreeto which construction of the meaningof accounts,and

expressionsof power relations in the is

construction of meaning, a consciousand

intentional process. Though the mannerin which accountingdata are reported

is
undeniably an important feature
and essential of the production of meaningin

accountsand the production and reproduction of accountabilitysystemsin

organisational settings, it is only one aspect of a complex account production

The meaning of accounts evolves not just as a result of the conscious

process.

processof classifying and reporting financial transactionsbut throughout the

processof record inscription, transmission,contextualizationand

complex

98
interpretation over spaceand time. Thus, the meaningof the accountat any given

moment may be lessthe result of a social actor's consciousintention to portray the

"facts" in a particular light than the unintentional result of colliding interests

underlying mediationsthat take place over time throughout the accountproduction

and communicationprocess,particularly when the effects of theseinterestsand

mediationson the meaningof accountingrecords is not consciouslyunderstood

nor subjectto explicit managerialcoordination and control.

In explorations of cracks in the image of accountingrecordsas neutral and

immutable recent archival literature challengingtraditional positivist views of the

record provides a framework for looking beyondjust the in

way which data are

to
classifiedaccording accountingprinciples and standards. The traditional

archival view of the record is that its it

author creates to effect consequences
as

part of official 23
transactions. The author of the record, therefore, fixes in the

record his will in terms of the desired to

consequences which he wishesto give

effect.24 Assuming none of the problemsthat can affiectreliability are introduced,

either deliberatelyor unintentionally, into the record's inscription, the traditional

view holds that the record then becomesthe stablevehicle by which the author's

intended meaningand documentarytruth about a transactionis communicated

over spaceand time. Everything is nice and neat and linear.

The ideas of communicationstheorist Mark Poster suggestthat the traditional

conceptualisationof records may have grown out of an era in which print

archival

was the predominateform Of communication. As Poster writes: "print

media

constitutes the individual as a subject, as to

transcendent objects, as stable
culture

99
 25
and fixed in identity, in short, as a grounded essence., In contrast in the

electronic age, "Electronic culture promotes the individual as an unstableidentity,

-)-)26
as a continuous processof multiple identity formation. In the sameway as
..
the electronic age shifts our understandingof the individual, so, too, doesit

changeour conceptualisationof the record.

The electronic age hasmoved the epistemologicaland ontological discussion

surrounding the record away from it

viewing as stableobject toward seeingit as

somethingmutable and unstable. In a recent review of Trevor Livelton's Archival

Theory, Recordsand the Public, Canadianarchival educatorTom Nesmith

challengesus to think of the record as:

... an evolving mediation of understanding about some phenomena -a

by
mediation created social and technical processesof inscription,
27
transmission,and contextualization.

Essentiallywhat Nesmith and a growing number of archivistsinfluencedby post-

modernist theory are sayingis that the is for

record a vessel communicated

meaning,a meaningthat is socially and technically constructedand that is not

28
static but evolves over time as the is
record created,kept and used.

From this perspective,the record appearsto be the result of an endlessset of

choicesmade by social actors, those who originally inscribethe record as well as

those who are involved in its subsequenttransmissionand contextualization,

among them record keepers. These social actors make choicesabout whether to

inscribe an account of a transaction,the form it will take, and the degreeto which

that inscription will be contextualized(eg, through in

preservation an official

record store), how and in what form. They also make choices
orgarusational

100
about the technological meansof inscribing, transmitting and contextualizingthe

record, whether they chooseto use paper, computersor someother means,with all

the limitations and problemsinherent in the chosentechnology.

As noted in the previous chapter, individuals have different incentivesfor their

actions and choices. In addition, a range of social factors will influencethese

incentives. The term socialfactors refers to afl factors pertainingto norms of

behaviourand systemsof belief in social settings. This might also be referredto

as culture.29 Culture relatesboth to the culture of the wider society,to the norms

and beliefs of defined groups (ie, managementor professionals),and to

organisationalculture. Together, the socially influencedchoicessocial actors

make in how they inscribe, transmit, contextualizeand eveninterpret records have

the effect of constructing the communicatedmeaningof the record over time.

The effect of social mediationson the communicatedmeaningin recordsis further

compoundedby the specialisationand decentralisationthat, to varying degrees,

accompany all large, complex organisations. Decentralisation complicates the

relationshipbetween the "facts" of a transaction,the record creator's

representationof those facts in a record, and the meaningcommunicatedto

subsequentreadersof the record in the foRowing way. The greaterthe numberof

information processorsin an organisationthe greaterthe numberof social actors

involved in the creation or receipt and keeping of records of an organisation's

businesstransactions. The greater the number of social actors involved in record

creation and keeping, the more varied their motivations and choicesconcerning

of record inscription, transmissionand contextualization. Thus, the

processes

101
 is
more varied organisationalrecord creation and keeping behaviour. In this way,

decentralisationincreasesthe diversity of intereststhat shapethe meaningof a

particular record over time, as a number of different processorseachwith their

own interestsand record keepingbehaviourswill carry out processesof record

creation and keeping for singlerecords or groups of records documenting

organisationaltransactions. These diverse influenceson record making and

keeping can, from a broader organisationalperspective,causeintentional and

unintentional, and often problematic, deviationsin documentarytruthfulness.

When we peek behind the record as object, we are reintroducedto the humanin

the record, that is.,to its "subject-ivity". Of course,whenever,humanbeingsas

social actors enter the picture things become messy, unruly and often conflict-

ridden, as conffict theorists have observed. Ian Carib it

sums up in the following

way: "Society is like a more or less confusedbattle If

ground. we watch from on

high, we can seea variety of groups fighting eachother, constantlyforming and

'.)30
reforming, making and breaking alliances. From this point of view, the

is
meaningof records a manifestationof the power struggle,both consciousand

unconscious,between competing interests as the record is created,kept and used.

In this confusedbattleground, it is a challengeto analysewhat relation the record

bearsto the phenomenonit is about or to its inscriber(s)' original intended

Each individual involved in record making, keeping and use is

meaning.

motivated by difTerentinfluences- personalinterests, culture,

organisational

societal mores and so on in the production of the account.

professionalvalues, -

Moreover, differing and often conflicting motivations can lead individualsto

keep records in ways that are in direct conflict with what is requiredto
create and

102
produce the quality of accountinginformation neededto sustainsystemsof

organisationaland social accountability.

In addition, there is no watching fi7omon high for record keepers,asthey are

unavoidablypulled into the scrum.even as they try to observefrom the sidelines.

As one with responsibilityfor reserving and preservingrecordsfor future use,the

record keeper does not simply passivelyhold the record but in

participates shaping

the terms of its original inscription and what happensto the record subsequently

through processesof re-inscription for preservation,recurrenttransnissionand

contextualization. As such, the record keeper shapesthe record's meaningand

becomesits co-author. It was Brien Brothman, influencedby the ideasof

postmodernist literary criticism and philosophy, in particular the French

philosopher JacquesDerrida, that first disquietedarchivistswith the suggestion

that record keepingwas somethingmore than an uninvolved act of custodianship.

Reflecting on archival practice, Brothman haswntten that it "forms an integral

"'
part of the record, also assertingthat the typical record keepingand archival

function of ordering records "also servedto transfigure,if not transform,the

record."" The interventionsof the record keeper,therefore,cantake the record

further from the meaningintendedby the record's original author and from

providing the kind of evidenceof businesstransactionsrequired to meet

organisationalor societal objectives.

To further highlight the record's shadowyrelationshipwith documentarytruth,

Brien Brothman, in his exegesisof the writings of Derrida

Jacques in relation to

theory, "the
asserts: writing that humansdo functions as much to obscure
archival

103
and defer [author's emphasis]meaningas to fix it ,32
permanently. Writing is a

form of temporal delay that seeksto capture an intendedmeaningin some

ineluctableform that transcendsthe vagariesof time. However, as such,it is

incapableof suspendingthe effects of time: "Time, creator of difference,

inevitably defers or postponesarrival at stablestructure whether of languages,

-

wntmg, societies, records or record systems.-)-)33

Brothman adds:

For Derrida, the very premisesupon which our commitmentto writing rest
themselvesestablishlimits to communicationthat writing cannotbreach.
To write is alreadyto concedethe necessityof placing our fate in others'
hands,so to speak. Writing, by its nature, suspendsits own consummation
of meaning. The certification of meaningas "the meaning"of a particular
piece of writing inevitably requiresthe endorsementof a subsequent
reading. It is other readers' inte retationsthat ratify the "original"
"genuine")meaningof the work. 3T

Thus, eachsuccessivereading of the record undertakenas part of record keeping

processesor by those who use the record to serveparticular purposes(eg,

organisationalor social accountability) hasthe potential to imbuethe record with

new meaning,meaningthat be
may very different from that intendedby the

record's original inscriber.

Clearly, post-modernistrevisions of thinking about accountsand recordshave

implications for accounting records as evidenceof businesstransactionsin support

of accountability. Despite the expectation of greatertrustworthinessof records as

a form of communicatingorganisationalaccountsof actionsand decisions,

the

post-modernistperspectivecalls the impartiality and objectivity of recorded

accountsinto question. This viewpoint forces us to seethat the record does not

offer objective impartial evidenceof facts but is, after all, merely an account of

actions and decisionsshapedboth intentionally and unintentionally

organisational

104
by the interestsof social actors involved in the record's inscription, transnssion,

contextualization and use over time.

Nevertheless,impartiality and authenticity in records, aswell as other desirable

qualities, such as reliability and timely accessibility,are essentialto the effective

production and operation of accountability even as we recognisethat these

qualities are impossibleto attain becauseof the mediatedcharacterof the record

as a form of communication. As Verne Harris points out, at best the record serves

'5
only as one window on organisational. and social processes. However, the

record is, in the end, as Harris acknowledges,one of the best windows we have.

To suggestthat records are not trustworthy, therefore, is not to suggestthat we

should not and cannot rely upon them as evidenceof businesstransactions.It is

only to suggestthat they must be seenas accountsof thesebusinesstransactions,

not as the undisputed"truth" of those transactions. In clinging to the idea of

records as impartial and objective, archivists' traditional thinking about the record

may be too limited to arrive at workable solutionsto the problem of making sense

of records as evidenceof businesstransactions. Evidenceof a business

transaction the record can be, even by its absenceor in a fragmentedform, but in

this regard it must be given a critical reading with an appreciationand

understandingof the messybehind-the-scenes

social interaction of often

conflicting intereststhat goes into the record's evolving and mediatedformation

with every new inscription, transmission,Contextualizationand reading. Archival

theorist Enc Ketelaar describesthis type of knowledge about the record as "social

"
and cultural archivistics, being the the involved
work of understanding processes
36
in the choicesmadeabout archiving. This study aimsto contribute to suchan

105
understandingand appreciationof the processesof archiving by empiricaffy

exploring record making and keeping in the context of Jamaicancommercial

banks in the course of exploring the relationshipsamongcompetitiveviability,

accountability and record keeping.

Of Record Keeping and the Quality of Records

Having gaineda deeperappreciationof the record as a socially andtechnically

mediatedform of communicationthat is much lesstrustworthy than we might like

to think, what next? Are we simply to throw up our handsin despair,

in
acknowledging, the words of Brien Brothman, a record's unavoidable

4(.
unraveling into promiscuous textuality? '737 This attitude would be acceptable if

we did not have to concernourselveswith the practical information requirements

of effective accountability and the needto ensurethat accountabilitysystems

in
operatewell order to keep our organisationsfrom succumbingto a natural

dissolution.

But sincewe do have to concern ourselveswith suchmatters,we must build our

damsagainstchaos. This brings the discussionto the subjectof record keeping.

From the moment in time when the first record was created,the record keeping

function also cameinto existence. For, as noted already,the making of a record

seeks to fix meaning over space and time, and to fix meaning implies somehow

keeping it intact in the face of forces that would lead to its erosionor obliteration.

be
Hence, there can no record creation without at the sametime bringing into

being record keeping.

106
The aim of record keeping is to ensurethe preservation
of records so asto
"preempt the intrusion of any discordant elementsfrom the
past and presentand
foreseeall future contingenciesof interpretation or
misinterpretationthat might

threaten or strain the binding conditionalities of textual meaningand challenge

documentarytruthfulness.7-)38
The record keeper's role, then, is one of salvaging

the record from its own deconstructionby fixing meaningand carryingthat

meaningforward through distanceand time as evidenceof the organisational

businesstransactionsto which the record refers.

This way seemsto suggestthat record keepingis concernedwith the record only

after it has been inscribed or created. However, as record creationand record

keeping are two sidesof the samecoin, the boundariesbetweenthe two activities

and the individuals involved in undertakingthem have alwaysbeenblurred.

From the outset of record making, scribeswere responsibleboth for making

records on behalf of others, the record's actual authors,aswell as keepingthem.

Even now, record keeping may be simply a matter of the record's original

inscriber retaining a file copy of a documentfor his or.her own referencein an

individualisedway with little consciousnessabout how this processshapesthe

for
record's evolving meaning subsequentreadersof the record, if there should be

any.

Alternatively, one person may createthe record and anothermay be responsible

for keeping it. This may be a simple caseof a record creator delegatingthe

107
function of record keepingto a direct subordinatesuch as a secretary. On the

other hand, the record keeping function may take in

place the context of a

systematicorganisationalrecords managementprogrammeconcernedwith the

controlled managementof all records throughout their life cycle from creationand

receipt, to transmission,
use, storage,retrieval and final dispositionin the interests

of administrativeefficiency and organisationaland social accountability. Just as

with the record, the record keeping function varies accordingto It

context. may

be undertakenwith differing degreesof systematisationin serviceof a variety of

interests.

Though it is now often the casethat someoneother than the original inscriberof

the record performs the record keeping function, the record keeperwho ignores

the processof record creation risks failing to preservethe meaningof the record.

In the electronic age, computers as a technology of inscription present new

to and fixing the meaningin records. Digital recordscan be

challenges preserving

altered or deleted more easily or their content lost due to technological

obsolescenceand the fragility of methods and technologiesof inscription and

As record keepersfind becoming

themselves involved in
storage. a result,

the terms conditions of record inscription so as to ensurethat later

prescribing and

preservationdoes not becomea moot point.

Beyond the needto ensurethat the new electronic technology does not interfere

of the meaningof records, there exists anotherrationalefor

with the preservation

keepersto becomeinvolved in the processof record creation. This is

record

becausethe interests of record creators may prevent them, either intentionafly or

108
unintentionally, from creating the quality of records neededto support the

effective operation of organisationalsystemsof accountability. Thus, there is a

for
need the record keeperto addressrecord creation as someoneindependentof

the interestsof the record's inscriber to ensurethat organisationalinterestsin

record creation are served. The record keeper must interveneto assistthe

organisationto identify the quality of records required to supportits accountability

systems,to ensurethat records are createdin order that organisationaltransactions

becomevisible for accountability purposes,and finally, to seethat recordsare

createdand kept in a way that supports documentarytruthfulnessover spaceand

time. None of theseobjectivesmay be the focus of recordscreators,who have

their own interests and concerns and may therefore intentionally or unintentionally

avoid creating records or create them in ways that underminethe trustworthiness

of records as evidenceof organisationaltransactions.

This role of assistingin the identification and safeguardingof organisational

interests in record creation is particularly important in large, complex

organisationswhere the interests be

of record creatorsmay quite diverseand in

If interests
conflict with those of the organisation. organisational in record

creation have not been identified if

or no one is looking out for those interests,the

quality of records may not support the requirements of effective accountability.

Tl-sis a role that can hardly be undertakenwhen the record creator and keeper are

the sameor even when the record keeper is someonewho primarily

one and

the record creator's interests (eg, a secretarykeepingrecords on behalf

represents

employer) sincethere may be a conflict betweenthe record creator's and the

of an

109
organisation's interests. In in
addition, undertaking both this task and the task of

preservationof meaningover time, record keepersideally must be capableof

the in
understanding ways which their own interestsand actionsshape

documentarytruthfulness and affect the quality of the record, for it is only through

this awarenessthat record keeperscan recognisethe distortions in meaningthat

their own actionsnfight introduce and how theseactionssubtly shapeand shift the

meaningof the record. Again, this is

mindfulness unlikely to be a feature of

record keeping by
undertaken record creators themselves
or by anyonelessthat a

highly trained record keeping professional.

Thus, in large, complex organisationsthe spatialand temporal distancesthat the

communicatedmeaningin the record must spanand new technologiesof record

creation and storagegenerallyrequire a more systematicapproachto record

keeping if the information requirements of organisational accountability systems

are to be met. Systematic record keeping refers to a record keeping system

information
wherein organisational requirementshave beenidentified, systems

have beenestablishedto support the attairunentof those requirements,and trained

record keepers,as distinct from record creators, have the capacityto understand

creation and preservationin support of meeting

and control processesof record

organisational information requirements.

When record keeping is unsystematicthere is the potential for a state of

keeping anomie to develop. Anorme occurs when there is

organisationalrecord

widespreadacceptanceof clear organisationalstandardsreflecting a set of

no
beliefs and norms that consciouslyand encourage
systematically
sharedvalues,

110
record creation and keeping behaviour that producesorganisationaffyintended

meaningin records. It is also due to the absenceof a record keepingregulator to

ensurethat organisationalrecord keeping interestsand requirementsare met.

Significantly, suchorganisationalanon-fieoften occurs when there hasbeenrapid

social change,the very conditions that will be presentas an organisationgrows,

decentralisesand specialisesin order to remain competitively viable." In this

state,record creation and keeping behaviour may becomeincreasingly

individualisedas the number of information processorsgrows. This may makeit

increasinglydifficult for an organisation'sgovernorsto direct socialactors' record

creation and keeping behaviour toward organisationalends. Thus, social actors

are likely to create and keep records in ways that reflect an increasingdiversity of

values,beliefs and norms of behaviour,whether influencedby valuesof the wider

society, a particular group or aspects of the organisation's culture. As such, their

record creation and keeping choicesmay be in growing conflict with what is in the

best interest of maintainingorganisationalaccountabilityand control, evenwhen

that is not the individual record creator's or keeper's consciousintention.

To the extent that record keeping is undertakenas a systematicfunction with an

awarenessof the interests and mediationsthat shapethe meaningof records,even

those of record keepersthemselves,as well as an awarenessof organisational

information requirements,through controffing processesof record inscription,

transmissionand contextualization,record keeping offers the promiseof

overconung the forces of organisationalrecord keeping anomieto ensurethe

production of records that are meaningfulin terms of sustainingorganisational

accountabflity.

III
Conclusion

This chapterhaspresentedthe secondpart of a theoretical framework linking

competitive viability, accountability and record keeping. It hasarguedthat

accountability systemsin large, hierarchicalorganisationsdependon recordsas

the meansof constituting such systemsas well as the meansby which accounts

are exchangedbetweenparties in an accountability relationship. The chapter

arguedthat, though the effective operation of organisationalsystemsof

accountability dependsupon records having certain characteristics,suchas

trustworthiness,the many intereststhat shapethe meaningof recordsasthey are

socially and technologically produced during processesof inscription or re-

inscription, transmission,contextualizationand use over spaceandtime

intentionally and unintentionally may prevent records from possessingthe

to
qualities needed sustaineffective accountability. Systematised
record keeping

is therefore neededas a meansof understandingand controlling influenceson the

meaningof records at the point of creation and throughout the spanof time for

which they are kept in

and used order to ensureproduction of the quality of

records needed to support effective operation of accountability systems.

End Notes

1 This is not to discount oral forms of communication. As Kristian Kreiner's researchindicates,

communication can be an important means of interpreting and shaping the ways in which
oral
accounting data are used within an organisation [seeKristian Kreiner, "Accountability on
recorded
the Move: the Undecidable Context of Project Formation, " Accountabilitv. - Power, Ethos and the

112
Technologies ofManaging, Rolland Munro and Jan Mouritsen eds. (London: International
Thompson Business Press, 1996): 85-102]. Similarly, Verne Harris, in discussing the South
African Truth and Reconciliation Commission, shows how oral testimony can be more reliable in
some ways than official records (See Verne Harris, "Law, Evidence and Electronic Records: A
Strategic Perspective from the Global Periphery, " paper presentedat the VV International
Archives Congress, Seville, Spain, September,2000).

2 Luciana Duranti identifies this as an organisation's legal system. Shewrites: "Every social group
ensures an ordered development of the relationships among its membersby meansof rules. Some
of the rules of social life arise from the ad hoc consent of small numbers of people; others are
established and enforced by an "institution, " that is, by a social body firmly built on common
needs, and provided with the means and power to satisfy them. The latter rules are compulsory;
their violation incurs a sanction or penalty. A social group founded on an organisational.principle
which gives its institution(s) the capacity of making compulsory rules is a juridical system. Thus,
ajuridical system is a collectivity organized on the basis of a systemof rules. The systemof rules
is called a legal system." (Luciana. Duranti, "Diplomatics: New Usesfor an Old Science(Part 11),
Archivaria 29 (Winter 1989-90): 5).

3 th
This discussion is informed by Frank Wood and Alan Sangster,BusinessAccounting 1,8 ed
(London: Financial Times Professional Ltd., 1999).

Duranti, 5.

Ibid, 9.

6 Sue McKenunish and Frank Upward, eds.,Archival Documents: Providing Accountability

Through Recordkeeping (Melbourne: Ancora Press, 1993), 1.

' See,for example, chapters on the management of directives, policies and proceduresin Wilmer
0. Maedke, Mary F. Robek, and Gerald F. Brown, Information and RecordsManagement, 2d ed.
(Encino, CA: Glencoe Publishing Co., 1981) and Betty R- Ricks, Ann J. Swafford and Kay E.
Gow, Information and Image Management, 3d ed. (Cincinnati, OH: South-WesternPublishing Co,
1992).

Seeuse of the tenn in Wood, 148.

See Wood, 3-4.

10Hilary Jenkinson,A Manual ofArchive Administration, 2nded. (London: Percy Lund, Humphries
& Co. Ltd., 1965), 2-6.

Preben Mortensen, "The Place of Theory in Archival Practice" Archivaria 47 (Spring 1999): 6.

12The Basle Committee on Banking Supervision in its paper on enhancing bank transparencycites
the need for the following information quality characteristics: comprehensiveness,relevance,
[See Basle Committee on Banking
timeliness, reliability, comparability and materiality
Supervision, "Enhancing Bank Transparency: Public Disclosure and Supervisory Information that
Promote Safety and Soundnessin Banking Systems (Basle, Switzerland: Basle Committee on
Banking Supervision, September, 1998)].

13
HarriS, 19.

14Written documents came to be acceptedas evidence before the courts with the first business
to the hearsay rule covering shop-books of tradesmen. The hearsay rule came
records exception by before
being around 1500 as juries began to rely on the evidence presented witnesses them
into from had
in court, rather than by going out and obtaining it themselves an informed person, as
[See John Henry Wigmore, A Treatise on the Anglo-American System of
been the earlier practice.

113
Evidence in Trials, 3rdEd., Volume 5 (Boston: Little Brown & Company, 1940), 9-19; 347-35 1;
369-370.]

15This definition, taken from the School of Library, Archival and Information Studies, University
of British Columbia, "Select List of Archival Terminology, " neatly summarizesthe Jenkinsonian
perspective. It is cited in Heather MacNeil, "The Context is All: Describing a Fonds and its Parts
in Accordance with the Rules for Archival Description, " The,4rchival Fonds: From Theory to
Practice, Terry Eastwood ed. (Ottawa, ON: Bureau of Canadian Archivists, 1992), 202.
Jenkinson's ideas are elaborated in his book, 4 Manual of, 4rchive, 4dministration, 2d ed. (London:
Percy Lund, Humphries & Co. Ltd., 1965), 2-6.
16
MacNeil, 201.

17John Roberts, "The Possibilities of AccountabWty," Accounting, Organizations and Society 16.4
(1991): 355-359.

18A paper by Verne Harris that discussesthe use of records as evidence in South Africa's Truth
and Reconciliation Commission is an interesting casein point. In this paper, Harris describeshow
South African courts overlooked the traditional rule against hearsayto allow for oral testimony in
support of land claims as it was felt that the official records were too greatly prejudiced in favour
of the ruling elite. (See Verne Harris passim).
19Roberts, 355.

20
Roberts, 359.
21
Roberts, 359

22Joni J. Young, "Getting the Accounting 'Right': Accounting and the Savings and Loan Crisis, "
Accounting, Organizations and Society 20.1 (1995): 55-80.
23
Jenkinson, 4.
24
Luciana Duranti, 6-9.

25Mark Poster, "The Mode of Information and Postmodernity," Communication Theory Today,
David Crowley and David Nfitchell eds. (Stanford, Calif.: Stanford University Press, 1994), 174.
26
Ibid.
2' Tom Nesmith, "StiH Fuzzy, But More Accurate: Some Thoughts on the 'Ghosts' of Archival
Theory, " Archivaria 47 (Spring 1999): 145.

28 See,
Another leading proponent of this viewpoint is the South African archivist, Verne Harris.
for example, his book Exploring Archives: An Introduction to Archival Idea andPractice in South
firica, 2 Ed. (Pretoria,
Ad National Archives of South Af ri
ca, 2000), in which he writes that the
is
meaning of the words archives and records a site of contestation. His own understanding of the
term is heavily influenced by the writings of Nfichel Foucault and Jacques Derrida, who see the
power (see pp. 18-23).
archive as a construction expressing relations of
29 See, Collins Dictionary of Sociology entry under social and culture ["Culture' and' oci
Collins Dictionary ofSociology, 2 ndEd. (Glasgow: HarperCollins Publishers, 1995)].

30Quoted in M. Haralambos and M. Holborn, Sociology: Themesand Perspectives (London:

Harper-Collins, 1996), 887-888.

31Brien Brothman, "Orders of Value: Probing the Theoretical Terms of Archival "
Practice,
Archivaria 32 (Spring 1991): 85 and 91.

114
32Brien Brothman, "Declining Derrida: Integrity, Tensegrity, and the Preservation of Archives
from Deconstiuction", 4rchivaria 48 (Spring 1999): 70.

33Brothman, "Declining Derrida, " 72.

34Brothman, "Declining Derrida, " 70.

35
Harris, 22.

36Eric Ketelaar, "Archivistics Research Saving the Profession," American Archivist 63.2
(Fall/Winter 2000): 326-327. Ketalaar calls for a study of what he terms "archivalization" that is
the processesleading to the choices involved in archiving. He writes: "People create, processand
use archives, influenced consciously or unconsciously by cultural and social factors. People
working in different organisations,create and use their records in different ways. (p. 329). He
. ."
argues that as archivists we must come to understand these processes better.

" Brothman, "Declining Derrida, " 78.

38Brothman, "Declining Derrida, " 79.

39The University of the West Indies, Introduction to Sociology: Reader, Vol. I (Bridgetown,
Barbados, University of the West Indies, 1998), 116. This section of the reader discussesEmile
Durkheim's study of threats to the social solidarity of industrial society.

115
Chapter Four: Competitive Viability, Accountability
and Record Keeping - The
Public Sector Analogy

Introduction

The previous chapter presenteda theoretical framework linking accountability

and

record keeping. To date, most research on the relationship betweenthesetwo

phenomenahas been undertaken in the context of the pubfic sector, though JoAnne

Yates' study of the use of communications technologies in American management

indirectly touches upon the relationship

I between accountability and record keepiMg in
'
a private sector context. The growing body of researchlinking development

administration,specificallypublic sectorreform initiatrves,and recordkeepmgcanbe

viewed as analogous to the theorised.linkages among private sector competitive

viability, accountability and record keeping. In establishingthat these relationships

are analogous, this chapter will demonstrate that the body of researchon development

administration and record keeping lends empirical support to the argumentsadvanced

in this study.

116
Drawing the Analogy: Competitive Viability, Accountability and Record
Keeping in Public versus Private Contexts

In the previous chapter, competitive viability was defined as the ability of private
I
sector business entities to function and develop in a sufficiently efficient mannerto

avoid Eaflureand ensure survival in a competitive market. Chapter two went on to

argue that both enviromnental and intemal orgamsationalfactors play a role M

acbieving and maintaining competitive viability. Effective decision-makingand

internal control are two significant contributors to achieving and maintaining

competitiVe viabifity. As orgarusations expand and decentrahse to maintam

competitive market position, the quality of decision-making and internal control may

become compromised unless supported by the effective operation of systems of

accountability. Chapter three advanced the argument that availability of quality

recorded information is critical to the effective operation of organisationalsystemsof

accountability and this objective is unlikely to be realised without appropriate record

keeping accountabilities and controls. The chapter concludedthat, In the absence

good record keeping, the type and quality of recorded information neededto sustain

effective accountability often will not be available. Without effective systemsof

sector entities are likely to experienceoperational inefficiencies

accountability private

if these are serious enough, become non-viable and fall.

and may, inefficiencies

Usually a businessentity is no longer competitively viable if it becomesinsolvent,

it its debt (over the long term). Similarly,

that is, when is unable to meet obligations

117
governments may be unable to meet their long-term debt obligations and therefore

be
might unableto function and developin a competitiveenvironment This wasthe
.2
3
case for many developing countries in the 1980S.
During this period a large number

were unableto meettheir debt obligationsand, as a result, defaultedon their loans.

The Third World debt crisis resulted from growing balanceof paymentsdeficits (ie,

an increasein the net value of claims by nationals of overseascountri'es on domest'Ic

economies)to which externaleconomicshocksM the form of the oil crisisandworld

depressionof 1979-1983 contributed This growmg debt burden hampered

.4
economic growth and development in poorer countries.

The mounting debt crisis in developing countries, and the threat to the stability of the
5
global financial system that this debt crisis posed led the Bretton Woods institutions
,
(le, the World Bank and the International Monetary Fund) to offer loan packages

linked to policy advice and technical assistanceaimed at economic stabilisationand

"structural adjustment." Drawmg upon by neo-class,cal econormctheory m which

markets are viewed as beig by

perfectly competitive and operate meansof voluntary

transactions on an equal basis between large numbers of autonomous, fully informed

entities motrvated by the desire to maximise their profits, Structural Adjustment

Programmes (SAPs) sought to achieve a boost in the supply side of the economy by

the removal of market imperfections to thereby redress balanceof paymentsproblems

bring to developing 6 Though applied somewhat differently

and prosperity countries.

in each country, SAPs tended to consist of such measuresas removal of import

quotas, tax and tariff reductions, a scaling back on social subsidies,reducing

118
government expenditure, deregulation of private sector operation, privatisation of

state-run enterprises, liberalisation of exchange rate policies, use of interest rates to

attract savings and constrain credit, strengthening of external debt management,

increasesM agricultural prices and energy prices, and removal of price controlS.7

Very early on, the World Bank and the International Monetary Fund concludedthat

public sector reform was a critical component of the economic reforms aimed at

achievffig economic viability and development in Third World countries. The neo-

classical economic theory that underpinned their developmentstrategiessupported

the view that stateinterventionis a sourceof marketiMPerfectiOn The consensus

_8
was that the governments of developing countries were beset by problems that

prevented them from effectively implementmg economic reforms. One World Bank

publication noted in 1983 that:

The disarray and ineffectivenessof sub-Saharanpublic administrations

threaten development efforts of governments and underminetheir ability to
carry out basic governmental functions. Capacity to make and implement
policy is reduced, revenuesgo uncollected, the little that is collected is poorly
allocated and much neededpublic servicesare poorly or not provided. The
engendered crisis of governmental administration is doubly serious at a time
when structural adjustment programmes are requiring key central government
to fundamental transformations the 9
institutions plan and manage in economy.

Thus, the generally acceptedview was that economic developmentin developing

countries was not possible without solving the problems presentedby Third World

governments.

Early public sector reform initiatives concentrated on privatisation and contracting

services or, m caseswhere govemment services could not be

out of govemment

119
privatised or contracted out, introducing private sector managementprinciples and

10
practices to the public sector. The early emphasison private sector approaches

reflected two interrelated influences on structural adjustment policies. First, it

reflected acceptanceof neo-classical econornic theory that saw state intervention as a

factor in market imperfection. Thus, structural adjustment pohclestended to focus

on

removal of market impediments causedby state interference in the operation of what

would otherwise be "

perfect markets. Second, there was a growing senseof

discontent in both developing and developed countries with changesthat had taken

place in public administration since World War H. Governinentsin many countries

had evolvedelaboratecentraliSedbureaucraciesin responseto more complexsystems

of administration. Over time, these governance systemsbecamedysfunctionaLbeing

too bureaucratic 12
and centrahsedto serve the purposesfor which they were intended.

In contrast, private sector entities were viewed as being more flexible and responsive

to market imperatives and, hence, served as a model of efficiency and effectiveness

for the public sector to emulate.

Initially, therefore, in emulation of private sector businessstrategies,public sector

reform initiatives often stressedcost containmentand fiscal restraintover and above

13
other objectiVes. Reform measureswere intendedto diminishthe role of

goverm-nentM the economy, reduce the influence of permanentofficials on policy

and/or the policy process and make government managersemulatethe private sector.

The goal of these reforms was to provide greater efficiency, results, performance and

for the money spent on government operations. The new public sector
value

120
managementpara igm was characterised by themes such as "empowerment-,

"improving service to clients" and "strengthening

efficiency in government. 714

The early emphasisof public sector reform initiatives

on privatisation and private

sector mamgement prmciples to bring about fiscal stabilisation did not lead to

significant change, however. 15 More was neededto produce fundamental

improvements in governance. As a result, public sector reform initiatives cameto

focus on the absenceof accountability, transparencyand the law in developing

rule of

countries. This shift in development strategy reflected not only the failure of earlier

approachesbut influences In development theory commg from the new mstitutional

economics (NIE). Proponents of NIE, such as Ronald Coase,Douglass North and

Oliver Williamson, reintroduced the state into developmenteconornIcs. 'Tor North

Third World countries provide examples of anti-development frameworks. Statist

regulation, iff-defined property rights and other constraints restrict rather than

stimulate economic activity. These conditions result in rent-seekmgand

redistribution, not rising productiVity. Organisationsthat operate within Third World

institutional frameworksare not inefficient;they are efficientat makinga society

6
.Y1
more unproductive. In Africa, asMamadouDia observes,the colonial legacy

meant that "new states became not only bureaucratic autocraciesbut also economic

and political monopolies, lacking in accountability, transparencyand the rule of IaNV'

which prevented effective implementation of policies aimed at achieving economic

17 To bring about real change in the public sectors of these countries, there
reforms.

emerged a consensusthat accountability, transparencyand the rule of law neededto

121
be mcludedas cornerstonesof public sector reform initiatiVes. For
example,in 1997,
the United Nations Development Programme published a policy paper "Governance
-
for SustainableHuman Development"
- in which it stated that
The United Nations Development Programme (UNDP) has been the
at
forefront of the growing international consensusthat
good governanceand
sustainablehuman development are indivisible. And we believe that
developing the capacity for good governance can be and be the
- should -
primary way to eliminate poverty.

Reflecting the new consensusthat good governance neededto go beyond an emphasis

on fiscal restraint, the policy paper went on to define good governanceas being

participatory, transparent and accountable. It is also effective and

...
equitable. And it promotes the rule of law. Good governanceensuresthat
political, social and economic priorities are basedon broad consensus'in
society and that the voices of the poorest and the most vulnerable are heard 'in
decision-makm*gover the allocation of development resources.19

As the UNDP policy paper mdicates, mitiatives directed toward strengthenig

democratic accountability now figured largely In developmentstrategiesand reflected

a growing view that governments Played an important role in establishingthe rules of

the game by which markets operate. Hence, development strategiesneededto target

cleanmg up these rules through reforms of overly bureaucratic and corrupt

governinents M developing countries.

Here, for the purposes of drawing an analogy between the linkages among economic

development, accountability and record keeping and those among private sector

competitive viability, accountability and record keeping discussedin the previous two

chapters, we must make a distinction between the notion of democratic accountabflity

122
 and good governanceas these concepts apply In the public sector, and accountability

and good governanceas they apply in the private sector. This study defines

accountability as "liability to give account of, and answer for the dischargeof duties
20
),,
or conduct. In a democraticpolitical system,electedofficialsgovern behalf
on of
citiZens to whom they are expected to be accountable for the way In which they

govern. Thus, normative definitions of good governance include the idea of

democratic accountability or government's accountability to the

people. In the

private sector, by contrast, accountability to citizens, or the public, is only expected III

industries that impinge upon the public interest, for example,banking (as be
will
discussedfurther in chapter five). In such cases,when democratic
accountability
intersects with the private sector, some form of regulation usually establishes
a
V---

framework for public accountability. Consequently, In the private sector context,

notions of good governance do not usuaByrest upon the idea of democratiC,or public,

accountability, but rather on accountability to shareholdersand other corporate

stakeholders.

In the public sector, below the level of the political directorate, public institutions (ie,

government departments and agencies) theoreticafly serve as the administrative

instruments of elected officials. Thus, public sector agenciesare accountableto

elected officials, and indirectly to citizens, for the way in which they operate to give

effect to government policies. Similarly, in the private sector, senior managers of

corporate entities are accountable to their board of directors who, in turn, are

to
accountable shareholdersfor the performance of the company. In both public and

123
private sector contexts there exist any number of internal administrative

accountability relationships.

The main point is that at the macro level there are differences between accountability

it
as applies M the public and private sectors. Only certain industries within the

private sector, becauseof the public interest in what they do, are accountableto the

people, whereas the basis of democratic goverment is built on accountability to

cft]Zens. At the rmcro level, or administrative leveL however, accountabil4 M the

public and private sectors operates in much the sameway. NIAnagersare responsible

to a directorate -m the case of the private sector, a board of directors and, M the case

of the public sector, elected officials - and there exist numerous other internal

accountability relationships.

This chapter has so far been able to show that developmentadministrators, through

their pohcies, have recognised that there are hnks among continuing competitive

for
viability which is necessary economic development, good governanceand

accountability and that this link is analogous to the links that this study argues exist

among private sector competitive viability, good corporate governanceand

that both
accountability. Development administrators clearly acknowledge macro-

(eg, interest rates, exchangerates, etc.) and nucroecononuc factors were responsible

for Third World balance of payments problems and debt and that they both play a role

viability and economic development of these countries. Further,

in the competitive

their policies reflect an understanding that good governance-a cornerstone of which

124
is accountability - ISone of the microeconomic factors critical to establishingand

sustaining competitive viability in the public sector, just as it is argued in tfisstudy

that it is necessaryto establishingand sustaining competitive viability in the private

sector. Finally, recent policy initiatives reflect the view that accountability, being

among other things a key mechanismfor achieving efficiency in operations, is a

precondition for economic viability and development.

An Overview of Research Linking Economic Development and Accountability

with Record Keeping

-D
Recent studies on development administration and record keeping provide empirical

evidence of links among public sector reform initiatives in developing countries -

with their goal of good governance, a key element of which is accountability -

economic development and record keeping. Since, it is argued, the relationships

among econofMc development, accountability and record keeping are analogousto

those among private sector competitive viability, accountabihty and record keeping,

the findings of this research offer some empirical support for the relationshipsposited

m chapters two and three.

The body of researchon public sector reform and record keeping be

must placed M

the context of literature on wider issuesof democratic accountability and record

keeping that has emerged over the last decade or so. This literature grew out of a

1989 chaflengeto archivists by Terry Eastwood, a Canadianarchivist and former

125
Chair of the Master of Archival Studies Programme m the School of Library,

Archival and Information Studies at the University of British Columbia, to "spirit an

understanding of archives as 'arsenals of democratic accountability and

-) , 21
contmulty .

Australian archivists answered Eastwood's call to action in 1992. Against a

background of goverment and corporate corruption in the 1980s,they set about to

explore the links among record keepmg, accountability and the role of the archival

and records managementprofession.22 Archivists at Monash University's Graduate

Department of Librarianship, Archives and Records, in developmga definition of

archives as the conceptual framework for the integrated archives and records

programmes offered by the University, advancedthe notion that the effective creation

of archivaldocumentsis required to "underpin the public accountabilityof

government and non-government organisations, freedom of information and privacy

legislation, protection of people's rights and entitlements. ).)23A desire to explore

..

this understanding of archival documents gave rise to a seriesof articles and research

papers, subsequentlypublished in Sue McKemnush and Frank Upward's Archival

Documents: Providing Accountability Through Recordkeeping, that linked

accountability with records and information management.

Subsequently, in 1996, Justus Wamukoya presentedthe first of the piecesof research

the links between public sector reform initiatives 'in developing countries
exploring

record keeping in his study of records and

management administrative reform
and

126
programmes in Kenya 24 While earlier literature on the relationship between
.

accountability and record keeping, in focusing on public accountability, was

concerned mainly with the question of protecting the public interest, Wamukoya's

study, in placing the discussion of the relationship between record keeping and public

sector reform in Kenya in the context of the literature on developmentecononUcsand

adniinistration, was the first to indicate that poor record keeping had negative

repercussions for the economic development of a country. His study was followed by

a 1997 study carried out by Pino Akotia on the managementof public sector financial

records and their implications for 25

good goverrunent. More recently, the

International Records Management Trust (hereafter referred to In this chapter as the

IRMr) has conducted research into the relationship between good governanceand

record keepmg. The ERMT'S study on the managementof public sector financial

records In sub-SaharanAfrica its

and impact on accountability and public sector
26
managementis of particular relevance and interest This body of research,in
.
linking record keeping with public sector reform initiatives aimed at good governance

and thereby economic development, lends support

empilriCal to the idea that there are,

indeed, linkages among private sector competitive viability, accountability and record

keeping as put forth in this study. It is to a detailed exploration of this researchthat

this chapter now turns.

The first of the three studies, and also the first to link development administration and

keepirig, is that by Justus Wamukoya completed m 1996. Wamukoya

record

of the relationship between records and

management
undertook an exanunation

127
 administrative reform as implemented in the Government of Kenya. He examined

current policies, procedures and techniques for, and the attitudes of various
agencies

in the public service to, the managementof records. Using data gathered from
case
studies of the Directorate of Personnel Management, the Civil Service Reform

Secretariat and the Ministry of Finance, he

was able to demonstratethe significance

of records managementM underpinning policy development, decision-makingand

accountabihty M the public service, notmg that:

Becauseof poor or inadequate record keeping systems,

many developing
countries today find themselvesconstrained in their developmentefforts and
to 27
unable provide efficient public services.

On the basisof his findings,WamukoyacaRedfor the adoption

of records

managementas a major component of administratiVereform In Kenya and other

developing countries as well as closer cooperation and collaboration betweenthe

Kenya National Archives and Documentation Service and the Directorate of

PersonnelManagement in the development of policies and proceduresaimed at

promoting the efficient and effective managementof records in the pubhc service.

Following Wamukoya's study, Pino Akotia produced a critical examinationof the

relationshipbetweenpublic sector financialrecordsmanagement

andgood

government through an analysis of the objectives, businessprocessesand records

systemsof the central administration of finance in Ghana. Akotia's study offers a

particularly relevant basis of comparison with the relationships explored in this study

becauseof its specific focus on financial records. Akotia argued that public finance is

a major instrument of constitutional, political and administrative control and that it

128
providesthe basisfor decisionmaking and the implementationof goverment

programmes. Accordmg to Akotia, fmancial records

provide evidence of how government has managed the nation's

...
resources. Records are the only basis for holding the Government accountable
for what it does or fails to do, why and how it does it and the results achieved
or targets Missed. Records provide evidence of good and badjudgments
displayed in adopting and carrying out public policies and of whether or not
requirements for the custody and managementof public resourceshave been
met. Together with regular audits, financial records managementprovides the
basis on which to measuregovernment's adequacyand the degreeto which it
has presenteditself as honest, efficient, well-meanig and accountable.28

He found that, where pubfic sector reform initiatives had included a records

managementcomponent, "restructuring of the records managementsystemsof

goverment was crucial for improving efficiency of econorMc policy refon-ns and

,29However, he goes on to argue that a whole

overall public sector management.

range of wider reforms In relation to strengthening planning and organisational

capacity In the civil service would have been enhanced had the Govemment of

Records Management Improvement Project been introduced earlier and been

Ghana's
30
giVen a wider remit.

Akotia notes, in particular, that the records managementreform project did not

financial draws the conclusion that "As a result, despite the

address records and

to strengthen financial the

management, overall
various policy measuresimplemented

to the Consolidated Fund remainedweak due to the

ability of government manage

financial ,,31
very poor and chaotic state of the existing paper-based records systems.

According to Akotia, the costs associated with failure to managefn=cial records

to efficiency enhancementsand the process of introducing

included impediments

129
accountabihty and transparency (as a means of preventing corruption) and pohcy
32
formulation.

The IRMT's 1998 study of the link between records and financial accountability in

sub-SaharanAfrica interest." This researchmarked a significant step

is also of

toward establishing,in a practicaLconcretemanner,the hnk betweenrecordssystems

and financial accountability. The results of this researchare instructive for

addressingthe issueson which this study focuses. The IRMT study basedits

conclusions on data collected in The Gambia, which, until 1994, was recognjisedas

one of the most successfuldemocracieson the continent with a government officially

to
committed a programme of good governance. Despite this view, many Gambian

officials and ordinary citizens recognised that there were abusesof Public expenditure

and that, In reality, the government was not accountable to the people. The

government's lack of accountability led directly to its overthrow in a coup on 22 July,

1994. The Armed Forces Provisional Ruling Council (AFPRC), which took over the

government, inunediately set about enhancmg transparency and prornotiIng

accountability by strengthening the role of the Auditor General and holding

commissions of inquiry to identify the perpetrators of econornic crime.

The ERMT researchteam was able to work directly alongsidethe investigating

lawyers for the conun'Lssionsof inquiry, which provided a unique opportunity to see

first hand how financial records managementaffects financial accountability. Their

led to
them conclude that lack of control of documentary evidencecontributed
work

130
to weak fmancial controls that permitted corruption and fraud to flourish The
in
34
Gambia.

Main Findings of the Studies

The studies outlined above all provide empirical data that

clearly establisheslinks

among economic development, good governance, accountability and record keeping.

Each of the studies present a number of specific findings because

which, of the

analogy that can be drawn between the links among econorMcdevelopment,

accountability and record keeping in the public sector and those among competitive

viability, accountability and record keeping in the private sector, shed light on how

poor record keepmg might affect private sector accountabihty and competitive

viability. What follows is a discussion of the main fmdmgs of these studiesorganised

into several broad thematic groups matching the assumptionsdiscussedin chapter

one.

Records Availability and Use

Each of the three studies presentedfindings on the availability and use of recorded

information in support of good governance, particularly those processesand policies

seenas being to
central restoring national econornic viability (ie, public sector

financial and personnel management). In the main, all three studies concludedthat

important information was not available in support of these processesand policies as

a result of poor records managementpractices. The result was that governmentswere

131
not able to fully effect public sector reforms aimed at strengtheningpublic sector

managementand, in consequence,were unable to fully effect practices and policies

aimed at achieving a greater level of economic development. The studies highlighted

a number of critical government functions and processesnegatively impacted upon by

poor record keepmg. These include: deciSion-making;personnelmanagement;

implementation of donor funded projects; expenditure control and reporting; revenue

collection; economic planning; debt management-,internal control and audit;

corruption and fraud prevention; financial reporting; and monitoring of adherenceto

financial regulatiOn and standards.

In addition to the fact that poor record keepingpreventedrecordsfrom being

to
available support key govermnent processesand policies, these studies also found

that public sector managersoften did not have a clear idea of what information they

to
actually needed in order efficiently and effectively execute governinent functions,

processesand policies. The same was true of donor agenciesaccordmigto

Wamukoya, who wrote: "... neither the governments nor donors fufly apprecmtethe

,35
need to link government policy mechanismsand the information sector ... Both

Wamukoya and Akotia attributed this lack of understandingto governments' and

donor agencies' failure to analysethe information required to support business

processesas part of restructurmg and reengineeringexeruses.

These studies also found that public sector officials often did not use recorded

information in decision-making or analysis. Wamukoya points out that the attitudes

132
of senioradministratorstoward the useof information for decision-making

the
under-valued role of information and the importanceof recordsand information

management. He cites a comment by David Osborne and Ted Gaebler, administrative

reform gurus, as indicativeof theseattitudes. Osborneand Gaeblerhaveobserved

that "... government managersare not, for the most part, used to having or using

information, especially for fOrward-looking purposes. And on many Issues,political

pressuresare often so great that data seemto be beside the point when decisionsare

made.,36 Similarly, Akotia notesthat within the Ghanaiancivil servicecomputers

generally were not used for analysis. Citing a study by Peterson, he pointed out that

the low level of computer-basedanalysisrelates to the fact that senior officers limit

37
the use of information in decision-making.

Attitudes to Records Use andManagement

The three studies also present revealing data concerning the attitudes of goverment

donor to record keeping and the value of recorded information as

and agency officials

a strategic resource.

All three studies present data that support the view that records managementis

not viewed as being a professional discipline

seldom an organisational priority and is

function. As these held

but instead, is seenas a low -level clerical evidence of widely

records managementin government, Wamukoya pointed to the

attitudes about

he experienced in conducting his own research. He encounteredextreme

challenges

133
difficulty collecting data for his study due to the indifference
public administrators

had to records managementand the generally low priority

with which they accorded

it 38 His experiencesled Wamukoya to write that "... despitegrowing awareness

.

about the importance of records management,most senior officials in the public

service accord it little recognition, treating it more like a clerical fiinction.

Consequently, poor organisation of records and ineffective control and retrieval

of
information has become a maj .or problem for most agenciesIII the public 3
Y, 9
service.

Warnukoya's findmgs are echoed in those of the IRMT and Akotia. Akotia found

that "... throughout the central administration of finance, records servicestend to be

viewed as a siMPle support function which will take care of itself. With little or no

managementsupport, general registry services have gradually deteriorated and are

presently a pale reflection of what they should be. 40

Wamukoya also observesthat most senior public officials contmue to give record

keeping a lower level ranking in relation to other govermnentalpriorities because

they remain unaware of the potential benefits of records managementto public

41
adnunistration. Uotia found a lack of awarenesson the part of governmental

authorities of the value of information as a strategic resource, which along with lack

of appropriate policies, resources and procedures, could be blamed for the poor record

keeping in respect of financial 42 The HWT study found that accountants,

records.

auditors and other senior public officials understand that records are neededfor

accountabdity, but are only just begmning to recognise the need for records

43 The study makes the additional observation that "There is a

management.

134
widespreadbelief that the [record keeping] problemis so prevalent,ingrainedand
"44
thankless that little can be done to IMProve the situation

Wamukoya and Akotia also found that donor agency attitudes failed to recognise

sufficiently the importance of good record keeping. Despite policies and aid

programmes that acknowledge the criticality of information to the state, Wamukoya

that
observes In Kenya no donor agencywas involved in a recordsmanagement

project m 1996 notmg that economic recovery programmesand pubfic sector

'45

reform programmes implemented with donor financial support have still not included

records managementamong the areasthat should receive urgent and significant

support. 46 Akotia agrees, makmg the observation that, in Ghanaas elsewhere,donor

agenciesmistakenly focused on the introduction of computer technology as the sole

information the 47 Moreover, they

solution to managementproblems In civil service.

did not provide a broad enough remit to Ghana's Public Sector Records Improvement

Project to support major changesM the managementof public finances.

Consequently, public sector financial managementimprovement initiatives have had

limited impact have 48

done.
a much more than they might otherwise

Training in Records Management

The HZMT study found that records professionalism in developing countries is

limited. Ac a result, records staff do not understand how legislati

10n affects the

of records, how to translate changing legal and regulatory

creation and use

135
requirements into practical systemsand how new teclinologies impact upon records

system design.49 The this lack of professionalismto the absenceof

study attributes

appropriate education and training in records management.

Warnukoya's study found that staff in government registries had received little, if

any, training M registry operations. He noted that this problem related to the fact that

registries were often used as dumping grounds for clerical officers who had failed In

other areas. Moreover, the situation was often worsened by lack of careerprospects

for registry personnel and the absenceof opportunities for training in records
50
manage e.

In regard to the managementof public sector financial records, Akotia's and the

HZW studies both pointed out that goverment accountantscreate and maintain

accounting records but have little or no background in records management. As a

result, they do not managetheir records effectively which, in turn, negatively affects

information financial " This discovery

the preparation of accounting and reporting.

has prompted the ERW to develop records managementguidelines for financial

52
recor s.

All three studies noted that attitudes of senior public officials, auditors and donor

be if
improved work is done to educatethem about the role of
agencies can only
"
development.
records in support of good governance and economic

136
Information and Records Management Practices

The three studies found an entire range of shortcornings with the way In which

recordedinformation was being managedin Kenya,Ghanaand The Gambia.

Among the most fundamental problems identified was the absenceof clearly defined

responsibility and authority for the record keeping function. More often than not,

there was no one agency with the authority to coordinate and regulate records

management. Instead, responsibility for record keeping was fragmented, usually

between a national archives authority and other government agencies. The studies

found that national archives services lacked the mandateand capacity to take on the

function of controlling and coordinating records managementthroughout the public

service. For example, M Kenya, Wamukoya found that the National Archives needed

to broaden its focus, as it only concentrated on schedulingfiles for permanent

preservation and destroying ephemeralmaterial. This di

approach id not adequately

provide for the managementof current and semi-current records. Records were

therefore not being managedas a key strategic resource of tmjor significance for

54
good governance, accountabflity and efficiency. Yet, as the IRMT study found,

good record keeping requires the existence of a strong records regulator.

management

It also gathered data that showed that the absenceof a strong internal records

regulator contributed to widespread non-compliance with legislative

management

for financial keeping.55

requirements record

137
Lack of a sufficiently well structured policy and procedural framework for the record

keeping function also led to weaknessesIn records systems. Akotia notes that

Colonial Financial Orders did not adequately define the statutory arrangementsfor

managing financial 56
records. Moreover, there was an absenceof policy on the

significance of information to public financial managementand no procedural manual

57
to provide clear and detailedguidelineson financialrecordsmanagement.

Wamukoya observed that ". although the Kenya Government has made
..

commendableefforts in supporting the Kenya National Archives and Documentation

Service *inits role as custodian of public records, a more comprehensivepolicy

mechanismembracing the managementof records through their entire life-cycle is

urgently required ... "8The ERMT study found that although government

procedures In The Gambia were comprehensivein describing the purpose, creation,

use and distribution of certain financial records, they provided little or no guidanceon

the control, storage or disposal of records m order to meet audit, accountability and

financial managementneeds.'9

All three studies observed the almost complete collapse of registry systems

throughout the civil service. Each study noted the ways In which collapse of the

registry systems has led to a host of common record keepMg problems such as

difficulties in tracing file movements

ineffective supervision of registry operations;

the location of closed files; delays in filing correspondenceresultmigin huge

and

backlogs; and inconsistency in file 60 All of theseproblems

numbering systems.

the integrity of recorded information as evidenceof public sector

compromised

138
businesstransactionsand hinderedits retrieval for useiii supportof efficient,

effectiveand uncorruptedpublic administration.

The studies by Akotia and the H?,MT found that the coflapseof registry systemswas

part of a general decline in public administration wherein informal practices

supplanted formal rules and which saw an institutional culture emergewhich made

little use of records As the ERAff noted: "Indeed the failure to create and maintain
.61

records systemswas sometimesmotivated by the desire to conceal financial and other

62
1,,
uTegularities.

Wamukoya's study also revealed the existence of information flow problems. For

example, in the Nfinistry of Fmance, all information flowed through one central

registry, a registry that did not operate weH to begM with. This practice both

reflected and reinforced the rigid, bureaucratic and centraliseddecision-makingand

commurucation structures m the nunistry. These structures undennined the

the Civil Service Reform initiatives and fi-ustratedattempts to improve

objectives of

the country's governance systems.6' Akotia also found that difficulties in the flow of

information contributed to problems, particularly in terms of budget preparation, with

64
monitoring and control.

139
 The Introduction and Use of Computers

All three of the studies found that although donors

recognisedthat the public service

suffered from information related problems they saw solutions being provided

through the introduction and application of computer technology,

which led to a

growing emphasison computertsed.information systemsas a component of civil

6'
service reform . For example, many developing countries have introduced new

computerised personnel and financial managementinformation systemswith

assistancefrom the World Bank and other donor agencies.Wamukoya statesthat

since the advent of public sector reforms, the policies adopted by most
...
governments M developing countries and donors alike have tended to accord
information technology a high priority, with records management
receiving a
low priority in terms of organisational placement,staffing and budget
66
allocation.

He goes on to note that

both government and donors defme information narrowly in terms of

...
computerization and tend to view computers increasinglyas 'solutions to the
managementof the information required to deliver "'
effective public services.

However, the three studies poirit to the fact that many of these MitiatiVeshave met

with limited for

success a number of reasons. One such reasonis a failure to link

computer systemswith paper-basedsystems. This has resulted m severalproblems as

follows: data in managementinformation systemsfrequently have beenunreliable

and inaccurate and paper record keeping systemsundermined;there is no framework

for managing records in electronic form; there is a lack of integration of computer

systems;and there is httle capacity for computer systems.

140
 All three studies attribute many of the shortcomings
of computer technology to the
fact that these systemshave been developed
without consultation with records and
information managers. Programmers and information technology
specialistsare

principally concerned with issuesof accessand retrieval.68 This has meant that

important issuessuch as linkage with older paper-basedsystemsand the integrity of

electronic records have been overlooked. Akotia arguesthat govermnentswould

have avoided many of these problems if they had

involved records managersIn

planning for the introduction of computer technology. He goes on to make the point

that their involvement would have dealt with issuessuch as the accuracy of the
source
data, managMigpaper-basedinput and output data, and
managementof electronic

records. They would also have raised issuesconcerning the protection of vital

records and disaster planning and recovery. In addition, they would have ensuredthe

availabihty of system documentation and a safe storage environment so as to

69
strengthen the reliability and trustworthiness of electronic records.

Record Keeping and the Development Agenda

Recent development programmes and initiatives reflect an emerging recognition that

good record keepmg supports accountabihty and that this, m turn, supports the

70
development. In
objectives of good governance and the attainment of economic

Ghana, Phase Two of a World Bank civil service reforin programme included the

improvement of records and information managementas a meansof strengtheningthe

institutional and operational structure of the Office of the Head of the Civil Service

141
and the Management Services DiVision.71 By 1990, the UNDP had its
established

Aid Accountability Initiative (later known as the Programme for Accountability and

Transparency [PACT]). This programme recognised the needto account for public

funds to meet accountability requirements and that lack of accountability constituted

72
to
a major obstacle good governance and economic development Through its
.
PACT Progranune, the UNDP forged links with organisations working toward

records managementon a global scale, Including the International Council on

Archives (ICA), the IRMT and the Association of Records Nbnagers and

Administrators (ARMA) International 73 The UNDP's interestiin f orgmg alliances

.

with records managementassociations evidenced recognition of the fact that well

managedrecords are neededto support accountabihty and provide the basis for

transparency.

As encouragmiga sign as these initiatives are, very little has changedin terms of

Wamukoya's and Akotia's observations that development agenciesfall to recognise

the importance record keeping in terms of the successof development

sufficiently of

initiatives even though they may recognise lack of quality information as a problem.

Development administrators still pay scant attention to record keeping in the policies

As evidence of this, we need only cite the 1998/99

and strategies they recommend.

World Bank World Development Report.

The report identifies knowledge related problems as presenting obstaclesto

and social well-being. One such problem relates to what the

advancing economic

142
authors of the report define as "information problems", that is a lack of knowledge

about such attributes as "the quality of a product, the diligence of a worker, or the

creditworthiness of a firm. " which is critical to effective "

markets. The report's
..

authors point out that mechanismsto alleviate information problems, such as product

standards,training certificates, and credit reports, are fewer and weaker in developing

countries.

The report acknowledges that information failures are a common problem for

financial mstitutiOns. The inabihty to properly assessand monitor dfferent types of

financial risks, such as the risk that an assetor loan will becomeunrecoverableor that

there will be a delay in the servicing of a loan, is an important causeof bank failures.

Failure to process information effectiVely can contribute to bank collapse. For

example, the authors of the World Development Report cite researchthat IMPlicates

information deficienciesof this type, coupledwith marketfailure to fully and

efficiently process available information, in the collapse of East Asian financial

75
rmrkets m 1997.

Thus, the report's authors argue, the ability of banks and banking regulators and

supervisors to gather information it

and accurately assess ISvital to the overall health

of banksIn partiCularand financial systemsIn general. The authorsof the report

the further point that effective information processing is supported by strong

make

accountability, which, in turn, ensurethe flow of required information.

systems of

They see systems of accountability as being strengthenedby the introduction of

143
accepted accountmg standardsand regular audits. For example,they maintain,

accounting standardshelp in the accurate assessmentof the health of banks by

providing reliable information on loan classification and concentration, on the

realistic valuation of collateral, and on loan loss 76

provisionmg. They point to

empffical studies showing that there is a high correlation between weak legal and

accounting systemsand countries with low incomes, suggestingthat a better

information environment, aided by strong accountability systems,leadsto healthier

banks which, in turn, contribute to financial market growth and stability.

Though accountMigand audit standardsand regular internal audits will no doubt

strengthen accountability, the researchby Warnukoya, Akotia and the M-Nff suggests

that to follow only these strategies will not Yield the desired results. Effectivehy,

managedrecord keeping prograrnmes also will be neededto strengthen

accountability. These studies of the public sector linking poor record keeping,

information problems, and lack of goverriment accountability with failure to effect

that research into the causesof banking failures must not

public sector reform suggest

overlook the important role of organisational record keeping practices as a source of

information problems. Even where strong accounting standardsand auditing

keeping may prevent banks and bank regulators

practices are in place, poor record

from obtaining the information they need to managerisk, effectively monitor bank

financial Empirical exploration of casesof bank f1

a lu res,
practices and prevent crises.

Jamaican financial crisis affords, can reveal whether these assertionshold true.
as the

Armed with a better understanding of the relationships among record keeping,

144
accountability and competitive viability, it is possible to develop more effective

policy and strategies to avoid the causesof collapse in banks and, possibly, other

types of commercial enterprisesas well.

Conclusion

This chapter has argued that relationships among economic development,

accountability and record keepIng M the public sector are analogousto those among

private sector competitive viability, accountability and record keeping. The concept

of competitive viability is applicable to the public sector if viewed as a country's

ability to remain competitive in a global marketplace and avoid being unableto repay

its debts. Though there are many definitions and paradigmsfor economic

development, competitive viability is an unportant precondition. SMcethe early

1980s, development strategies have placed an emphasison economic reforms aimed

at improving the chancesthat developing countries could reduce and repay their debt

obligations. However, there has been early recognition that macroeconomicreform

alone would not lead to significant improvements in the competitive viability of these

countries. Institutional reforms dedicated to strengtheninggovernancealso would be

needed. This ILS

analogous to the argument, advancedin -chaptertwo, that

macroeconomic factors alone do not support the competitive viability of private

sector entities; endogenousfactors, in particular, effective systemsof accountability,

are also significant. In the public sector, donor agencieshave come to view

accountability as underpinning good governance. This study arguesthat this iLs

equally true of good corporate governance.

145
 There is a growing body of empirical evidence to
show that clear relationships exist

among economic development, accountability and record keeping. Studies concerned

with record keeping and public sector management 'indeveloping countries by Justus

Wamukoya, PMo Akotia and the IRMT provide data to demonstratethe links.

Recently, some donor agencieshave taken stepsto

establIShprogrammesthat midicate

their acknowledgement of these relationships although, overall, development

policies

and strategies still focus little on eliminating poor record keeping as a meansof

resolving information problems that undernune economic development. Based on

this argument, the fmdmgs presented in the three studies discussedin this chapter

have been used to provide empirical support for the posited relationships
among

private sector competitive viability, accountability and record keeping outlined in

chapters two and three.

End Notes

' JoAnne Yates, Control Through Communication: TheRise ofSystem in American Management
(BaltiMore, Maryland: John Hopkins Press, 1989).

It is recognisedthat given the social role of the public sectorother non-economicdefinitions of

competitive viability equally could be used. For example, when the public sectorfails to meet the
social or economic expectationsof citizens, citizens may lose faith in the political directorate. In
extreme cases,such loss of faith may lead to loss of political power, either by legitimate means(le, in
an election) or non-legitimate means (le, a coup).

' There is some debateas to whether the Third World debt crisis of the 1980swas merely a liquidity
problem or signified *insolvency. Beatriz Armendariz de Aghion and Francisco Ferreira, in surveying
the academic literature of the 1980s, argue that while the crisis was initially Viewedas a liquidity
problem, academics later came to view it more as an insolvency problem. See Beatriz Armendariz de
Aghion and Francisco Ferreira, "The World Bank and the Analysis of the International Debt Crisis,"
The ArewInstitutional Economics and Third World Development,John Harriss, JanetHunter and Colin
M. Lewis eds. (London: Routledge, 1995), 221-226.

146
4 Paul Mosley, "Structural Adjustment: A General Overview, 1980-9,
" Current Issuesin Development
Economics, V.N. Balasubramanyamand SanjayaLall eds. (London: MacMillan Education Ltd.,
1991),
225.

The threat to global financial stability aroseas a result of the high level
of commercial bank exposure
to Third World debt. Measured in terms of outstanding loans to lowermicomedeveloping
countries as
a share of total commercial bank loan porffolio, LDC loans rose from 49.6 % in 1975to 61.5% n 1978
[Armendariz de Aghion and Ferreira, 219].

6 Howard Stein, "Institutional Theories

and Structural Adjustment in Africa, " TheNew Institutional
Economics and Third World Development, John Harriss, JanetHunter
and Colin M. Lewis eds.
(London: Routledge, 1995), 109-132.

Mosely, 223 and 229; Stem, I 11.

" Stein, 110.

9 The World Bank, A GovernanceApproach Civil ServiceReform Sub-Saharan

to in Afilca: Improving
Effectivenessand Efficiency (Washington, D. C.: The World Bank, 1983),2 quoted JustusMuranga,
in
Wamukoya, "Records Management and Administrative Reform Programmes Kenya,"
Mi unpublished
PhD thesis, University of London, 1996,76.

Wainukoya, 28.

" Stein, I 10-111.

12
fbid, 29.
13
Wamukoya, 142-143.

14D. J. Savoie,Globalization Governance (Ottawa: Canadian Centre for Management

and
Development, 1993), 12 & 16 quoted in Pmo Timothy Akotia, "The Managementof Public Sector
Financial Records: The Implications for Good Government," unpublishedPhD thesis.,University of
London, 1997,33.

An IRMT study notes that, "Despite three decadesof developmentaid most African countrieshave
not improved significantly since independence." The study goesonto Citeseveralreasonsfor this
failure basedon an extensivereading of developmentadministration literature. Reasonsgiven include:
1) the legacy of colonial systems;2) lack of ownership of the reform process;3) disconnection
betweenthe state and civil Society;4) difficulty in implementing change;5) the deterioration of
financial managementsystems;6) the collapseof record systems;and 7) poor communicationsand
technical infrastructures. [Kimberly Barata, Piers Cain and Anne Thurston, "Accountability and
Public SectorManagement: The Management of Financial Recordsin sub- SaharanAfrica: A Final
Report" (London: IRMT, 1998), 18].

16John Hams, JanetHunter and Cohn M. Lewis eds., The New Institutional Economicsand Third
World Development (London: Routledge, 1995), 6.

17Marnadou Dia, A GovernanceApproach to Civil ServiceReform in sub-SaharanAfrica, World Bank

Technical Paper No. 225 (Washington, D. C. - The World Bank, 1993), 12 quotedM Waniukoya, 34.

'8 "Governance for SustainableHuman Development," United Nations DevelopmentProgramme,

1997, online, Internet /www.
(http-. undp.org), 2 February, 2000.

147
 Ibid.

2o The Oxford English Dictionary, p. 87.

2' SueMcKenimish and Frank Upward, " Introduction, " Archival Documents:Providing
Accountability Through Recordkeeping, Sue McKeninlish and Frank Upward, eds. (Melbourne:
Ancora Press, 1993), 2.
22
McKemmish and Upward, 1.
23
Ibid.

24Wamukoya
passim-
25
Akotia passim.
26
IRMT passim.
27
Wamukoya, 62.
28
Ibid, 223.
29
Akotia, 16.
30
Ibid.
31
Akotia, 17.
32 ibid.

33
IRMTpassim.

34For more on how records were usedin The Gambia to prove corruption in court and how missing
those of corruption and fraud, see The Return to
records impeded the legal prosecution of suspected
Documentary Evidence in The Gambia, dir. IRMT, videocassette,
Democracy: Accountability and
UNOPS, 1997.

" Wamukoya, 134.

(New
Government. York, N. Y. Penguin
-. Books, Inc.,
36David Osborneand Ted Gaebler,Reinventing
1992), 359 quoted in Wamukoya, 79.

37
Akotia, 272-273.

lbid, 181-182.

39
Akotia, 212.
40
lbid, 241; IRMT, 50.

4lWarnukoya, 146.

42
Akotia, 261.

148
43
IRMT, 2.
44
lbid, 84.
45
Ibid, 227.
46
Wamukoya, 230.
47
Akotia, 318.
48
lbid, 317.
49
IRMT, 2.

'0 Wamukoya, 146-147.

" Akotia, 252; MMT, 11.

12Kimberly Barata, Piers Cain and Dawn Routledge,Principles and Practices in Managing Financial
Records: A ReferenceModel andAssessmentTool (London: IRMT, 2001).

" See for example ERMT, 52.

54Wamukoya, 148.

55
IWT, 5 1.
56
Akotia, 242.
57
Ibid, 255-256.

5" Wamukoya, 141.

59
IRMT, 11.

60SeeAkotia, 235-241 and Wamukoya, 146,190 and 191.

61Ibid, 64-68; IRMT, 58.

62
IWT, 58.
63
Wamukoya, 206.
64
Akotia, 243.
65
Wamukoya, 138.
66
Ibid, 218.
67
Wamukoya, 232-233.
68
IRMT, 2.
69
Akotia, 278-279.

149
70Despite theserecent initiatives, developmenttheory still doesnot recognisethe needfor supporting
records managementand the establishmentof a records managementregulator FRMT, 28].

" Akotia, 104. Akotia, however, commentedthat reform of records and information managementdid
not have a wide enough remit in relation to financial records and therefore efforts to improve public
sector financial management were not as effective as they might otherwise have been.
72
lbid, 299; IRMT, 47-48.
73
Akotia, 300.

74 World Bank, World DevelopmentReport 199819(Washington, DC -.The World Bank and Oxford
University Press, 1999),83.

" lbid, 82.

76World DevelopmentReport, 90.

150
Chapter Five: Competitive Viability, Internal Control and Accountability in the
Banking Industry

Introduction

The first two chaptersof this study set out a theoreticalframework linking

competitive viability, accountability and record keeping,while chapterfour found

empirical support for the theorised.link in researchon the relationshipsamongrecord

keeping,public sector reform initiatives and economicdevelopmentin Africa.

Further empirical support for this link is sought in the experiencesof collapsed

Jamaicancommercialbanks in later chapters. However, in advanceof exploringthe

Jamaicanfield researchdata.,somebackgroundinformation on the bankingindustry is

necessary.

Aside from aiming to familiarise the readerwith significantaspectsof the banking

industry, this chapter seeksto illustrate that the literature on bankinglendssupportto

the ideasput forth in chapterstwo and three about the relationshipsamong

keeping. Basedon the literature, this

competitive viability, accountability and record

chapter presentsexamplesof how failures of bank internal control a

systems, major

151
component of which is accountability, have contributed to bank failure. It is argued

that accountability structures, systemsand procedures,as an important

meansof

managingand controfling a range of risks associatedwith bankingoperationsand

maintainingan accuratepicture of financial performanceand position, underpin

banks' competitive viability. This chapterthen goes on to discusshow

quality
information and communication,a prerequisiteof which is good record keeping,is

viewed as being a critical elementof banks' systemsof accountabilityand internal

control.

What Banks Do

Traditionally, banks have played an important role in the economy as intermediaries

betweendepositorsand borrowers. Arising ftom their role as intermediaries,banks

offer two main products: 1) deposit products and 2) loan products. Banks generally

use deposit products to fund their loan products. Thus, we may view the business
of

banksas both managingliabilities (liabilities being depositsthat pay out moneyon

demandor at somefuture date) and managingassets(assetsbeing loansand

investments)-' Paymentsystemsare by-products of and facilitate banks' role as

2
intermediariesbetween depositors and borrowers.

The Economic and Social Role of Banks and the Need for Banking Supervision

in virtually all countries around the world, whether developedor developing

152
economies,the banking industry is one of the most heavily regulatedcommercial

sectors. Banking is regulatedfrom "cradle to grave" from processingof applications

-
for licensing for as long as a bank remainsin business. The
needfor tight regulatIon

of the banking industry is due to the crucial role financial intermediation

playsin the

economy and to the fiduciary responsibility bankshaveto thosefor whom they hold

money. In acting as intermediariesin the mobilisation of resources,banksare ableto

influencethe direction, pattern and flow of national resourcesthereby

affectingthe

rate of economic development. They are able to fulfil this role becausethey help to

provide saverswith highly liquid assetsat lower levels of risk while giving investors

to
access a larger pool of resourcesfor investmentfinanceat a lower cost and in a

more suitableform than would be possibleby relying on saversand investorsto find

one another. Banks' role as financial intermediaries is particularly important in

economieswith relatively undevelopedcapital markets suchas in developing

economiesbecauseinvestors do not have accessto other sourcesof funding through

equity financing. Banks also have a central role in the execution of the goverment's

in
monetary policy and preserving overall balance in the economy.

It is for thesereasonsthat regulation of the banking industry is consideredimportant.

Whether banks perform their functions well may determine"the degreeof successof

the developmentefforts, particularly if they make conscientiousefforts to mobilize

reservoirs of funds for allocation to entrepreneurs for investment in projects with the

highest rates of social return.-)1,4

In performing their financial intermediationfunction,

in the best interestsof their depositorsand society,banksare expectedto ensure

of
management assetsand to guaranteethe safety of depositor'sfunds. They
prudent

153
are expectedto adherestrictly to safe and sound bankingpracticesand maintain

adequateinternal control measuresto prevent incidencesof fraud, forgeries and other

financial rnisdemeanoursin order to ensurestability

and engenderthe public's

confidencein the financial system. The argumentfor prudentialregulation lies in the

fact that bankers,not alwaysbeing motivated by depositors'

and society's interests,
do not necessarilyoperatetheir banks in a mannerthat
will guaranteethe safetyof
depositors' funds, the viability of the bank, and the health the financial
of system.

Types of Banks

There are two major categoriesof banks:wholesalebanksand retail banks.

Wholesalebanking usually entails the provision of servicesto a smallnumberof very

large customers, such as corporations or governments. This type of banking is largely

inter-bank; that is, banksuse the inter-bank marketsto borrow from and lend to one

another. American investmentbanks and UK merchantbanksoffer examplesof

wholesalebanking activity.5 Retail banking, on the other hand,entailsthe provision

of basic to
services a large number of small customers. This type of banking

traditionally hasbeenmadepossibleby having a high numberof branchesin places

like shoppingcentres,college campuses,industrial estatesand high or main streetsof

cities and towns.6 Increasingly,thesetypes of banksalso deliver their services

through channelssuch as the telephoneand the internet.

Commercial banking is actuafly an American term referring to both wholesale and

154
retail banking activities, but not investment 7
banking. In Jamaicanlaw, a commercial

bank is a bank licensedunder the provision of the Banking Act to

carry out banking
business.8 The Banking Act of Jamaicadefinesbankingbusinessas "the business
of

receiving from the public, on current account or deposit account,moneywhich is

repayableon demandby chequeor order and which may be investedby way of

advancesto customersor otherwise; and such other businessof like businessasthe

Nfinister may, by order, prescribe."9 Thus, this study concentrates on the traditional

role of the bank as deposit taker, lender and maker of payments,primarily to small

in
customersas retail banking.

Types of Banking Systems

There are two basic models for banking systems:universaland non-universal. The

banking laws of eachcountry reflect which model hasbeenadoptedin that country.

The universal bank model permits banksto engagein a wide rangeof financial

activities, including a full range of traditional banking and securitiesactivities.

Universal banking refers to the provision of all or most of financial servicesunder a

largely banking 10 This type of banking activity may include

single, unique structure.

intermediation;trading of financial instruments,foreign exchange,andtheir

derivatives; underwriting new debt and equity issue;brokerage;corporateadvisory

services,including mergersand acquisitionsadvice; investmentmanagement,

firms in the bank's " An

insurance;and holding equity of non-financial portfolio.

increasingnumber of countries follow universalbanking for

practices, example,

155
Canada,France and the UY, and the EuropeanUnion allow universalbanking." In

thesecountries, banks are permitted to operate as fully integrateduniversalbanksthat

supply a complete range of financial services from one institutional entity.

In banking systemsthat are not universal, the sametypes of financial servicesmay be

offered, but not under the auspicesof a single banking structure. In fact, the laws of

countrieswith non-universalbanking systemswill prohibit the degreeto which banks

may becomedirectly involved in non-bankingactivities. The underlyingreasonfor

theseprohibitions is to establishwhat might be called fire walls to preventbanksfrom

engaging in highly risky activities that may affect the soundnessof their banking

operationsand thereby the safety of depositors' funds. This bank model reflectsthe

theoretical situation in Japan and, until very recently, the US. In practice, in the US

to
and, a lesserextent Japan,market and competitive forces have largely displacedthe

narrowly defined specialisedbank models. Indeed, these led

pressures to passageof

new banking legislation in the US in 1999 that has seenthe country adopt a more

banking 13
approach. In theory the Jamaicanbanking systemis non-
universal

but, as shall be discussedin greater detail in the following chapter,in reality

universal

became by default during the financial crisis as a result of the formation of

it universal

large financial conglomeratesowning both banking in

and non-bankingsubsidiaries

there interconnectionof both transactionsand lending.

which was considerable

156
Competitive Viability in Banking

In chaptertwo, competitive viability was defined as the ability of private

sector
businessentities to function and develop with sufficient efficiencyto
avoid failure and
in
ensuresurvival a competitive market. In the context of banking, competitive

viability simply refers to the ability of a bank to function and developin a way that

avoids failure and ensuresthe continuing operation of the bank.

In many casesbanks do fail and are liquidated (ie, their assetsare sold off). However,

in other casesbanks actually are not allowed to fail becauseof concernsabout the

effects of failure on the stability of the financial system. Often, if governments or

regulators perceive that a bank is "too big to fail" they may step in to rescue it. For

this reason,bank failure usually is defined as insolvencyleadingto liquidation,

mergerwith a healthybank under governmentsupervision,or rescuewith the help of

state financial support.14 This is the definition of bank failure to be in

used this study.

Banking -A Risky Business

The competitive viability of banks essentially rests on their ability to manage a range

in
of risks arising the normal course of bank businessactivities of lending, deposit

taking and making payments. As one banking authority hasnoted: "Banking is about

taking bankers " 15 Banking is so

taking risks ... without risks, cannotmake money.

about risk that banking expert Joel Bessisdescribes

the bank as a "risk
much

157
 "
machine. 16 It is important for banks to managetheserisks, however,
particularly

becausebanks are more highly leveragedor gearedthan other types of businesses.

That is to saythat bankshave a higher ratio of risk assetsto shareholdercapital than

17
most other types of enterprises. This financial structure makesbanksrelatively

more susceptibleto insolvency if risks are not managedproperly.

The traditional areasof banking risk generallyidentified in the literature are: 1) credit

risk, 2) liquidity risk, 3) market risk and 4) interest rate risk. 18 These discussed
are

below. Despite the compartmentafisationof risks in the bankingliterature, manyof

theserisks are inter-dependentand, consequently,bank risk analysisand management

19
now places greater emphasis on assessinggroups of risks.

Credit Risk

Credit risk is one of the oldest types of risk in banking and, as Joel Bessispoints out,
).)20
in
"is paramount terms of the importance of potential losses. Each time a bank

makesa loan, it takes a risk, known as credit risk. Credit risk commonlyarisesas a

result of the risk that a customerwill fail to comply with their obligation to servicea

debt. Failure to comply may refer simply to a delay in making a payment or to

default the loan.21 Credit risk also occurs when the customer'scredit
outright on

standing declinesin any way.

A conunon causeof credit risk is large exposureto a singleborrower or group of

borrowers. Large exposurescan also arise as a result of concentrationsof

related

158
lending to a particular type of industry, economic
sector, or geographicalregion, or by
having setsof loans with other characteristicsthat
makethem vulnerableto the same
22
economic ctors.

Connectedlending, which is the extensionof credit to individuals firms

or connected
to a bank through ownershipor through the ability to exert direct or indirect
control -

also posescredit risks, as suchlending decisionsare not alwaysmadeon the basisof

an objective assessmentof the risks involved and thereforecanlead to defaultson

loans. Connectedparties include a bank's parent organisation,major

shareholders,

subsidiaries,affiliated entities, directors, executiveofficers, and firms controlled by

23
the same groUp.

Increasingly,credit risk also arisesin a bank's investmentandtrading portfolios and

in other banking activities as a result of new methodsfor minimising,or hedging,

againsttraditional forms of credit risk and the provision of new bankingservices(eg,

24 25
assetsecuritisation , interbank lending and overnight deposits). In either case,the

value of the bank's assetsdecline as a result, which canthreatensolvency.

Banks managecredit risk by meansof knowing their ctstomersin order to be ableto

their
assess credit worthiness; effective board and seniormanagementoversightof

credit decisions;written policies and procedureson lending; of asset

assessment

quality and loan loss provisioning; creating and maintaining appropriate loan

documentation; establishingprocessesand analyticalcapabilitiesfor ongoing

monitoring of the condition of the loan book including

and other assets, loan

159
concentrations;and establishingprocessesfor dealingwith problem loans.

Liquidity Risk

Liquidity is an excessof current assetsover current liabilities. When bank has

a
insufficient liquidity it may experienceinsolvencyand bankruptcy. Joel Bessis
notes,
however,that extremeilliquidity is often the result of other risks, for example,

important lossesdue to the default of a high-end 26

customer. This, in turn, can cause

a run on the bank or the closing of credit lines by other institutionsthat createsa

shortageof funds leading to extremeilliquidity and fatal risk.

Liquidity risk also refers to difficulties raising funds at a reasonablerate in retail or

wholesalemarkets. Problemswith raising funds on the marketsmay arisedue to

temporary periods of illiquidity in the market itself, which forces the cost of money

up, or as a result of the characteristicsof the bank: its funding needs,stability,

27
reputation and so on.

Liquidity risk is usually the normal outcome of daily bankingtransactions. These

transactionsproduce a maturity gap betweenassetsand liabilities. For example,a

bank may collect short-term depositsbut lend long-term. Given the gap between

maturities (when the bank must pay out on the deposit it

and when wiH receivefunds
28
from the loan) there exists the potential for a lack of liquidity. Thus, banksmust

manage maturity gaps in order to avoid problems with liquidity.

carefully

160
D-
Responsibility for ensuringadequatelevels of cashand working capital to meet daily

liabilities and unexpectedcircumstancesusually falls within the treasurymanagement

function. This function generaflyhas the responsibility of managingmaturity gaps

as well by meansof a processknown as assetand liability management(ALM). Most

banks also have Asset and Liability Committees(ALCOs) that facilitate board and

senior managementoversight and overall coordination of the ALM function.

Market Risk

Market risk is the risk of declinesin market rates or prices, including interestrates,

foreign exchange rates and equity and commodity prices. The value of a bank's

portfolio of traded instruments- such as equity sharesor bonds - will be a function of

29
its market price, coupon coupon frequency, time, interest rate, and other factors.
,
Fluctuations in the price of an instrument may be due to broad changesin market

prices or from in
a shift the price of a particular instrument. Market risk is becoming

an increasinglysignificant risk for banks as they move into more off-balancesheet

banking involving the trading of market-basedinstruments(eg, futures, forwards,

to
options, and swapS)30 protect, or hedge,againstother types of risks. While treasury

in Asset and Liability Management (ALM) functions,

management, and particular

traditionally have included only the management of liquidity and interest rate risk

discussed below, recently they have expanded to include the containment of market

risk using such techniques as value at risk (VaR), stress simulations and capital at risk

(CAR) calculations. 31

161
Interest Rate Risk

Interest rate risk is a type of market risk. In market-based

economies,most of the

activities of a bank generaterevenuesand costs that are relatedto interestrates.32 The

instability of interest rates is what generatesthe risk. Thus, interest

rate nsk is the risk

that there will be a decline in earningsdue to movementsin interestrates. It arises

primarily from mismatchesin both the volume and maturity of interest-sensitive

assets(eg, loans), liabilities (ie, interest earningdeposits)and off-balancesheet

items.33 For example,a bank will experiencea reduction in its earningsif there is a

mismatchbetween its fixed and variable rate loans. If the bank hasan excessof fixed

rate loans, it will be vulnerableto rising interest ratesbecauseit will lose the

additional revenuethat could have beengeneratedfrom the loan as a result of the

higher rates but still haveto pay out more on variablerate deposits. Conversely,if a

bank has an excessof fixed rate deposits,it will be vulnerableto falling interestrates.

Interest rate risk can arise as a result of rate fluctuations,imperfectcorrelationin the

adjustmentof the rates earnedand paid on different instrumentswith otherwise

in
similar characteristics the maturity and re-pricing of assets,and express or implied

IiOS. 34
options imbeddedin bank liabilities
assets, and off-balancesheetportf
0 An

unexpected shift in interest rates can have a serious impact on the profitability of a
35
bank Consequently,banks must maintain a good balanceof assetsand liabilities by
.
carefully managing interest rate risks. Again, banks use the ALM process to achieve

this objective.

In addition to the major types of bank risks discussedabove,there are many

162
additional and related risks that must be mentionedsincetheserisks also can threaten

bank solvency. Many of theserisks are not unique to the banking sector. The

following are but a few of the more significant additional areasof risk:

settlements/payments risk, which occurs when one party to a transaction pays money

or delivers assetsbefore receiving its own cash or assetsthereby exposing it to

potential liquidity problems; foreign exchangeor currencyrisk, which arisesunder

any systemof flexible exchangerates as a result of the fluctuation of those ratesand

be
can categorisedas a type of market risk; sovereignrisk, which may be viewed as a

specialclassof credit risk wherein a loan to a governmentmay not be repaid; fraud;

operationalrisks, which can encompassmany different types of risks but generallyis

associatedwith the risk of loss arising from humanor technicalerror; legal risks,

which encompassany risk arising from violations of or non-conformancewith laws,

rules, regulationsor prescribedpractices;reputationalrisks, being the risk of

significant negativepublic opinion that in

results critical loss of funding or customers.;

is
macroeconomicrisk, which the risk that instability of suchmacroeconorf& factors

as inflation rates, foreign exchangerates and reservesmay threatena bank's stability;

being the risk of political interferencein 36

bank. It should
and political risk, a private

be noted that there is no generalagreementin the literature on the classificationof

these risks into categories. For example, some banks view settlements or payments

risk as a form of operational risk, while others do not recogruseoperationalrisk as a

37
separate category of nsk at all . The classification of these risks is, therefore,

somewhatarbitrary.

163
Explaining Bank Failures

The incidenceof bank failures hasbeen growing sincethe early 1980s. The literature

on the causesof bank failure offers so many different reasonsfor bank collapsethat

one commentator has said that the reasonsare "so complex and so country-specific
7-)38
that generalizinga solution [to bank failure] was impossible. However, as

theorisedin chaptertwo, the factors affecting the competitiveviability of banks,like

other commercialenterprises,can be grouped in to two broad categories:1)

exogenousfactors, or those factors originating outside of the bank itself and 2)

endogenousfactors, or those originating within the bank and relating to bankers'

strategiesand methodsof conducting business. Thesefactors threatenthe competitive

viability of banks by either increasingthe types or degreeof risks banksface or

through failure to manage those risks effectively.

W-Y
ogenousFactors
.E.

The literature suggeststhat exogenousfactors further break down into two sub-

categories. 1) macroeconomicinstability and 2) bank supervisoryweaknesses.

implicated in bank failures 39 The performanceof the

An unstable economyis most .
increasingly,global economy can determinebank survival. Quantitative
national and,
bank failure indicate a positive correlation betweensuch
studies of the causesof

factors as rising nominal interest rates, increasesin the real exchangerate, rising

increasing bank failure.40 Qualitative casestudiesalso

irfflation and incidenceof

164
implicate macroeconomicfactors in a number of bank failures, for
example,declining

oil prices in the caseof collapsedTexan banks, rising interest ratesin the failure of

US thrifts, the collapseof the "bubble economy" in Japanand the deterioration

of
loan quality in Poland and former Soviet Union countries.41 Karin Lissakers
points

out that emergingmarkets, such as the Jamaicanmarket, are both more likely to be

to
subjected macroeconomicshocksand less able to absorbthem. 42 However, as

most observersagree,although macroeconomicshocksmay initiate most banking

failures, thesefailures often are made significantly worse by ineffectivebanking

supervision.

A number of factors can undermineeffective banking supervision. Theseinclude: a

weak regulatory framework, government interferencein the operationof bank

supervision, and a weak or ineffective supervisory authority. For example, in a

number of the casesinvolving poor asset management, regulatory authorities

overlooked credit exposureseven though they exceededwell-definedregulations

(This is a phenomenon generaUyidentified as regulatoryforbearance). 43In the

collapseof the US thrift industry, some commentatorshave arguedthat regulatorsput

the interestsof the regulatory body aheadof those of taxpayersand failed to close

insolvent banks most agreethat overly restrictive regulationcontributed

-44Moreover,,
to the collapseof the US thrift industry in the first by it
place exposing to substantial
45
interest rate risk The Bank of Credit and CommerceInternational(BCCI) failure
.
illustrates the problemsthat can anse as a result of the difficulties associatedwith

regulatory oversight of a global financial concernwith a complex administrative

structure.

165
Aside from overly restrictive regulation and regulators simply failing to do their jobs

effectively, someanalystsargue that banking regulation in and of itself can have

unintendedperverseconsequencesleadingto bank failure (generaflyreferredto as

moral hazard). As SamJaffa states"Thrift depositswere and still are insuredby the

federal government, somethingwhich maderegulators' burdenthat much heavier,

since depositors, in
safe the knowledge that they could not lose their money,took

little notice of how thrifts were run, or of whether or not their life savingswere being

r)46
prudently invested. GeorgeKauffman arguesdepositinsurancelegislationcan

causeriskier behaviour by banks that lead to higher numbersof failures and greater

systernicrisk. As he
a result, contendsthat govemmentsshoulduse regulation
47
sparingly.

In light of the potential moral hazardsof banking regulation,many expertsnow see

discipline the 48Market discipline

market as a more effective meansto regulate sector.

essentiallyrelies upon corporate to

shareholders monitor and disciplinebanks.

Proponentsseemarket discipline working essentiallyas follows: if know

shareholders

that a bank is not prudently managedthey can disciplinethe bank by sellingtheir

The directors and managersof the bank then must either improve
shares.
49
the bank's market value decline. In a country suchas Jamaica
managementor see
developed,however, governmentregulation will
where capital markets are not well
50
likely remain a necessity.

166
EndogenousFactors

Poor corporate governanceand bank managementcan weakena bank's by

position

allowing what might be relatively minor problems in the first instance(le, a difficult

period as a result of a macroeconomicshock) to becomemajor causesof irreparable

damage. For example,excessiveexposureto a single sectorwas the main

causeof

the failure of JohnsonMatthey, Banco Ambrosiano, CanadianCommercialBank and

the Calgary-basedNorthland Bank, the US thrift and commercialbank sectorsand of

a number of banks in Denmark, Norway, Finland, Swedenand Japan Bank

.51
managerssimply madepoor lending choicesthat left them over-exposedin certain

sectorsand vulnerableto macroeconomicshock.

Poor asset management often also includes a poor choice of collateral. The collateral

be
might closely linked to the performanceof the sectorwhere the excessiveexposure

lies. When the sector collapses,so too does the value of the underlyingcollateral

thereby preventing a bank from recovering its losses. This was the casewith the

coflapseof a number of Texan banks heavily exposedin the for

oil sector which

Texan real estatewas the main sourceof collateral. When oil prices collapsed,so did
52
the value of the real estate.

Often.,a weak loan portfolio is symptomaticof larger operationalproblemsrelatedto

and
management incentive structures. This was the casein statebanksin
governance,

Central Eastern European and fonner Soviet Union countries,where theselarger

problems manifestedin poor lending decisionsbasedon non-commercial

operational

167
criteria."

In severalcases,inexperiencewith new procedureshasbeenat least

a contributing
factor in bank collapses. Inexperiencein dealingwith a relatively
new product -
foreign exchangeservices led to fatal lossesat Franklin National Bank
- and
BankhausHerstatt. Limited understandingof the effects of volatile interestrateson

the price of mortgage-backedsecuritiescontributed to the collapseof manyUS

54 Barings
thrifts. collapsed in part because its managementwas primarily comprised

of older bankersunfamiliar with the new derivativesmarket that the whiz kid Nick

Leesonwas so ingenious at dealing in. This led them to placetoo much control in
55
Leeson'shands.

Lack of adequate internal control mechanisms, employee performance reward systems

that encouragerisky behaviour, and a "herd instinct" that reflects sub-standard

have
management also been identified as contributing to bank failure. In the Barings

for
collapse, example,British Chancellor,Kenneth Clarke, in connectionwith his

investigationinto the bank's collapse,blamedmanagementerrors that led to a failure

to spot Nick Leeson's unauthoriseddealing. In commentingon the collapse,Clarke

stated: "It's a picture of total control

collapseof management It is incrediblethat
...
in bank like this [Barings]. 56
sucha systemof control should exist a

Generalmanagerialor bank supervisorydeficiencyoften leavesthe door open to and

fraud, which has figured prominently in a number of bank failures.

encourages

Among these were Banco Ambrosiano, Bankhaus Herstatt, Franklin National Bank,

168
BCCI, the US thrift industry and Barings.57 However, in modem times fraud
as a
58
primary causeof bank failure is rare. The collapseof BCCI is the only clear

exampleof a bank failure where fraud was the primary cause.

A declinein franchisevalue contributed to the collapseof the US thrift industry.

Where the economicvalue of a bank's capital declines,shareholdersand managers

have incentivesto take greater risks as they have more to gain in doing so than they

haveto lose. Not only is there an incentive for them to take greaterrisks, declining

59
franchisevalue often encouragesself-dealingtransactionsand outright fraud. In the

caseof the US thrifts, when the mutual firms were sold to shareholders,the reserves

were used to finance 60

risky ventures thereby threatening capital adequacy.

Severalcasesof bank failure have occurred handin handwith organisedcrime

penetration. For example,organisedcrime penetrationwas evidentin the collapseof

a number of Russianbanks. It is also an issue to

with respect many smaHbanksin the

Caribbeanand Pacific operating in tax havenswhere the launderingof moneythrough

electronic funds transfersis not unconunon. Thesecountriesoften have weak

teeth to illegal 61
transactions.
regulatory regimeswith no prevent

In examiningthe failure of a given bank, it is impossibleto identify a single,and

sometimes even a primary, cause with absolute certainty becausethere are so many

independentvariablesthat interact in complex ways. MacroeconornIsts

may havea

tendencyto focus blame on macroeconomicfactors-,

credit risk will
managers tend to

blame the quality of the loan book; treasury managersWill be inclined to blamefailure

169
on lack of liquidity, and internal auditors will tend to focus blameon the absenceof

effective internal controls. T. Mouck of the Anderson School of Managementat the

University of New Mexico characterisescapital marketsas

complexadaptivesystems-

that is, they consist of a network of interacting agents,processesand elementsfrom

which a dynamic, aggregatebehaviour 62

emerges. Financialsystemsshouldbe

in
viewed much the sameway.

That being said, however, expertsincreasinglyagreethat endogenousfactors,

specificallycorporate governanceand internal control, of which accountability

systems form an important part, play a major role in bank failure. For example, in

information asymmetry-basedtheories of banking crises,banks' inability to assess

and monitor different types of financial risks often is attributed to weaknessesin

credit and financial reporting. These weaknesses,as the 1998/99 World Development

Report suggests, can arise from ineffective accountability systemsthat limit the

amount of information flowing to banks and their regulatorsabout different risks and

reducesthe trustworthiness of financial reports used to monitor and control those

63
risks.

Banking - Riskier Than Ever

Corporate governance and internal control also have become in

more of an issue part

because banking has become riskier, and as the risks increase, the need to effectively

them also increases. There are a number of interrelatedchanges

manageand control

170
in the environmentof the banking sector that makethe bankingbusiness
riskier and

threaten banks' competitive viability. Among thesechangesare a more demanding

client base;rising shareholderexpectations;increasingcompetitionfrom non-

financial institutions encroachingon traditional areasof bank business

againsta
background of banking as a maturing industry; growing interdependence
of world

economiesand financial markets (globalisation); 64

and rapid technologicalinnovation.

All of thesefactors, linked together, have madebankingin the current environment

more complex, higher risk, lower profit and lesspredictable.

To remain competitively viable in the current environment,bankshavebeenforced to

expandand innovate. For example,they have respondedto the challengesof the

current businessenviromnentby spreadinginto new bankingactivitiesin the 1980s,

for example, trading. These new areas of activity have brought new areas of risk. As

Brian Quinn notes in respectto trading, "[trading] movesliterafly at the speedof

sound - and computer-driventrading nearerto the speedof light. To suggestthat

more responsiVe risk management tools are necessaryis a considerable

,65 Banks also have introduced new productsand servicesby

understatement.

is
unbundling risks through trading; that to say,risks that were previouslybundled

together in a loan are now being unbundledand manipulated. Fix-rate lending is

into floating rate, and vice versa. Loans are securitisedand bought and sold
switched

in secondarymarkets. With thesenew banking

developments, hasbecomemuch

technical. Bank executivescan no longer understandto any degreeof depth the

more

that take place in their banks; therefore, there is a greaterneedfor control

transactions

The banking sector has also moved to consolidate,a move that hasled to
systems.

171
more international banking, including cross-borderlending and bankingand

investmentin subsidiariesand branchesin other countries. Internationalbanking

increasescountry and exchangerate risk and requiresnew

methodsfor managing
66
theserisks.

In innovating and expandingto remain competitively viable in the current

environment,banks, like other businessenterprises(as discussedin chaptertwo), have

introduced new computer systemsas a meansof dealingwith the rising number

and

complexity of transactions and to gain a strategic advantage over competitors.

However, these systems also have carried with them new risks. For example,

computerise systemsand controls meanthat transactionprocessingand control

systemsare less tangible. Brian Quinn arguesthat in this environmentit is lesseasy

for a personto understandhow the parts fit together to producethe whole.67 In

addition, a recent Basle Committee paper on risk managementfor electronic banking

and electronic money activities points to the fact that, while electroniccommerce

opens up new opportunities for it

competitiveness, also opens the door to increased

68
operational, reputational and legal risk .

Additionally, banks have turned to another typical strategy(as discussedin chapter

two) used to deal with the organisationalside effects of growth and innovation, that is,

they have flattened their organisationalstructuresto reducesomeof the operational

inefficiencies associatedwith large, hierarchical forms.

organisational In a recent

in Financial World, Kevin Thomson noted: "From re-engineering to mergers,

article

are going to extreme lengths to survive in an increasingly competitive,

organisations

172
fast-moving global environment. There's been
a shift away from nice, tidy structures,

with clear reporting fines and an obvious hierarchy where communicationis fairly
-
straightforward - to somethingaltogether different.7769
He observesthat organisations

are now flatter and more streamlined,and that reporting lines less
are clear,job roles
and titles blurred, decisionsmademore quickly and businessmessagesmore
70
complex.

As theseexamplesillustrate, there is a greater level of

inherentrisk that now existsin
banking as a result of changesin the businessenvironment
coupledwith the
industry's responseto those changes. Consequently,banks
must pay greaterattention

to managingand controlling their risks through establishingeffectivesystemsof

internal accountabilityand control or face an increasein operationalinefficiencies

that naturally accompanygrowth and innovation and which can lead to failure.

Banking on Internal Control

Brian Quinn,formerExecutiveDirector andHeadof FinancialSupervisionat the

Bank of England, has observed that ten years ago internal control systemswere of

little concernto bank executivesand supervisors,noting that "Of course,control

-)-)71
systems existed then, but they were taken for granted. Times have changed,

however. In a recent paper on internal controls in banking, the Basle Committee

commentedthat the

heightenedinterest in internal controls is, in part, the result of

significant losses by
incurred several banking orgai-Latlons. An

173
 analysis of the problems related to those losses indicates that they
could probably have been avoided had the banks maintained effective
internal control systems. Such systems
would have prevented or
enabled earlier detection of the problems that led to the losses, thereby
limiting damage to the banking organization.72

In support of the Basle Committee's observations,W.J. McDonough has

noted that

virtually all the most serioustrading related losseshaveinvolved internal control

breakdowns.73A number of high profile casesillustrate the

point. The collapseof
Barings bank, which cost il. 27 billion, was attributed to flaws in the financial

controls of the Singapore 74

operations. Another exampleof the failure of internal

is
control systems the case of Sumitomo Corporation, Tokyo -a failure that cost a

reported $US2.5 billion. In June 1996, Yasuo Hamanaka went from being the world's

most successfulcopper dealerto "rogue dealer." Evidencerevealedthat Hamanaka's

trading activity was known only to himself and one other employee and that the

London metal exchangehad twice warned Sumitomothat Hamanakaappearedto

havefalsified transactionrecords.75 There is evidenceto suggest,then, that banks

without effective systems of internal control cannot effectively managetheir risks and

may, as a consequence, fail. Ray Kinsella has observed that "Where controls are
-76
deficient fraud, and even failure, are seldomfar behind.

While it is not the intention here to arguethat failure of internal control systemsin

and of themselves trigger bank insolvency, clearly the evidence shows that lack of a

good systemof internal controls can definitely exacerbateother problemsand

contribute to a bank's decline. Cyril Bennett argues that.

no single risk management approach or commercial philosophy

... insulate financial
will a institution from the effectsof unexpected
on
events an ongoing basis. However, good managementpractice and

174
 business-focusedcontrols are likely to afford long-term protection to
an organization. Furthermore, they are essentialcore
values/mechanisms required tojacilitate commercial risk taking in the
context of uncertain markets [author's emphasis].77

In this sense,effective internal control systemsserveas buffers againstexogenous

factors contributing to bank failures. Brian Quinn supportsthis

view. He states*
The results are evident: a small number of banks have consistently
in
prospered the last two decades since 1979, almost whatever the state
of the economy. Many others have at best stood still and still others
have left the sector altogether. Much, perhaps, most, of the difference
between the more and less successful has been the strength of their
systems and controls. 78

There is now a new emphasisin banking on internal control reflectedin what is

commonly referred to as the "compliance culture" or what Ray Kinsella has called a

4(. in
shift the operational centre of gravity within banks" to internal audit/compliance
79
functions This new focus has arisenin manybankingjurisdictions in responseto
.
public concern over bank crisesas well as heightenedexpectationson the part of all

stakeholdersregarding the integrity and relevanceof financial statements,

80
accountabilityand corporate governance.

Basle Committee Framework for ]Internal Control

In response to the growing importance of internal control, the Basle Committee on

Banking Supervisionhas developed framework

a recommended for internal control in

banks. The Basle Committee on Banking Supervisionis a Committeeof banking

authorities that was establishedby the central bank governorsof the

supervisory

175
Group of Ten countries in 1975 81 In January of 1998, the Committee issued a
.
"Framework for the Evaluation of 1nternalControl Systems"as part of its ongoing

efforts to addressissuesin banking supervisionand improve the supervisionof banks

in the area of risk managementpractices. In issuingthe framework, the Comn-iittee

statedthat

A system of effective internal controls is a critical component of bank

management and a foundation for the safe and sound operation of
banking organizations. A system of strong internal controls can help to
ensure that the goals and objectives of a banking organization will be
met, that the bank will achieve long-term profitability targets, and
maintain reliable financial and managerial reporting. Such a system
can also help to ensure that the bank will comply with laws and
regulations as well as policies, plans, internal rules and procedures, and
decrease the risk of unexpected losses or damage to the bank's
82
reputation.

The framework, drawing on the experienceof membercountries,setsout a numberof

principles that comprisethe essentialelementsof a soundsystemof bank internal

controls. In so doing, the framework describeshow accountabilityshouldbe

establishedand maintainedto ensureeffective internal control and prudent decision-

in
making the operation of banks. Theseprinciples,which fall into broad-based

internal control framework developedby

categoriesconsistentwith an earlier general

the Conunittee SponsoringOrganizationsof the TreadwayCommission(COSO)

of

include: the establishmentof a soundmanagementoversightand control culture;

implementation
proper risk assessment;the establishment, and monitoring of control

information and communication;and continualmonitoring of the

activities; effective

control systems. The Basle Committee document notes that the

efficacy of internal

is to that "all banks, regardless of size, have an

objective of the principles ensure

system of internal controls which is consistent with the nature, complexity,

effective

176
and risk of their on- and off-balance-sheetactivities and that respondsto changesin

the bank's 7-)83

environmentand conditions.

The Relationship between Internal Control and Accountability Systems

Though not precisely the same, internal control systems and

accountability systems

are closely related. Inherent in the Basle Committee's framework is the recognition

that one of the primary mechanismsfor maintaininginternal organisationalcontrol is

accountability,for it is through accountabilitythat the feedbackand feed-forward

mechanismswhich organisationsrequire to maintain stability and control operate.

Without thesemechanisms,as was shown in chaptertwo, organisationsmust

eventuallysuccumbto natural forces of disintegrationasthey grow and expand.

In setting out the requirement for effective management oversight, the framework

the "who/to
establishes essential whom" bond of accountabilitystarting at the very

top of the organisationalhierarchy with the board of directors,who are accountableto

shareholdersand regulators, and layered throughout the organisationfrom senior

to
management the individual worker. The framework documentalso identifies the

importance of organisational. culture as setting forth values consistent with good

corporate governancewhich those within the organisationmust be held accountable

for upholding, again starting at the top of the organisation. The principlesconcerned

with risk address

assessment the need to develop accountabilitystandardsconsistent

with perceived levels of risk and organisationalobjectivesthrough the establishment

177
of appropriate activity controls for different departmentsor divisions; physical

controls; approvalsand authorisations;and verifications and reconciliation. The

prescribedcontrol activities set out important aspectsof how the actionsand decisions

of accountablepersonsare to be judged in the banking environment,namely top level

reviews and periodic checking for compliancewith exposurelimits, both of which

rely on the availability and flow of trustworthy and timely managementinformation.

The final set of principles in the framework documentacknowledgesthe needto

monitor and control the control systemitself, by meansof an internal audit function.

As such, it is possibleto concludethat the Basle Committee's framework clearly

operateson the basis of the idea that it is only through establishingthe structures,

systemsand proceduresthat achieveaccountabilitythat the objective of internal

control over banking be

operationscan met and that bank be
risks can managed

effectively. The framework, therefore, is imbued with the notion of accountability,

and the principles addressall of accountability'svarious dimensions.

The Importance of Information, Communication and Record Keeping in

Internal Control and Accountability Systems

The Basle Comn-fittee framework recognises quality information and communication

being to how internal control and accountabilityoperatewithin banking,

as critical

the issuein Principles 8,9 and 10 of the document. For the

example,
addressing

Conunittee statesthat information be

should reliable,timely, accessible,and provided

in a consistentformat.
-).
)84
The details of theseprinciples are discussed
more fully in

chapter seven.

178
In referring specificaflyto information and communicationin its frameworkthe

Basle Comn-itteehasrecognisedthe unequivocal importanceof managedinformation

in the establishmentof organisational.accountability and internal control. This is

of

particular note in relation to the focus of tl-sstudy as it lends supportto the posited

fink betweencompetitive viability, accountability and record keeping. Though

information and communicationis mentionedas only one elementof an effective

internal control systemin the framework, it is assignedequalimportanceto other

aspects. Moreover, the framework acknowledgesthat the quality of information and

communicationin a banking enterpriseis linked to how recordsare createdand kept

and that, therefore, there is a needto managerecords as part of record keeping

systems. Specifically, the framework prescribes that "Internal information [must be]

part of a record-keepingprocessthat should include establishedproceduresfor

, 85
records retention.

Conclusion

This chapterhas provided an overview of banking as an industry asbackgroundto

field researchto be presentedin the chaptersthat follow on Jamaicancommercial

bank failures. In doing so, it hasbeenarguedthat in the courseof performingtheir

functions lending, deposit taking and making payments - banks are open to a
core -

Moreover, changesin banks' operating and

environment banks'
number of risks.

to those changes(ie, growth and computerisation

expansion, and
responses

179
restructuring) have introduced additional risks and threatsto their internal control. In

order to avoid failure and to remain competitive, banksincreasinglymust manageand

monitor theserisks carefully, together with their financial positions and perfon-nance.

The careful managementand monitoring of risk and financial position and

performancerequiresthat banks maintain effective control over internal operations,

which is essentiallytantamount to ensuringthat accountabilitysystems,as described

in chaptertwo, are establishedand operateeffectively. The Basle Comn-fitteeon

Banking Supervisionhas laid out a framework consistingof basicprinciplesof

effective internal control in banking. The principlesof internal in

control outlined the

Basle Committeeframework recommendaccountabilitystructures,systemsand

proceduresas a meansof establishingand maintainingeffectiveorganisational

control. Accountability, it be
must concludedtherefore, is essentialto effectiverisk

management and, thereby, competitive viability in banking. Finally, the Basle

Committeeframework lends support to the theoreticalframework advancedin

chapterstwo and three in its inclusion of information and communicationas an

important aspectof effective internal control systemsandby its acknowledgement

that good record keeping underlieseffective infon-nationand communication.

End Notes

1 ShelaghHeffeman, Modern Banking in Theory and Practice (West John

Sussex: Wiley & Sons,
1996), 15.

2 Heffeman, 20.

' Seepapers Financial Institutlons Tralnlng Centre,Deregulation in the Nigerian Banking

included m

180
Industry: Directions, Challenges,Problems and Prospects,Proceedingsof the Bank Directors Senuinar
1991 (Lagos, Nigeria: Financial Institutions Training Centre, 1991).

Ibid.

5US investmentbanks began

asunderwriters of corporate and governmentsecurityissues. Modem
investmentbanks engagein a wide range of activities, including market making, consultancy,
acquisitions,mergers, and fund management.LJK merchantbanks beganas financiersof tradewho
guaranteedmerchantsbills of exchange. Now, however, the merchantbanks haveexpandedinto
market making, mergers and acquisitions, and dealing securitieson behalf of investors. Retail banking,
on the other hand, entails the provision of personal servicesto a large number of small customers.

6 Gerald Klein, Dictionary ofBanking, 2nded. (London: Financial Times Publishing, 1995), 272.

' Heffeiman,16.

Laws of Jamaica,The Bank of JamaicaAct, Act 17 of 1992, Part 1, s. 2.

Laws of Jamaica,The Banking Act, L. N. 17/1992,Part 1, s. 2.

10Heffeman, 27.

11Heffeman, 27.

12
Heffeman, 28.

13Up until this date,the Glass-SteagullAct separatedcommercial and investmentbanking activities

and limited the types of investments that banks could make; for example,they could not invest in
securities brokerages. With repeal of the Act in 1999, U. S. banks became free to engage in a wider
range of financial services.
14
Heffeman, 268.

15Ray Kinsella, ed., Internal Controls in Banking. West Sussex,England: JohnWiley & Sons,1995),
4.

16Joel Bessis, RiskManagement in Banking (West Sussex: John Wiley & Sons, 1998), p-xii.
Australian banking expert Robert Till has noted that the view of banks as solely a risk machine is
be the old paradigm. Banks now manage and offset these risks by providing a range of
tending to
for fee, for advice; e-commerce partnerships; financial
services a example, wealth management
transaction processing; custodial services; risk management and advice; and estate management.
Basically, according to Till, banks the value of their infrastructure and are selling that
are realising
[Robert Till, to author, 29 August, 2001]. This study still views
capability to other organisations email
banking however, banks' provision of services for fees as
the risk machine model of as valid, and sees
a type of risk management strategy.

" Klein, 295 (entry for "geanng"). Most other typesof businesses have 30% ratio of shareholderfunds
for banks 10% [Benton E. Gup, "Bank Growth and "
Failure, paper
to financed debt, but the averageis
"Effective Corporate Governance, " Ocho Rios, Jamaica, 13 May, 1999].
presentedat the seminaron

18Bessis,p-xiii.

"
Institutions, at the 14th
'9 Manion Williams, "The Changing Role of Financial Training paper presented
Banking Institutes, Kingston, Jamaica, 25-30 March, 2001.
World Conference of
20
Bessis,

181
21Heffeman,165.
i
22Basle Committee Banking Supervision, "Core Principles for Effective
on Banking Supervision,"
Basle, Switzerland, September,1997,20. Large exposuresin a single
geographicalareahave recently
been the causeof problems for Credit SuisseFirst Boston, which sufferedfull-year
net lossesof f 93
million as a result of exposureto Russia. The problem arosefrom borrower defaults,coupledwith
foreign exchangelossesand the collapse of Russian equities ["News Digest," Financial World (May
1999): 7].

23Basle Committee Banking Supervision, "Core Principles for Effective Banking

on Supervision,"20.
Connectedlending was implicated in the Chilean banking crises of the 1980s[SeeJorgeMarshall,
"LessonsLearnedfrom the Chilean Experience," Preventing Bank Crises: Lessonsfrom RecentGlobal
Bank Failures, edited by Gerard Capno Jr., et al, eds. (Washington,D. C.: The World Bank, 1998), 43
52. -

24Heffernan definessecuritisation "the

as processwhereby traditional bank assets(eg, mortgages)are
sold by a bank to a trust or corporation, which in turn sells the assetsas securities." [Heffernan,28].
Thesesecuritiescan then be traded in the formal market just like other securities.

25Basle Committee on Banking Supervision, "Enhancing Bank Transparency,

" Basle Switzerland,
September,1998,21.
26
Bessis,7
27
Ibid.
28
Bessis, 8.

29A coupon refers to "a detachable

part of a bond or certificate which is presentedto either the issuer
of the bond or his bankers which entitles the holder to the dividend/interest
due."[Klem, Dictionary of
Banking, 65.].

30A future is a contract to buy or sell a specific amountof a namedcommodityor financial paper at an
agreedprice on a given future date. A forward for
is a contract the purchaseor saleof a specific
commodity, security, foreign currency or any other financial instrument for delivery andpaymentat
some future date. The main difference between futures and forwards is that in the caseof futures the
to
price is marked market on a daily basis and therefore fluctuates; both partiesto the transactionmust
post collateral for settlementof any changesM value. The price of forwards on the other hand does not
fluctuate but is set at the time of the transaction. An option is a contractfor the right to buy or sell a
commodity or financial paper by a set date; a fee is paid for the contract and the option expireson
if A
maturity the right is not exercised. swap is simply the swap of one thing for another; for example,
in the foreign exchangemarket it is the purchaseor salein the for
current market a simultaneous
purchaseor sale in the future foreign exchangemarket Nem, Dictionary ofBanking, 123,128,220,
and 3 10.]
31
Heffeman, 181.

32It should be noted that somecountries do not allow their interestratesto fluctuatein responseto the
(eg, the Eastern Caribbean States). In these countries interestrates are set and controlled by the
market
The World Bank's Structural Adjustment Programme has aimedto eliminate government
government.
rates to permit them to float freely in response to market forces.
control of interest

33Off-balance sheetbanking has becomeincreasingly popular with banks as a meansof protecting

themselvesagainst other risks. Off-balance sheet items include contingentcommitments (eg, promises
fature loans) or contracts that generate income for a bank but do not appearon its balancesheet
of
[Heffernan, 28]. They can range from stand-by letters to
of credit complex derivatives, which is the
to instrument the price of which is based on its underlying assets,for example, pork
term given any

182
futures are basedon the underlymg future market value of pork. Nein, Dictionary
ofBanking, 80].
34Basle Coninfittee Banking Supervision, "Core Principles for Effective Banking Supervision,
on " 2 1.
35Heffeiman, 167.

36Thesedifferent types
of risks are discussedin Heffernan, 10,166-168,293,308-309; GeorgeC.
Kaufman, "Summary," 111 Preventing Bank Crises: Lessonsfrom RecentGlobal Bank Failures, Gerard
Capho Jr., et al, eds. (Washington, D. C: The World Bank, 1998), 34 1; Basle Commi on Banking
Supervision,"Core Principles for Effective Banking Supervision,21-22; Bessis, 10-12, Beatriz
Armendanz de Aghion and Francisco Ferreira, "The World Bank andthe Analysis of the International
Debt Crisis," The New Institutional Economics and Third World Development,JohnHarriss, Janet
Hunter and Colin M. Lewis, eds. (London: Routledge, 1995), 221-226; Michael Murphy, "The
UnmanagedRisk," The City 5 (Winter 1998): 26-29; Anthony Walsh, "Internal Control In the
ComputerizedBanking Environment," Internal Controls in Banking, Ray Kinsella ed. (Chichester:
JohnWiley & Sons, 1995); David Law, "Keeping an Eye on Risk," Financial World (March 1999). 32-
33; Andrew Newton, The Handbook of Compliance: Making Ethics Work in Financial Services
(London: Financial Times Pitman Publishing, 1998); Basle Commi'tteeon Banking Supervision,
"Operational Risk Management," Basle, Switzerland, September,1998;Basle Committeeon Banking
Supervision,"Risk Managementfor Electronic Banking andElectronic Money Activities," Basle,
Switzerland,March 1998.

37A 1998 paper by the Basle Committee Banking Supervision

on notedthat awarenessof operational
risk as a separaterisk categoryat the board of director or seniormanagementlevel hasbeenincreasing.
However, as operational risk is a newly recognisedareaof banking risk, thereis no generalagreement
asto what it encompasses.Many banks have defined it as any risk not categonsedasmarket or credit
risk. Some have defined it as the risk of loss arising from human or technicalerror. Many banks
associateoperational risk with settlementsor paymentsrisk andbusinessinterruption, administrative
and legal risk. Most banks view technology risk (le, the risk of a major system failure) as a type of
operationalrisk, while somebanks view it as a classof risk in its own right. Also, the majority of
banks associateoperational risk with all businessImes,including infrastructure[Basle Conumitteeon
Banking Supervision,"Operational Risk Management."]. In his book on risk management,Joel Bessis
definesoperationalrisk as "those malfunctionings of the information systems,of reporting systems,
and of the internal risk monitoring rules." [Bessis, 12].

38Andrew Sheng,"Bank Restructuring Revisited," Preventing Bank Crisis: Lessonsfrom Recent

Global Bank Failures, Gerard Capno Jr. et al eds. (Washington,D. C.. The World Bank, 1998), 325.

39Douglas D. Evanoff, "Global Banking Crises: Commonalities,Mstakes, andLessons," in Preventing

Bank Crises: Lessonsfrom Recent Global Bank Failures, Gerard Capno Jr. et al, eds.Washington,
D. C.: The World Bank, 1998), 249-254. One exceptionis Brazil, where statebanksbecameinsolvent
without any macroeconomic crisis [John Williamson, "Bank Crisis: Commonalities, Mistakes, and
LessonsViewed from a South Asian Standpoint," in Preventing Bank Crises: Lessonsfrom Recent
Jr.
Global Bank Failures, Gerard Capno et al eds. (Washington, D".C.-.The World Bank, 1998), 288.

40
Heffeman, 308.

41SeeHeffernan, 268-297 and JamesR. Barth and Robert E. Litan, "Lessonsfrom Bank Failures 'inthe
United States," ThomasF. Cargill, Michael M. Hutchinson, and Takatoshi Ito, "The Banking Crisis in
Japan," Richard J. Hemng, "Banking Disasters: Causes and PreventatiVe Measures, Lessons Derived
from the U. S. "
Experience, and Michael Bonsh and Fernando Montes-Negret, "Restructuring
DistressedBanks in Transition Economies: Central Europe and Ukraine," in Preventing Bank Crisis:
Lessonsftom Recent Global Bank Failures, Gerard C Jr.
apno et al eds. (Washington, D. C. The
-- World
Bank, 1998).

42Karin Lissakers,"The Role of the International Monetary Fund, " in Preventing Bank Crises: Lessons
Recent Global Bank Failures, Gerard Capho Jr. et al eds. (Washington, D. C.: The World Bank,
from

183
1998), 30.

43Heffernaii, 292,
and JamesR. Barth and Robert E Litan.
"Heffernan, 294. Also, Gerard Capno, Jr. has
observedthat: "Evidence from aroundthe world clearly
demonstratesthat many regulatorshave becomepoor and unfaithful agentsfor their principals (the
taxpayers)and have, albeit unintentionally, exacerbatedthe frequencyof banking crises. This agency
problem has been as costly as the banks' moral hazardproblem. Thus a failure to police reckless
drivers puts other drivers at risk. Likewise, highway departmentshave learnedthat putting guardrails
on mountain passesencouragessomedrivers to increasetheir speedand increase,rather than decrease,
the likelihood and seventy of accidents." [Gerard Capno Jr et al, eds..,Preventing Bank Crises:
Lessonsfrom RecentGlobal Bank Failures (Washington,D. C.. The World Bank, 1998), Xi)]

45Seefor example,JamesR. Barth and Robert E. Litan, 134.

46Jaffa, 132. ThomasCargill et al make the sameargument

with respectto the collapseof Japanese
banks [Cargill et al, 187].

47GeorgeC. Kauffman, "Bank Failures, SystemicRisk,

and Bank Regulation," The Cato Journal 16,1
(SprIng/Summer1996): 1-19, accessedonline over the Internet 10 March, 1998 andavailableat
http://www. cato.orglpub/ioumal/cj 16nl -2.htiffl.

48See,for example,Basle Committeeon Banking Supervision,"EnhancMgBank Transparency:Public

Disclosure and SupervisoryInformation that promote Safetyand Soundnessin Banking Systems, "
Basle, Switzerland, September,1998; ThomasF. Cargill et al, "The Banking Crisis in Japan,"
Preventing Bank Crises: Lessonsfrom RecentGlobal Failures, GerardCapno, Jr., et al, eds.
(Washington,D. C.: World Bank, 1998): 303-324; Michael H. Moskow, "RegulatoryEfforts to Prevent
Banking Crises," Preventing Bank Crises: Lessonsfrom RecentGlobal Failures, GerardCapno, Jr., et
al, eds. (Washington,D. C.: World Bank, 1998): 13-26.

49Paul L. Bydalek, "Lessonsfrom Recent Global Bank Failures: The Casefor Brasil, "Preventing Bank
Crises: Lessonsftom Recent Global Failures, Gerard CaPriio, Jr., et al, eds.(Washington,D. C.- World
Bank, 1998): 53-68.

50This opinion was sharedby a senior FINSAC official (seesubjectA-5, personalinterview, Kingston,
Jamaica,I June, 1999).

51For full discussion of the failure of these banks see Heffernan, 268-297.
a
52
Heffeman, 292.

53Nfichael Bonsh and FemandoMontes-Negret, 77.

54
Heffeinan, 292.
55
Jaffa, 44-66.
56
Jaffa, 44-66.

57For a full discussionof the failure of thesebanks seeHeffernan,268-297.

58Heffeman, 293.

59Richard J. Herring, "Banking Disasters- Causes and PreventatiVe Measures, Lessons from the U. S.
Preventing Bank Crisis: Lessonsftom Recent Global Bank Failures, Gerard CaPno Jr.
Expefience, in"
(Washington, D. C.: The World Bank, 1998)- 209-236.
et al, eds.

184
60
Heffeman, 294.

61Email from Robert Till to 29 August, 2001.

author,
62The idea that financial
systemsoperate as complex adaptivesystemscomesfrom an article by T.
Mouck who, applying chaostheory, describescapital markets as complex adaptivesystem. In his
article, Mouck points out that this view of capital markets is challengingwidely accepted
methodologicalapproachesto capital market research,most notably with respectto assumptionsof
linearity and predictability [seeT. Mouck, "Capital Markets ResearchandReal World Complexity:
The Emerging Challengeof ChaosTheory," Accounting, Organization and Society23,2 (1998). 191

63SeeWorld DevelopmentReport and CharlesW. Calomiris

and Gary Gorton,"The Origins of
Banking Panics:Models, Facts and Bank Regulation," Financial Markets and Financial Crises, Glenn
R. Hubbard, ed. (Chicago-.University of ChicagoPress, 1991), 109-174.

64Thesefactors are discussedin Dimitris Chorafos,Bank Profitability (London:Butterworths, 1989);

JamesLynch passim; Leonard Sinclair, "Managing Credit Risk in Medium-SizedCorporates,"
Understanding andManaging Risk.- Papers of the Cambridge Seminar, 10-15 September,1995
(Cambridge:University of Cambridge, 1995); "Knowledge Engineeringfor Financial Institutions
SpecialReport," Financial World (February 1999), 21-50; andLaw, 34.

65Brian Quinn, "The Bank of England and the Developmentof Internal Control Systems,
" M Internal
Control in Banking, Ray Kinsella ed. (Chichester,John Wiley & Sons,1995), 37.

66
Marshall, 48.
67
lbid, 38.

68Basle Committeeon Banking Super-vision,"Risk Managementfor Electronic Banking andElectronic

Money Activities. "

69KevM Thomson,"Communicate to Compete," Financial World (May 1999): 23.

70
Ibid.
71
Quim, 35.

72Basle Committeeon Banking Supervision, "Framework for the Evaluationof Internal Control
Systems"(Basle, Switzerland, Basle Committee on Banking Supervision,January,1998) 1.

73W.J. McDonough, "The Denvatives Angst," Financial Times, 15 August, 1994.

74
lbid, 34.

75Law, 34.

76
Kinsella, 1.

77 Cited Kinsella, 7.
in

78 Quinn, 38.

79Kinsella, 3.

" Kinsella, 2.

185
81Basle Committee,"Framework for the Evaluation of Internal Control Systems," I fn 1.

82Basle Committee, "Framework for the Evaluation of Internal Control Systems," 1.

83Basle Conunittee,"Framework for the Evaluation of Internal Control Systems,"5.

84Basle Committee,"Framework for the Evaluation of Internal Control Systems," 4.

85
lbid, 17.

186
 Chapter Six: The Jamaican Financial Crisis Explaining the Collapse
- of
Jamaica's Indigenous Commercial Banks

Introduction

This is the first of four chapters that presents the findings of the field research

conducted for this study on the collapse of several indigenous Jamaicancommercial

banks. The central question that this chapter and the others that follow seekto

explore is: To what extent, if any, can poor record keeping practices be implicated In

the collapse of failed Jamaicancommercial banks? The purpose of seekingan

answer to this question is to use the casestudy of the fafled Jan-micanconunercial

banks to provide empirical evidence of the theoretical linkages among competitive

viabflity, accountabflity and record keeping as discussedin chapterstwo and three of

this study.

Discussion of the researchfindings begins in this chapter with an overview of the

field research- Background information is then provided on the Jamaicanfinancial

187
crisis, presentmg the argument that weaknessesin the banks' accountabifity systems

contributedto their downfall. This discussionis usedas evidenceof the relationship

between competitive viabihty and accountability outlined in chapter two. In support

of the theoretical relationship between accountability and record keeping put forth in

chapter three, the arguments In this chapter are foflowed in chapter sevenby

empirical evidence that shows how poor quality information, the result of the banks'

records creation and keeping practices, weakened their accountability systemsand

resulted in a loss of internal control and poor decision making that eventually led, in

combination with exogenous and other endogenousfactors, to the banks' downfall.

Chapter eight then explores why the banks' records creation and keeping practices

were so poor. In chapter nine, discussion of the researchfmdmgs focuses upon how

the banks' record creationand keepingpracticesaffectedbanksupervisionand,

subsequently,government intervention in and rehabilitation of the failed Jamaican

commercial banks. Finally, discussion of the researchfindings in

concludes chapter

ten with observations about the lessonsto be learned from the Jamaicanexperience.

An Overview of the Field Research

This particular chapter and the others which follow present and analysefield research

data primarily collected between May 1999 and November 2000 on four failed and

two viable Jamaican commercial banks as a meansof exploring the relationships

and record keepMg. The data on which

among competitive viability, accountability

findmgs in this chapter are based include interviews with officials at the Financial
the

Sector Adjustment Company (FINSAC) Limited and officials in both failed and

188
viable commercial banks, physical examination of records and record keeping

systemsof both failed and viable commercialbanks,and review of relevant

documents, such as commercial bank policies and procedures. As the data

collected

relate to four of six failed Jamaicancommercial banks, they are consideredto be

reasonablyrepresentative of the entire population of failed Jamaicancommercial

banks. The data were coded and analysedusing qualitatiVe data analysissoftware
III

accordance with the Grounded Theory-based methodology set out in Appendix 2.

The interviews constitute, by far, the most important source of information about the

operations of Jamaicancommercial banks, both those that failed and those that did

not. Approximately 50 ethnographic interviews were conducted with FINSAC

officials (8 interviews); with former directors (3 inter-views),senior executivesand

operational managers(19 interviews), and other staff (3 interviews) of f our failed

Jamaicancommercial banks; with senior executives and operational managers(12

interviews) and other staff (2 interviews) in two viable Jamaicancommercial banks;

with externaland forensicauditorsand with other individualscloseto the institutions

involved in the Jamaicanbanking crisis (3 interviews). These people were

surprisingly candid in discussing the problems encounteredduring the Jamaican

financial collapse. More detailed information about the nature of the interview

subjects and the types of questions they were asked is provided in AppendLX1.

Given the sensitivity of the researchtopic, the identity of interview subjectsand the

mstitutions for which they work has had to be protected; therefore, m citations of

interviews, subjects are identified only by an assignedalphanumericcode, not by

189
name or institution, and all referencesthat would link them to a particular institution

havebeenremoved.

The Collapse of the Jamaican Financial Sector

From the beginning of the 1990s symptoms of fundamental problems in the Jamaican

'
financial sector beganto appear. By nud 1996, it was apparentthat the financial

sector was in a state of crisis, a crisis that would lead to the insolvencyand technical

failure of all of Jamaica's indigenous commercial banks, save one, in the span of two

(see Table 6-1 below). 2 In responseto the growing crisis, in January 1997, the
years

Government of Jamaicaestablishedthe Financial Sector Adjustment Company

(FINSAC) Limited to addressthe liquidity and solvency problems being experienced

within the sector through a process of intervention, rehabilitation and divestment. As

of 1998, FTNSAC had become Jamaica's largest holding companywith some 158

domestically owned financial institutions. It

companiesand investments in nearly all

also had provided support to the fmancial sector by way of and

acqutSitiOns soft

lendmg totaRing $J73.5 bfllion ($US 1.8 bilhon), of this $J68 bilhon ($US 1.7 blUlon)

the banking sector covering 1.5 million depositors. Through Its

was in support of

intervention in the financial sector, FINSAC came to own or control all domestic

banks (with the exception of the very small Trafalgar Commercial Bank) or

banking '
approximately 60 percent of all the country's assets.

190
Table 6-1 -.Summary of Failed JamaicanCommercial Banks and GORFINSAC
Intervention

Bank Intervention

Century National Bank
Citizens Bank
Eagle Commercial Bank
Island Victoria Bank
Placed under temporary managementby the Minister of Finance
in July 1996.
FINSAC acquirescontrolling interest in September1997by
virtue of its 84% purchaseof ordinary shares. FINSAC also
acquiresthe banks' non-performing loan portfolio to provide
additional liquidity and solvency. Now mergedto form Union
Bank, which subsequentlyhas been sold to the Royal Bank of
Trinidad and Tobago (hereafterreferred to asRBTT)
FINSAC provides J$553.3million ($USI. 4 million) in financial
assistanceand additional assistancefor the payout of advances
from the Bank of Jamaicain November 1997and later
purchasesat a nominal price in 1998. Now mergedto form
Union Bank, which subsequentlyhas beensold to RBTT.
FINSAC purchasesthe bank for J$8.5 billion ($US212.5
million) and transfers its sharesto Eagle Commercial Bank in
1998. Now part of Union Bank, which subsequentlyhas been
sold to RBTT.

National Commercial Bank FINSAC acquirescontrolling interest in February 1997with the

acquisition of 40% of outstanding ordinary shares of NCB plus
43.8% of NCB Group for a total holding of 68%. FINSAC also
purchased $Jl 2.7 billion ($US67.5million) M non-performiing
loans to provide additional liquidity and solvency. November
2000 NCB shareholdersvote for a restructuring of the bank.
Under the arrangement,all public shareholdersin NCB Group
receive one sharein NCB for eachGroup sharethey own.
FINSAC's preferenceshareholdingof $J5.3billion ($US 132.5
million) M the Group is converted to a 76% holding of ordinary
sharesin the Bank. NCB sold to Canadian-based AIC Limited
for $6.034 billion ($US 150 million) in January2002.

Workers Savings and Loan Bank
Placedunder temporary managementby the Ministry of
Finance in February 1997 and FINSAC provides $J8.5billion
(SUS212.5million) in overdraft supportloan in February/March
1998. Now merged to form Union Bank, which subsequently
has been sold to RBTT-

Sources:Financial Sector Adjustment Company (FINSAC) Limited, Auditors' Report and Financial
Statements,January 29,1997 to March 31,1998; FINSAC, Annual Report, 1998,15-25; Government
Jamaica, Ministry Finance, "Public SectorResponse to the Problems of the Financial Sector,"
of of
Ministry Paper No. 13/98,8 April, 1998; Government of Jamaica, Ministry of Finance, "FINSAC, "
Ministry Paper No. 31/98,27 October, 1998; Bank of Jamaica, Annual Reports, 1996-19971
The Gleaner, November 9,2000, A-3; "Union Bank Sold,." The
"Shareholders Back NCB Scheme,"
Gleaner Wednesday, March 14,2W 1, Online, Internet www.jamaica-ja_leaner. com II September,
2001; "NCB Sale Settled, " Saturday, 12 January, 20002, Online, Internet www. jamaica-gleaner. com,
12 January, 2002.

191
The financial crisis has driven the country into an enormous debt trap from
which, at
it
present, is difficult to see how it 4
will recover. FINSAC's initial $J73.6 billion

($US 1.8 billion) infusion of capital into the country's financial

sector represented60

percent of the Government of Jamaica's total budget for the year (1998) and raised

the country's burden of debt servicing to approximately 65 percent of its annual

revenue (see 5
Table 6-2). As of 2000, the FINSAC ball out had cost the Jamaican

Government and taxpayers an estimated $JI 30 billion (roughly $US 3.2 billion),

which equatesto roughly 44 percent of GDP, during the longest period of negative

econorMCgrowth in the country's history. 6 Not only has the econonUccost of these

bank failures been high, there has been a high social cost as well. In 1999, the

Government's efforts to raise funds to cover the debt through placing higher taxes on

gasoline led to riots and protests across the country that had seriouseconornicand

social ramifications.7 Moreover, the JamaicanGovernment has had to reduce

spending drastically on critical social programmes, education, health and maintenance

of the country's infrastructure of roads, water and waste disposal systems. In

addition, the bank collapses have tightened up credit, which has hamperedthe growth

of the productive sector and limited employment. Given the econorMCand social

impact of these bank failures, it is clearly important to understandfully all of the

factors contributmg to their coflapse.

192
Table 6-2: JamaicanPublic Debt

Item 96/97 97198 98/99 99/00 July 2000

Domestic Debt 85.2 101.5 139.2 175.3 189.2
(M billions of
Jamaicandollars)
External Debt 111.2 117.7 123.1 133.4 128.9
(M billions of
Jamaicandollars)
Total Debt Stock 196.4 219.2 262.3 308.7 318.1
(M billions of
Jamaicandollars)
Domestic 38.2% 42.1% 53.1% 60.5% -
Debt/GDP
External Debt/GDP 49.9% 48.8% 48.2% 47.6% -
Debt service/total 57.0% 61.1% 65.8% 82.5% -
revenue
Debt service/total 38.8% 37.6% 42.8% 52.4% -
spending
Total debt/GDP 196% 97% 110% 120%

Source:"Domestic debt jumps again," Financial Gleaner, October27,2000,3.

Explaining the Collapse of Jamaica's Indigenous Commercial Banks

A number of cumulatiVe and dynamically interrelated factors can be cited as sources

of the problems experienced by the JamaicancommerClalbanks. These problems

ultimately saw the country's entire financial system becomea "weak and vulnerable

'house of cards' ready to fall to the ground. )8

. The following discussionsummarises

debate about the reasonsfor the sector's problems, drawing upon

emerging

Jamaicanacademics,financial analysts,bankers,regulators,
observations of

development administrators and field researchinterview

government officials,

subjects.

193
In keeping with the theoretical framework outlined in chapter two, the contributory

factors can be grouped into two broad categories: 1) exogenous,that is, those factors

originating outside of the banks 2)

and endogenousfactors, those factors originating

inside the banks and relatmg to the businessstrategies bankers pursued and the way

that they conducted their businessin responseto exogenousfactors. Though it is

possible to discern these two categories when analysing the factors contributing to the

banks' problems, such factors do not exist In isolation and therefore cannot be looked

at entirely independently of one another.

Many explanations of the bank failures, not surprisingly those most often given by

supporters of the Government Opposition JamaicaLabour Party (JLP), typically have

focused on exogenous factors such as the state of the country's economy and weak

framework. Though partly to blame, this study contends that these factors
regulatory

do not provide fuUy satisfactory explanations for the coHapseof the country's

banks. Rather, in keeping with the theoretical framework set

indigenous commercial

out In chapter two, this study presents empirical evidenceto support the argument that

the external operating environment gave rise to conditions that prompted directors

the failed banks to increasethe size and scope of their banking

and managersof

With growth and innovation came a level of decentralisationand

operations.

directors' and managers' control over their banks.

specialisatiOnthat weakened

These internal control problems could have been dealt with had directors and

failed banks and maintained effective systemsof internal

managers of the established

for all aspects of the banks' busmiess

actlivities- In many
accountability and control

194
 cases,however, they failed to understand the need to establishsystemsof internal

accountability and control to addressnew businessareasand risks. Equally

importantly, their existing systemsof internal

accountability and control did not

function effectively for a variety of reasons

which will be discussedfully further

along in this chapter. As a result, the banks succumbedto the inevitable dissolution

that results from uncontrolled growth and innovation as discussed

in chapter two.
The casefor this argument begins in this chapter with a review factors typically
of

cited as having contributed to the Jamaicanbank failures.

Exogenous Factors

Analysts and commentators point to a number of exogenousfactors as having

contributed to the collapse of Jamaica's indigenous commercial banks. In particular,

commentators identify the Government of Jamaica'smacroeconomicpolicy and

failure to properly regulate the financial sector as principal among the sector's

problems. It must be emphasiSedthat becausethe purpose of this study is not to

present a definitive causal explanation for the Jamaicanbanking crisis, but rather to

implicate poor record keeping as a factor in the collapses,' the discussion encompasses

only areas of general consensusabout miterrelatlonshipsbetween these exogenous,

factors and the bank failures as opposed to presenting a more exhaustiveand detailed

set of arguments and counter-arguments relating to the relative significanceand

interrelationships among the factors.

195
As mentioned in chapter five, quantitative studies of the causesof bank failures

indicate a positiVe correlation between bank failures and macroeconorMCInstability,

marked by indicators such as rising norninal interest rates, increasesin the real

inflation. 9 All of these signs of trouble were in evidence in

exchange rate and rising

the years leading up to the recent problems in Jamaica'sfinancial sector (see Table 6-

3). A number of reasonsfor the country's macroeconomic instability have been

advanced; however, there is a growing consensusthat liberalisation pohcles that

formed part of International Monetary Fund (IN4F) programmesand World Bank

Structural and Sectoral Adjustment loans contributed to Jamaica'smacroeconomic

10
ility.
instab'

From the mid- I 980s to the early I 990s, in accordancewith the conditions of EMT and

World Bank involvement in the country, the JamaicanGovernment introduced a

number of structural reforms leading to liberalisation of the country's trade regime,

"
foreign exchangemarkets and financial markets. With liberalisationand structural

adjustmentcamea devaluationof the dollar.

Jamaican In 1989,the exchangerate

was $US I to $J6.50, but throughout the 1990s the Jamaicandollar beganto slide

drasticaflyto reachits 1999restingpoint of approximately$USI to $J40. Not only

did the exchangerate increase,between 1990 and 1993 inflation was averaging

12 its highest 80%, but declined thereafter. " The

49%. In 1991, it reached point of

the Jamaicandollar and the existenceof an inflationary

necessity of supporting

led the JamaicanGoverment to raise interest rates. In December 1993

environment

short-term lending rates rose to as high as 61.32* 6.14

196
Table 6-3: Macro-econornic Indicators 1991-1997

Year % Change in Inflation Rate Commercial Exchange

Money Bank Lending Rate $J: $US
15
Supply Rate
1991 63.5 80.2 40 12.85
1992 76.7 40.2 46.4 23.01
1993 43.7 30.1 61.3 25.68
1994 24.3 26.9 56.1 33.35
1995 25.2 25.5 55.2 35.54
1996 18.8 15.8 55.2 37.02
1997 14.0 9.2 44.2 35.58

Source:Paul Chen Young, With All Good Intentions: The Collapseof Jamaica'sDomestic Financial
Sector,Policy Paperson the Americas, Volume IY, Study 12 (Washington, DC: Centrefor Strategic
and International Studies, 1998), 9.

Although the Goverment had hoped that interest rate increaseswould buttress the

faltering Jamaicandollar and "cool off' the inflationary economyby tightening the

its
money supply, policy had the opposite effect. Banks, rather than taking the signal

to tighten up lending, speculatedthat the Government's high interest rate policy was a

short-term measureand continued to lend freely, attracted by the profit potential of

high interest bearing loans. In fact, in the sameyear that the bank lending rate

bank loans increasedby 67.5%. 16

its
reached peak (1993), commercial and advances

It was prunarily these loans, made at exceptionally high and ultimately unsustainable

interest rates, that later became 17 From the rnid- I 990s, several
non-performing.

banks began to decreasein the quality of their loan

commercial experience a sharp

In 1994 the loans rose by 7.4% of total loans

portfolio. number of non-performing

5.7% the previous year. In 1996, the Bank of JamaicaAnnual Report noted
against
had sought hquidity support to meet cash flow needsresultmig
that some institutlons

197
from a general deterioration in the quality of assets(11.3% non-performing loans).

Bank of Jamaica statistics for the sameyear indicate that banks' profitability was

begmnmg to fall sharply."

The banks' problems were compounded by the fact that high inflation resulted in an

overvaluation of assets,especiafly property. Many of the banks were over exposedin

this area becauseborrowers tended to pledge real estateas collateral on loans and

many of the banks had made loans to connected parties (eg, investment arms and

insurance companiesthat were offering investment or lump-sum policies that allowed

them to take deposits disguised as prenuums. These funds were used to finance

longer-term MVestmentsin the real estate and tourism sectors) that were heavily into

the real estate market. 19 When the Government's liberalised monetary policies began

to take effect around 1994 and inflation declined, the value of real estateplummeted,

resulting in a lack of liquidity and under capitalisation in many Jamaicancommercial

banks. The Governor of the Bank of Jamaicahad warned bankersof the effect of

liberalisation but many took no notice, having beenused to an inflationary

environment where the value of even fixed assetssuch as cars increasedover time

20
rather than depreciating.

The high Jamaican-dollar short-term lending rate also encouragedmany personsand

to seek loans denominated in foreign currency, for which

commercial enterprises

lending rates were lower. This flight to foreign capital eventually placed added

the Jamaicandollar causing further depreciation in value. Moreover, the

pressure on

198
increasedcapitalflows betweenJamaicanand internationalmarketsassociatedwith

globalisation more readily transmitted international econon-ucfluctuatlons into the

Jamaicaneconomy, which again contributed to pressureon the Jamaicandoflar 2' As

.
the dollar continued to drop, many of those who had received foreign currency loans

were unable to keep up payments, further eroding the quality of the banks' assets.

The high interest rate environment also encouraged individual investors to place their

money In short-term, high-yielding instruments, such as time deposits. In 1994, time

deposits grew by 71.5% over the previous year.22 Ultimately, the mix of short-term

high-yielding time deposits and long-term loans created a mismatchbetweenassets

and liabilities in several banks and sowed the seedsof the banks' liquidity problems.

Moreover, high interest rates encouraged the development of the commercial paper

market as, rather than seek loans to finance their activities, businessenterpriseswere

able to attract financing more easily by floating short-term, high-Yieldinglending

instruments. Some banks were happy to back these instruments In order to avoid

taxes and to reduce the amount they neededto set aside to meet statutory reserve

requirements. In the long run, however, many of these businessenterpriseswere

to MVestorsthe sums owed on maturity of the commercial paper. The

unable pay

banks, which had guaranteedthe commercial paper issues,were left "holding the

bag."

199
Another of the elementsof the Government'shberahsatiOn
policy InVolvedbank

regulatory reform. Prior to Jamaica's aidependencefrom Great Britani, its fmancial

system was dominated by foreign-owned banks that operated in accordancewith their

home countries' prudential regulations and operating standards. Around

independence(1962), the Goverm-nentof Jamaicapassedindigenouslegislation

governing banking 23
operations.

Although the Government introduced periodic amendmentsto the 1960 Banking Act

in responseto the changing sectoral.landscape,Jamaica'sregulatory framework

to
remained insufficient addressthe new circumstancesof the financial sector. The

existirig legislative framework it

made all too easy for fmancial iiistitutions to take

advantageof regulatory arbitrage. For example, the Bank of Jamaicahad no

regulatory control over building societies and many conunercial banks took

advantageof this legislative loophole by selling problem loans to connectedbuilding

to bad loans from their books.24

societies in order remove

To addressregulatory weaknesses,in 1992 the earlier Banking Act was repealedand

new legislation was passedto better monitor building

replaced with a new act and
25 According to many analysts and commentators, however, the 1992
societies.

Banking Act had a number of major design faults that contributed to the financial

One Jamaican commentator, Dennis Boothe, argues that it encouragedwanton

crisis.

Unlike the 1961 Act that stated that banks' fixed assets(eg, prenuses
mvestments.

could not exceed 40% of their capital base,the 1992 Act allowed a
and real estate)

200
bank to invest up to 100% of its capital in fixed assetS.
26 This
openedthe door to the

capital adequacy and liquidity problems the banks experiencedwhen real estate

devalued. The 1992 Act also allowed mvestment

m non-fmancial assetsup to 100%

of a bank's capital base thus, according to Boothe, allowing banks to invest wildly in

such things as hotels, agricultural enterprisesand works of art in which they had no
27
managementexpertise.

Ansord Hewitt, another analyst of the Jarmican financial collapse,arguesthat by

not

expressly prohibiting investment in financial activities in the list of banking activities,

the Act essentially "made allowance" for the formation of financial conglomerates.

As a result, while the legislation frowned on universal banking, there was recognition

m 1992 when amendmentsto the Banking Act were made that banks were already
28
heavily into other areasand that this situation was to be tolerated The legislation
.
encouraged some Jamaicancommercial banks, "near banks" and *insurance
companies

to form large, complex financial groups, in many casesto take advantageof loopholes

in the regulatory framework respecting taxes and reserve requirements(eg, buildmg

societies were created to hide bad loans from commercial banks and thereby reduce

the level of funds banks had to set aside for loan loss provisioning). Thus, by the

early 1990s an unhealthy pattern of interlocking institutional ownership had emerged

and by 1995 there was an establishedpattern of groups boasting ownership of

insurance companies, commercial banks, merchant banks, trust companiesand

mvestment houses.

201
According to econonust Wilberne Persaud, these group structures destroyed
corporate

"fire walls," placing added financial strain on the commercial banks.29 In

some cases

the insurance companies pressured banks within their group of companiesto approve

dubious projects and provide loans on favourable terms and in excessof legal lending

limits. Such loans to related parties contributed to contanunationand decline of the

financial sector (eg, Crown Eagle Life had an overdraft of $J13.3 billion $US332
-

million - with Eagle Commercial Bank at the time of FINSAC intervention. National

Commercial Bank, it was discovered when FINSAC intervened, held a $J7.5 billion
-
$US 187.5 million - overdraft by Mutual Life) 30 This practice, ultimately, created
.
liquidity problems in the banks, eventually leading to insolvency.

The 1992 Act also did not property control entry into the sector, despitethe

Government's stated intentions. In order to gain a licence applicantshad to meet two

conditions: they had to be "fit and propei" to run a bank and meet capital adequacy

requirements (V60 miUion or approximately $US2.6 miffion at 1992 rates of

" Hewitt points out that inflation. eroded the capital adequacylimits set in
exchange).

1992 and these were not changed again until 1997. Furthermore, as determination of

who was fit and proper to start a bank was left solely to the Minister of Finance, some

it became largely 32
decision.
argue that a political

Due to regulatory weaknesses,the Bank of Jamaicaestablisheda specialtask force in

1995 to "fast track" appropriate amendmentsto the Bankmg Act. These came into

force in 1997. W'hile the 1992 Act and its 1997 amendment,together with a seriesof

202
prudential guidelines on areas of operational and risk managementintroduced

throughout 1995 and 1996 provided a more standardisedlegal framework

of

operations for commercial banks and introduced provisions aimed at enhancing

prudent practice in the banking sector and strengthenig the powers of supervisory

authorities, many commentators believe that it came too late.

Besidesthese legislative weaknesses,the supervisory structure was designed

only to
deal with a small number of commercial banks. As the sector grew
m size,

inspections were not carried out on a regular basis and the time lag between

inspections and issuanceof reports becametoo long.33 Moreover, supervisors

could

not deal adequately with specialist areas,particularly the loopholes and gaps In the

legislation. The fact that there was no "super authority" to regulate the rising number

of financial conglomerates and no legal regulations to facilitate the exchangeof

information between authorities or to permit the disclosure of information to the

public and analysts also prevented proper supervision of Jamaicancommercial banks

34
accor mg to some.

Whether it was as a result of an inability to take action due to a weak regulatory

P--- forbearance
framework, lack of staff capacity, or political pressure,regulatory also is

cited as a factor m the collapse. For example, Dennis Boothe notes that the Bank of

Jamaicawas aware that Century National Bank was experiencingmajor problems

well before the Minister of Finance put it under temporary and

management argues
31
that the Bank of Jamaica should have taken action three years earlier than it did
.

203
Ansord Hewitt notes that a Ministry of Finance press releaseindicated that as early as

1984 the Caldon Group had refused to provide information to the Bank of Jamaica

but that supervisors allowed it to continue to operate until 1996-97.36The financial

of
statements many merchant banks and some commercial banks clearly indicated

that there were breachesof provisions of the 1992 legislative framework revealing

that the banks had seriously exposedthemselvesin real estateand large amounts of

connected lending as far back as 1992.37 Still the Bank of Jamaicafailed to address

these problems. Moreover, former Jamaicanbanker Paul Chen Young arguesthat

even when the regulators fimlly did take action they did not provide adequate
38
leadershipand planning.

V13,1
Regulatory forbearance also encouraged bankers to take decisionsand actions with

less than due diligence (the problem of moral hazard as discussedin chapter frve).

The Bank of Jamaica,as domestic lender of last resort, extendedoverdrafts to

commercial banks during the height of the financial crisis. Jamaicanfinancial analyst

Jason Abrahams argues that this created a "total absenceof moral hazard" because

"high net worth depositors in Century, Eagle and Workers, for example,all enjoyed

the risk free interest rate of the day confident 'in the
extraordinary premiums over

bail 39
them OUt.,,
if
knowledge that things got sticky the government would

A failure on the part of the banks' external auditors to enforce international best

practices in accounting only exacerbatedregulatory and supervisory weaknesses

to the sector's problems. Financial analyst JasonAbrahams notes one

contributing

204
particularly apt example of auditors' laxity in citing the caseof a local financial

institution that managedto convince its auditors that a $J200 billion ($US5 billion)

unreallSedloss it was facing on an investment need not be booked as the company's

directors had a "high level of confidence" that these assetswould soon recover in the

internationalmarkets.40 Many believethat auditors' laxity alloweda numberof

Jamaicanfinancial institutions to get away with reporting their assetsin a mannerthat

proved misleading to shareholders,supervisory authorities and the public. In an

attempt to addressthis perceived weakness, the Government of Jamaicapassedan

amendmentto the Banking Act M 1997 that made it a duty for auditors to report to

the chief executiVeofficer of the bank, each director of the bank and the Bank of

Jamaicaany transactions or conditions that misrepresentedthe financial position of

the bank, could jeopardize a bank's financial viability, or any financial

41 The act also made provision for the Bank of Jamaicato appoirit
irregularitieS.

special auditors in caseswhere there was reasonablecauseto believe a bank's

42
ordinary auditor should not conduct a particular audit. Again, theseamendments

arguably came too late.

Endogenous Factors

Though many of the failed banks' problems clearly were triggered by the economic

environment in which they operated, as the Government Of Jamaica

and regulatory

to point out in its own defence, the fact that some banks failed while other,
was quick

205
foreign-owned, banks, such as the Bank of Nova Scotia,
profited during the same

period and under the same operating conditions requires investigation and further

explanation as it suggeststhat exogenous factors alone cannot account for the bank

failures. Rather, it implicates the decisions and

actions of directors and managersof

the failed bankstaken in responseto their externalenvironment.

43 Indeed,Jamaica's

Minister of Finance, Dr. Omar Davies, has referred to decision-making

and

judgments of directors and managersIn the failed banks during the period as "warped
1,44
and twisted.

it is, nevertheless,possible to argue that decision-makmg was no better in some of the

foreign banks and that their successis really due to the fact that they siMPly had

deeper pockets and bigger reputations to trade on 45 This must not be dismissedas an
.
explanation, since a senior treasury official in one of the foreign-owned banks

admitted in an interview conducted for this study that the bank had received what

amounted to a "ball out" from its parent company. As this official commented,the

Jamaicansubsidiary ran into the same liquidity problems as the banksthat failed;

however, unlike the failed banks, which were all indigenous, this foreign-owned bank

was able to tap into the reserves of its in 46

parent company order to avoid insolvency.

In contrast, another foreign bank included in the researchsampleneededno

additional liquidity support from its In

parent. addition, though someof the foreign

banks had well-establiShedisland-Widebranch networks and enjoyed low cost of

funds, the same can be said of the indigenous National Commercial Bank that failed.

Indeed, in 1998 the Bank of Nova Scotia had 44 branchesand the National

206
 47
Commercial Bank had 42 In addition, one of the viable commercial banks had only
.
one branch- This Indicates that directors and managersIn at least some of the
viable
banks made very different, obviously more prudent, decisionsfaced
with arguably the

sameexternal operating conditions as other banks.

However, a case also can be made that the external operatMigconditions of the

indigenous Jamaicanbanks that failed and the foreign-owned banks that remained

viable during the financial crisis were not precisely the sameby virtue of the fact that,

in addition to Jamaicanregulatory and supervisoryrequirements,foreign owned

banks were subject directly and indirectly to the regulatory requirementsof the

country out of which the parent company operated. It can be argued that these

additional, and more stringent, regulatory and supervisory requirementsencouraged

more prudent decision-making on the part of directors, managersand employeesof

the foreign banks and prevented them from engaging in the speculativeand

sometimes corrupt businesspractices that the

characterLsed failed indigenousbanks.

There is some support to be found for this line of argument in the results of the field

research conducted in one of the foreign-owned banks. In this bank, interview

subjects' statementsindicated a relationship between foreign supervisory

requirements and the parent company's strong internal control culture, which in turn

influenced the behaviour of managersand employeesat the local level with respectto

48
internal control and risk managementpractices However, the fact that another of
.

the foreign banks, despite being subject to foreign regulatory requirements,

experienced operating problems similar to the failed banks suggeststhat the need to

207
meet foreign regulatory and supervisory requirements may not have beenthat

significant a factor. More detailed comparative analysis of the regulatory and

supervisory frameworks under which the foreign banks operated and how these

influenced the banks' internal control systems

would be neededbefore any definitive

conclusions could be reached about the significance of this factor.

If parent company support and accessto a larger customer basedoes

not account for

the continuing viabihty of A the foreign-owned banks and it appearsthat, in many

cases,the banks that did not fail took more prudent decisionsand adopted better

strategies - whether or not as a result of additional foreign regulatory requirements-

we must ask what can account for the poor decision making and operating problems

of the fafled banks? In the pubfic debate surrounding the bank faures, many

commentators have blamed bankers' decisions and actions on "sharp practice," by

which is meant practices that are fflegaL bordering on the iflegal or self-dealing

motivated by a desire for short-term financial gain A Government paper citing the

causesof the bank failures accused directors and managersof thesebanks, M certain

instances,of "actions that were flagrantly dishonest and in the sole interest of the

major beneficial shareholder and/or the latter's 49

associates. Indeed,

into accusationsof fraudulent practices on the part of some directors and managersin

failed Jamaicanfinancial institutions 50 Examples of directors' and

several is ongoing.

managers' sharp practice include allegations that they took out loans for themselves

or close associatesat subsidisedrates of interest with no intention of paying the loans

back. Other observersof the Jamaicanfinancialcrisis havecited casesof directors

208
and managerstaking advantage of weaknessesin the country's regulatory framework

51
to increaseshort-term profit returns. In addition, the Governor of the Bank of

Jamaicahas stated pubhclythat the banks' problems arose becausesenior directors

and managersdeliberately used "creative accounting" with respect to assetvaluation

and income recognition in order to avoid having to set asidefunds to provide for a

growing number of non-performing assets,a practice motrvated by directors' and

managers' desire for short-term profitability

While there is evidenceto support the argument that a number of directors and

managersIn the failed Jamaican banks were engagedin thesetypes of sharp practices,

on its own this argument fails to account for the sheerpervasivenessof internal

operatmg problems M the failed banks. For example, a Ministry of Finance and

Planning paper on the problems of the collapsed banks cites a wide variety of internal

operating problems, such as inadequate credit/investment assessmentand monitormg;

excessivecredit concentration; inadequate capital levels; high and non-income

eammg levels of related party exposure; high and increasiIng levels of non-perf ornung

assets;and absenceof, or failure to comply with proper internal control procedures

52 As this list of the banks' problems

and effectiVerisk managementprinciples.

line of argument that relies on the assumptionthat bank directors and

suggests,any

knew exactly what they were doing and had adequatecontrol over
semor managers

their operationsand risks at all times is untenable.While it is true that directorsand

aware, to some extent, of their non-performing loans as

senior managerswere

by the fact that a number of them took steps to hide these problems from
evidenced

209
the regulatory authorities using various strategies, the very fact that the banks had

such a high degree of non-performing loans coupled with public statementsby several

different conunentators and the data collected for this study equally indicate that the

banks' directors and senior managersin many casescould not manageor did not

recognise the full extent of the riSks they faced.53 Far from being "masterminds", the

failed banks' directors and managersapparently had lost control of their financial

institutions. They seemednot to know what was going on or, if they i,

did not to know

how to deal with it.

While the effects of sharp practice should not be underplayed,the field research

it
results suggest that is also possible to link directors and managersof the failed

banks' loss of control over their financial institutions with the argument advancedin

chapter two that growth and innovation, required to maintain their competitive

in
position a changing economic environment, led to decentralisationof information

processing, information, and incentives. This, in turn, causedinformation related

problenis leading to operational inefficiencies.

During the period of the financial crisis, the failed banks experiencedgrowth and

forms. 54 Fi li
irst, lb eralisation of the foreign exchangeand
innovation in a variety of

the door for banks to become involved in areas of business

capital markets opened

foreign commercial paper trading, in which they had

activity, such as exchangeand

Second, the de facto easing of restrictions on licences for the

not previously engaged.
the banking 55
financial institutions encouraged growth in sector.
establishment of

210
Between 1977 and 1994 annual growth in terms of financial turnover
moved from 9%

to 50% and the average annual growth rate was 17% at a period when the economy

56
was experiencing negatiVegrowth- In 1980 there were 36 licensedcommercial

banks,building societiesand financialinstitutions with total assetsof $J2.5billion

($US62.5 million). By 1996 the number of licensed institutions stood at 57

with total

assetsof $J192.6 billion ($US4.8 billion). Increasing competition in the sector

prompted directors and managersof the failed banks to establishadditional branches

in a bid to protect their market share. In 1987 there were 156 commercial bank

branches. By 1994 the number had expandedto 201.57 Increasedcompetition also

placed pressure on banks with smaller customer basesto offer more attractive rates of

return on deposits, which, in turn, increasedtheir cost of operation and exposedthem

to greater market and liquidity risk. Finally, the regulatory framework in place at the

time encouraged banks to diversify into non-core areas of businessin which they had

little or no managementexpertise, as already discussed.

The banks' growth and expansion in terms of new products, services,branchesand

areas of operation throughout the 1990s resulted in a rising number of business

transactions for processing that necessitateda conconutant level of decentralisation

and specialisation. For example, M one bank with a large branch network credit

administrationwas decentralised
and delegatedto branchstaff in order to facilitate
58
increasedtransaction processing.

211
There is evidence to suggest that as the banks decentrahsedthey
experiencedthe

types of problems discussedm chapter two as arismg from decentralisation

of
information processors, information and incentive
i s, that is
i, the problems of

information asymmetry and bounded rationality. For

example,after decentralisingits

credit operations, this same bank found it necessaryonly a few years later to re-

centralise the function due to internal control problems that had developed during the

period of 59
decentralisation. Under the decentralised.systemof credit administration

there had been too many bank officers making decisionsabout the extension of credit,

each with their own motivations (ie, more interested in selling loans than in prudent

credit risk management),and too little information flowing to managersand directors

about bank officers' credit decisionsand actions.

Lack of inforination prevented managersand directors from holding these officers

accountable for their decisions and actions in order to maintain internal control or

acquiring te infon-nation they as managersrequlred to take sound decisionsand

actions with respect to businessstrategy. Although this bank's experienceswith

its
managing credit operations offers but one example, it is evident that other of the

failed banks were experiencing similar internal control problems. In discussingthe

bank failures, the former Governor of the Bank of Jamaicadescribedhow the banks

had poor credit practices and inadequatecontrol environments 60 Similarly, a

.
Government of Jamaicapaper pointed out that the failed banks suffered from absence

of, or failure to comply with, proper internal control proceduresand effective risk
61 Given that had the level
managementprnClpleS. growth and mnovation mcreased

212
of risk associatedwith manyof the indigenousbanks' transactions,the banks'

of
absence effective internal controls and risk managementwas extremely dangerous.

Also of note in relation to the argument that growth and innovation destabilised

internal control and decision making in the failed banks is the fact that the single

foreign bank included in the field research samplethat experiencedsimilar rapid

growth and decentralisation also experiencedsimilar operating problems and required

infusion funds from its to 62 In

an of parent company avoid insolvency. contrast, a

foreign bank that did not exhibit signs of internal operating problems remained

relatiVelysmaHduring the period and did not expandits branchnetwork, though it

63
did operatesubsidiarycompameS. Furthermore,though not includedin the research

sample, the only indigenous Jamaicanbank not to fail during the period was one that

was very small in terms of size and scope of operations in comparison to the banks

64
that failed Thus, the results of the empirical researchsuggestthat growth,
.

innovation, and decentralisation contributed to the operational Mefficienciesthat

Jamaica's indigenous commercial banks.

contributed to the collapse of almost all of

As argued in chapter two, accountability servesas a remedy to the inherent

introduced by decentralisation and specialisatiOn.Thus, the

operational problems

systems of internal accountability would have servedto

establislunent of strong

the operatmg problenis brought about by growth and innovation.

counteract

Unfortunately, in many cases,directors and managersfailed to establishsuch

systems.

213
This brings the discussionto another popular argument that has beenadvancedto

explain the bank failures. Many analysts have argued that Jamaicanbankers failed to

establish effective controls to manage areas of risk brought about by their expansion

into new products and services M the context of a volatfle financial enviromnent. As

already noted, the operating environment in which Jamaicanbankersfunctioned

becamemuch more complex throughout the 1990s. Prior to hberahsatiOnand

structural adjustment, foreign exchange and interest rates were steadyand the value

to
of assetswas not subject severe market fluctuations. Moreover, bankers were not

involved in as many businessactivities sensitive to these risks. Many have argued

that bankersIn the failed Jamaicanbankshad little experiencewith managingnew

areas of risk brought about by changesIn their operating environment and expansion

into new products and services. For example, as already noted, increasedcompetition

forced the banks to offer higher rates of interest on deposit accounts. This situation

reduced the comfortable interest rate spreadsthe banks previously had enjoyed

between their assetsand liabilities and required the banks to monitor assetand

liability mismatchesmuch more closely, particularly as interest rates were fluctuating

widely during the period. Despite the need for tighter monitoring and control of asset

and liability mismatches,it was late in the day (je, late 1990s, in some caseswhen

already on the brink of failure) that the banks began to make serious efforts to

undertake assetand liability management.

214
Many commentators have attributed directors' and managers' faflure to
estabhsh

accountabilitiesand controls to managenew areasof businessrisk to their lack of

knowledge and experience. A number of the indigenous

commercial bankers,

accustomedas they were to large interest rate spreadsand high rates of return, did not

have the necessaryexposure to risk and financial managementtechniquesto

avoid the
65
new ris s. Moreover, unlike their counterparts in foreign-owned banks, they had

few, if any, external sources of expertise upon which to Call.66

Despite these obvious shortcommgs in the banks' accountability systems,

not all
internal control failures and poor decision making in the failed banks be
can

attributed to management'sfailure to establishsuitable systemsof internal

accountability and control. It is clear from the field researchthat Jamaican

commercial bankers were not totally remiss in establishingoperating accountabilities

to aid in the identification, assessmentand managementof their businessrisks and to

managetheir balance sheets. Indeed, by law the banks were required to have put

some of these in place. For example, at the time, Jamaica'sbanking regulation

required that they track and ensure adequate levels of cashreserves,liquid assetsand

loan loss provisions as well as submit to the Bank of Jamaicaannual balancesheets

loss 67 A more
and profit and statementsplus various monthly and annual returns.

detailed discussion of the types of financial reports the banks were required to submit

to the Bank of Jamaicacan be found in chapter nine.

215
At the very least III order to meet the Bank of Jamaica's statutory reserve and

reporting requirements, the banks had put in place basic accounting and management

reportmg systerns, to
which varymg degreesthey had computerised. Usirig these

accounting and managementreporting systems,they also generateda number of

internal reports to assist in identifying and managing their risks. Takmigthe

identification, assessmentand managementof credit risk as a specific example,the

banks, to varying degreesand levels of effectiveness,were assessingthe credit

worthiness of borrowers, settmg lending lirnits for staff at different levels, securing

loans, tracking past due and non-performing loans and monitoring assetand liability

maturities.68 Admittedly, however,they were not adequatelytrackmgtheir

guarantees(ie, contingent liabilities such as overdraft facilities and the backing of

69
commercial paper).

it be
Thus can seenthat despite acknowledged weaknessesin the banks' internal

procedures the fact remains that they had put some

control and risk management

in place. The data collected for this study,

policies, procedures and reporting systems

however, overwhelmingly suggest that, time and again, bankers in the failed banks

to and managetheir risks effectiVely despite the

were unable control operations

internal accountabilities and controls they had established,even when such controls

have been to override by managersand

should adequateand were not subject

sharp or fraudulent practices. For instance, in terms of credit

employees engaged in

despite the accountabilities noted above, the banks

risk management, controls and

ted their loan portfolios, as i

indicated
I by
ill
sti Eailed to manage credit risks la
associ with

216
 the high number of non-performing loans they had on their books. This
raisesthe

interesting and perplexing question as to why the banks' systemsof internal

accountability and control were not supporting effective internal control and decision-

making? The answer to this question will be sought in the following chapter,
which

examinesempirical evidence linkmig weak accountability systemsand poor record

keeping.

Conclusion

The failure of Jamaica's indigenous commercial banks has had

a profoundly negative

effect on the Jamaicaneconomy and society. For this reason, it is imperative to fully

understand all the reasonsfor the collapse. While macroeconornicinstability and a

weak regulatory framework have been cited as factors In the banks' collapses,this

chapter has argued that, becauseother foreign-owned banks profited under the same

externalconditions,the decisionsand actionstaken by directorsandmanagersof the

failed banks must be implicated in the failures. The argument has beenmadethat

although sharp practice on the part of a few directors and managersaccountsfor some

of the apparently imprudent decision-making characteristic of the f ailed banksit

cannot account for the sheer pervasivenessof such poor decisionsand the operating

problems such decisions produced. The chapter pointed to other evidencegathered

durm*gthe field researchwhich supports the theoretical framework outlined m chapter

two suggesting that growth and imovation that gave rise to problenis of

decentralisatiOn
of information decentralisation
processing, of informationand

217
decentratisation of incentives led to operating inefficiencies, the failed banks. It
In

was argued that strong systenis of internal accountability and control would have

mitigated the effects of increasing decentralisation; however, becauseof lack of

managementexpertise in new areas of businessrisk, necessaryaccountabilities,and

controls were not established. In addition, the chapter arguesthat the internal

operating problems M the failed banks and the poor decisionsof the banks' directors

and managerswas due not only to a managementfailure to establishaccountabilities

and controls for new areas of risk but also to a failure of their existing systenisof

internal accountability and control. The next chapter explores the reasonswhy these

systems were not functioning effectiVely.

End Notes

' The preciseyear in which the Jamaicanfinancial collapsecan be said to have startedis a matter of
interpretation that dependson the factors that one acceptsas having causedthe collapse;however,
most analystsand commentatorsagreethat the seedsof the collapsewere sown long beforethe first
banks failed. For example, seeDennis Boothe, "Case Study of SelectedFinancial Institutions,"
Symposiumon the Crisis of the JamaicanFinancial ServicesSector,University of the West Indies,
Kingston, Jamaica,27 November, 1999, author's transcription of tapedproceedings.ClaremontKirton
and Moya Leiba Barnes date the financial crisis in terms of forced closure,mergers,and government
assistance. Using thesefactors the crisis can be dated from 1995-1998. They note that economists
also try to date the crisis by the following: to
non performing assets performing assets 111the banking
systemexceeds 10%, that cost of rescueoperationswas at least 2% of GDP, extensive banking
problems that resulted in large scalenation alisations, and large amount of bank runs [see Claremont
Kirton and Moya Leiba Barnes, "Financial Sector Crises in the 1990s:Macro and Micro-Economic
Roots, Symposiumon the Crisis of the JamaicanFinancial Sector,University of the West Indies,
Kingston, Jamaica,27 November, 1999, author's transcription of taped proceedings]. For the sakeof
simplicity, the study views the collapse of the sectoras commencing with the first in a seriesof bank
failures; that is, with the collapse of the Blaise financial institutions in 1995, although it acceptsthat
the roots of the collapse go back much further.

'A review of the audited financial statementsof the failed Jamaicancommercialbanks at time of
failure reveals that the capital baseof thesebanks was fairly small in comparisonwith UK, US or
Canadian banks. The banks had a capital base at time of failure of around $J200-500 million ($US5-
12 million). The largest, National Commercial Bank (NCB), had a capital base of $J2.15 billion ($US
50.4 million). All of these banks were highly leveraged with capital/asset ratios far below the required
Basle Committee minimum of 8%. Indeed, NCB at time of failure had a capital/assetratio of only
around M

218
' Paul Chen Young, With All Good Intentions: The Collapse ofJamaica's DomesticFinancial Sector.
Paperson the Americas Volume M Study 12 (Washington, D. C.: Centre for Strategic and
Inter-nationalStudies, 1998),1.

' SeeNorman Girvan, "Jamaica: An Internal Debt Trap?" Symposium the Crisis the Jamaican
on of
Financial ServicesSector,University of the West Indies, Kingston, Jamaica,27 November, 1999,
author's transcription of taped proceedings and 'Domestic Debt JumpsAgain, " Financial Gleaner, 27
October, 2000,3.

'Paul Chen Young, 1.

6 "FINSAC bill nears $130b," The Financial Gleaner, Friday, August 25,2000,3.

7 "Nation Unites in Protest," The Gleaner, Tuesday,April 20, AI-3; "More Mayhem," The Gleaner,
Wednesday,April 21,1999, A- 1. Demonstrations and protests againstfuel price 'increaseswere not
previously unknown in Jamaica. A number of fuel price hikes in the 1970sand 1985were met with
public outcry and civil disobedience [seeGail Hoad, "Unwelcome dejAvu," The Gleaner, Tuesday
April 20,1999, A-3.

" FINSAC, Annual Report, 1998,8.

' ShelaghHeffernan, Modern Banking in Theory and Practice (New York: JohnWiley & Sons, 1996),
268.

'0 For a discussionof the impact of Structural Adjustment Programmesand liberalisation on the
financial sectorsin developing countries, seefor example, works by Howard Stein ed., Deregulation
and the Banking Crisis in Nigeria: A Comparative Study (BasMgstoke: MacNfillan, 1999). Recently,
in its Development Report titled "Attacking Poverty", the World Bank has admitted weaknesses in the
conditionality programmes of World Bank adjustment loans [see"World Bank attacks 'deep poverty
amid plenty', " The Gleaner, Sunday, 15 October, 2000,9].
" Omar Davies, "Introductory Statements"Symposiumon the Crisis of the Jamaican Financial
ServicesSector. University of the West Indies, Kingston, Jamaica,27 November, 1999,author's
transcription of taped proceedings. Seealso //www.
htt-p: worldbank.org and http: //www. imf. org for
summariesof assistanceprovided to Jamaica.
12
Boothe.

13Greta Bogues,"Origins and Causesof the Banking Crisis," Symposiumon the Crisis of the
Jamaican Financial ServicesSector. University of the West Indies,Xingston, 27
Jamaica, November,
1999, author's transcription of taped proceedings.

14Bank of Jamaica, Annual Reports, 1987-1997.

" Money supply can be defined as the total stock of money in the economy[SeeGeoffreyLipscombe
Pond, Banking: The Business, Ped. (Loughborough: LoughboroughUniversity, 1998),20].
and Keith

16Bank of Jamaica, Annual Report, 1993.

17This pattern is not uncommon in developing financial to

markets according experienced financial
Wilbert 0. Bascom, who writes: "It is not unusual for seriouslending and internal control
supervisor,

219
deficiencies to be concealedwhen economic conditions are boorruingand for credit quality problems to
surface when the economyis in a downturn. " SeeWilbert 0. Bascom,Bank Managementand Supervision
in Developing Financial Markets (London: MacNfillan PressLtd., 1997), 251.

18Bank of Jamaica,Annual Reports, 1994 and 1996.

Wilberne Persaud,conversationwith the author, Kingston, Jamaica, 10 May, 2001.

20Bogues. Note that the appreciation of motor vehicles was also due to import control (le, duties).

21Jeffrey Frankel of the Council of Economic Advisors statesthat globalisation increasesthe

international effects of domesticfinancial crises. This is becauseincreasedprivate capital flows,
brought about by globalisedmarkets, can transmit and increasea country's susceptibilityto
international economicshocks. In addition, volatile private portfolio flows can interact with liberalised
banking systems,where exchangeand interest rates fluctuate, to increasethe likelihood of foreign
exchangepressures. Under theseconditions, in order to defend the exchangerate, governmentsmust
raise interest rates or seea sharp decline in the exchange rate. If the governmentis unable to raise
interest rates, for example because raising interest rates would further erode the quality of banks'
assets, then exchangerates may come under speculative attack. See Jeffrey A. Frankel, 'Treventing
Banking Crises," Preventing Banking CtIses: Lessonsftom Recent Global Bank Failures, ed. Gerard
Capno et al (Washington, D. C.: The World Bank, 1998): 6-7.

22Bank of Jamaica,Annual Report, 1994.

23Laws of Jamaica,The Banking Law, L. N. 31/1960.

24Davies. Davies notes that, in the caseof the Blaise financial institutions, the Bank of Jamaicaknew
that something was going wrong but could not pinpoint what it was because the problem would be
by
cured the time they could check it out. As it turned out the Blaise group of financial "institutions
was hiding its problem loans by playing a sort of shell game. This entailed salesof loans between
that the loan that the bad loan
entities. The buyer would issue a piece of paper indicating was good so
was not reflected on the books of the other financial entity. Boothe notes that other sharp practices
designedto circumvent financial regulations included the issuing of debentures by merchant banks to
requirements. Also, insurance companies created policies with very little insurance
circumvent reserve
attachedto them [SeeBoothe].

Laws of Jamaica, The Banking Act, L. N. 17/1992 and The Financial Institutions Act, L. N. 16/1992.

26Boothe; Laws of Jamaica,The Banking Act, L. N. 42/1995, s. 10.

27
Ibid.

2" Ansord Hewitt, "An Assessmentof the Regulatory Framework of the Jamaican Financial Semices
Financial Services Sector, University of the West
Sector," Symposium on the Crisis of the Jamaican
Indies, Kingston, Jamaica,27 November, 1999, author's transcription of tapedproceedings.

29Wilbeme Persaud,"Financial Sector Growth, Innovation and Crises: The Links, " Symposiumon the
Financial Services Sector, University of the West Indies, Kingston, Jamaica, 27
Crisis of the Jamaican
transcription taped proceedings. As of March 2002, the GOJ has passed
November, 1999, author's of
legislation to the BOJ tighter regulatory powers to delve into the financial operationsof
additional give
to deposit taking [see "Clamp tightens on Financial Sector,"
any company connected a institution
March, 2002, Onlmie, Internet, iamaica-gleaner. com accessed 20 March, 2002.
Wednesday, 20 www.

220
 Boothe.

Laws of Jamaica, The Banking Act, L. N. 42/1995, s.6.

32Hewitt. Hewitt contendsthat the design faults in the 1992 legislation were due to "regulatory
capture," stating that the Act was "hijacked" by senatorsacting for two of the indigenouscommercial
banks.
33
Davies.

34Claremont Kirton and Moya Leiba-Barnes.

Boothe.

36HeWitt.

Bogue.

'8Chen Young, 11.

39JasonAbrahams, "The Need for Restructuring of the JamaicanFinancial Architecture and the Way
Forward," Symposium on the Crisis of the JamaicanFinancial ServicesSector,University of the West
Indies, Kingston, Jamaica, 27 November, 1999, author's transcription of taped proceedings.

Abrahams.

" Laws of Jamaica, The Banking (Amendment) Act, L. N. 26/1997, s. 10.

42Laws of Jamaica, The Banking (Amendment) Act, L. N. 26/1997, s.15.

43
Persaud.

" Davies.

45SubjectE-2, personal interview, Bridgetown, Barbados, 17 November, 1999.

46
Ibid.

471 am indebted to Dr. Wilberne Persaud,of the University of the West Indies' Department of
line to The figures for the number of branchesare
Economics, for pointing this of argument out me.
derived from each bank's 1998 annual report and financial statements.

48 Seefor example, interviews with subjectC-2, personalinterview, Kingston, Jamaica,29 September,

Kingston, Jamaica,5 October, 1999 and subjectC-7,
1999, subjects C-5 and C-6, personal interview,
Kingston, Jamaica, 6 October, 1999.
personal interview,

Finance Planning, "Public SectorResponse

to the Problemsof
" Government of Jamaica,Ministry of and
" Nfinistry Paper No. 13/98,8 April, 1999.
the Financial Sector,

50SubjectF-2, personal interview, Kingston, Jamaica, 30 August, 2001.

Keynote Speaker ROB Awards "

Luncheon, JIOB News (May 1999): 1+.
51"BOJ Governor at

221
52Goverment of Jamaica,Ministry of Finance and Planning, Tublic SectorResponseto the Problems
of
the Financial Sector," Nfinistry Paper No. 13/98,8 April, 1999.

53SubjectA-5, personal interview, Kingston, Jamaica, I June, 1999. This

subjectstatedthat "[1]
would say that again there is an issue of crisis recognition, of peoplefeeling that they could delay
things or work it through somehow.
. ."
54ChangesM the Financial SystemStructure: 1961-1999 (Total Assets,Deposits,Loans A
in millions,
figures asof December 31,2000)
1961 1971 1981 1990 1995 1996 1999
Commercial banks
Number of banks 6 6 8 11 11 9 6
Number of branches 69 131 179 170 205 188 129
Assets -- 517 2,634 17,328 121,325 135,996 192,843
Deposits 406 2,103 12,098 89,135 94,103 126,814
Loans 330 1,495 8,997 45,864 54,563 36,719

Merchant banks
Number of institutions 3 6 21 25 23 13
Assets 12 93 4,527 17,334 19,778 10,079
Deposits 2 35 2,843 6,868 6,760 4,545
Loans 10 38 2,863 6,024 7,349 2,704
--

Trust companies
Number of institutions 2 6 10 3 -- -- --
Assets 24 163 109
--
Deposits 14 126 86
Loans 14 104 75 -- -- --
--

Building societies
Number of institutions 7 16 7 6 32 14 5
Assets 17 57 388 3,058 29,084 35,926 40,412
Savingsfimds 14 53 367 2,667 25,217 28,765 32,577
Loans 14 46 271 1,596 9,714 15,570 14,709

Credit unions
Number of institutions 110 127 96 80 82 77 66
Savings 2 10 185 694 3,516 4,681 9,436
Loans 1 9 184 652 2,831 3,652 6,680

Financehouses
Number of institutions 10 5 4 4 2
-- --
Assets 59 266 639 530 724
Savingsfunds 47 157 210 236 393 -- --
33 168 206 185 205
Loans -- --

Source:Bank of Jamaica

" Hewitt and Davies passim.

" Persaud.

Mnistry Finance, "Public SectorResponse to the Problems in the Financial

5' Government of Jamaica, of
Paper No. 13/98,8 April, 1998; Bank of Jamaica,Annual Reports, 1987-1997.
"
Sector, Nfinistry

222
511
Subject A- 12, personal interview, Kingston, Jamaica,6 July, 1999.
j
59
Ibid.

60"BOJ Governor Keynote Speakerat ROB Awards Luncheon."

6' Government of Jamaica,Ministry of Finance and Planning, Tublic SectorResponseto the Problemsof
the Financial Sector," Ministry Paper No. 13/98,8 April, 1999.

62SubjectE-2, personal interview, location confidential, 17 November, 1999.

6' This conclusion is basedon the researcher's assessmentof the bank after conducting interviews and
conducting on-site examinations.
64This refers to the Trafalgar Commercial Bank.

6'Govemmerit of Jamaica,Ministry of Finance and Planning, "Public SectorResponseto the Problemsof

the Fmiancial Sector," Mnistry Paper No. 13/98,8 Apnl, 1998.

66For example, interview subjectB-3 points out that indigenous banks did not anticipatedrastic shifts
in exchange rates in dealing with foreign exchange risks and interview subjectE-3 notesthat
management'sunderstanding of risks in the failed banks was flawed. SubjectB-3, personalinterview,
Kingston, Jamaica,25 June, 1999 and subjectE-3, personal interview, Bridgetown, Barbados,19
November, 1999.

67Laws of Jamaica,The Banking Act, L. N. 42/1995, s. 16.

6" This is basedon an analysis of the kinds of reports coveredunder the retention schedulesfor the
failed banks. Thesereports provide evidenceof the kinds of risk managementand analysiscarried out
by the banks.

69SubjectA-1, personal interview, Kingston, Jamaica, 19 May, 1999; SubjectA-16, personal

interview, Kingston, Jamaica, 30 July, 1999; and SubjectB-3, personalinterview, Kingston, Jamaica,
25 June, 1999.

223
Chapter Seven: Implicating Poor Record Keeping in the Failure of Jamaica's
Indigenous Commercial Banks

Introduction

Using data from the field researchon the failure of Jamaicancommercialbanks,

the previous chapterprovided empirical evidencein support of the theoretical

relationshipbetween competitive viability and accountabilityas discussedin

chaptertwo. This chapter seeksto provide empiricalevidenceof the relationship

betweenaccountability and record keeping as positedin chapterthree and to

illustrate the effects that poor record keeping can have on accountabilityand

competitive viability. Thus, following on fi7omthe argumentin the previous

chapterthat weak systemsof internal accountabilityand control contributed to the

internal control problems and poor decision-makingthat characterisedthe failed

banks,this chapter contendsthat, in addition to more generallyrecognised

in
weaknesses the banks' accountabdity the
systems, of
absence adequate

information to support the effective operation of the failed banks' established

internal accountabilitiesand controls - the fault of poor record keeping-

223 -
contributed to the poor decision-makingand operationalproblemsexperiencedby

the banks.

The chapter beginswith a brief overview of someof the factors

contributing to

weaknessesin the banks' internal control systems. It then goes on to focus on

poor communicationof businessrules and the absenceof trustworthy and timely

accountingand managementinformation, resulting from the banks' record

creation and keeping practices,as factors contributing to poor decision-making

and operationalproblems.

Accounting for Weaknesses in the Failed Banks' Internal Accountability and

Control Systems

A useful place to begin exploring the factors contributing to weaknessesin the

collapsedbanks' systemsof accountability and control is with a review of the

Basle Committee framework for the evaluation of internal control systems

discussedin chapterfive. This framework definesthe characteristicsof an "ideal"

internal accountability and control systemand thus offers a point of comparison

with the internal accountability and control systemsfound in the failed Jamaican

commercialbanks. To reiterate, the Basle Committeeframework calls for internal

control systemswith sufficient managementoversight and control; the proper

assessmentof risks; the establishmentof various control activities to manage

risks; effective information and communication;and finafly proper monitoring of,

to,
adherence and efficacy of internal controls.

224
Unquestionably,the field researchdata indicatesthat the failed banks' internal

control and accountabilitysystemshad severalweaknesseswhen comparedwith

the Basle Committeefi7amework.Evidence suggeststhat, in a numberof

instances,the banks' directors and managers,someof whom were engagedin

sharppractice, failed to set a tone of high ethical standardsand integrity, which

would have been to '

needed encourageand support a soundcontrol culture. As

in
such, somecases,managementoverrode existing internal accountabilitiesand

controls, which had the effect of underminingthe efficacy of the banks'

2
accountabilityand control systems. Furthermore, as alreadymentioned,bankers

in the failed banks did not identify or understandall of the areasof risk that they

faced in their existing operating environmentand thereforefailed to take adequate

3
stepsto addresstheserisks. Managementalso failed to establishsufficientmeans

to
of monitoring adherence and effectivenessof internal controls and

by in
accountabilities,as evidenced weaknesses the internal audit function.

While there is clear evidenceto indicate that all of the abovefactors undermined

the banks' internal accountabilityand control systems,this chapterexamines

another elementof the framework that is critical to the effectivenessof such

systems: information and communication. As noted in. the Basle Comniittee

framework, quality information and communicationare essentialfoundationsof

the other interconnectedelementsof internal accountabilityand control systems.

Though the field researchconducted for this study has revealedthat the quality of

in
information and communication the failed banks was poor, in the public debate

the collapseof the faded Jamaicancommercialbanksthis problem

surrounding

has received little recognition as an important factor to in

contributing weaknesses

225
 5
the banks' internal accountability and control systems. Where the absenceor

quality of information and communicationhasbeenidentified as a problem, the

focus of the discussionhasbeenlimited to the needfor inter-bank exchangeof

information about customers' credit history in order to support better credit risk

6
analysis.

In contrast to the relative silencein the public debateabout information and

communicationas a factor contributing to weaknessesin the failed banks' internal

accountabilityand control systems,FINSAC officials and consultantsclosely

involved in intervention into and rehabilitation of the failed banksquickly

identified poor quality information and communicationas a significantproblemin

the failed financial institutions. Consequently, they have spent a great deal of

time and resourceson improving accountingand managementinformation

systemsas a major part of their effort to improve internal control and decision

making in theseinstitutions.

This chapter advancesthe argumentthat practiceswith respectto the creationand

keepingof records underminedthe quality and communicationof information in

the banks. As a result, directors and managersoften were unableto obtain an

accurateassessmentof their financial positions as the basisof good decision-

making, adequately their

assess risks, and maintainproper control of operations

throughout their organisations. The discussionfocusesfirst on recordsneededto

establishthe structure of internal control and accountabilitysystemsand to

standardsand proceduresof operation and then goes on to discuss

communicate

the creation, communication and keeping of records neededto support the giving

226
and holding to account. As eachaspectof a systemof internal accountabilityand

is
control dependenton another,this chapter also airnsto reveal how weaknesses

in the banks' information and communicationinterrelatedwith and

undermined

other aspectsof their accountability and internal control systems.Finally, the

chapter aimsto show the impact of poor information and communicationon the

failed Jamaicancommercialbanks' decision-makingand operations.

Weaknesses in the Creation and Keeping of Constitutive Records

Chapterthree discussedthe ways in which certain types of recordsserveas a

meansof establishingthe structuresand proceduresof accountabilitysystems.

Policies, procedures,directives, strategies,organisationchartsandjob descriptions

are all types of documentsthat organisationsuse to set out the structureand mode

of operation of their internal control systems. In addition, these types of

documentsserveas instrumentsin the processof holding organisationalactorsto

account in that they stipulate the performancestandardsintendedto both constrain

and measurethe actions and decisionsof theseactors. Sincethe lines often are

blurred betweenthe dual constitutive and instrumental.purposesthat policies,

proceduresand similar documents in

serve relation to the operationof

organisationalsystemsof accountabifityboth aspectsof such documentaryforms

will be dealt with in this discussionof their role in the failure of the Jamaican

commercial banks' internal accountability and control systems.

227
The Basle Committeeframework, in its discussionof directors' and senior

for
managers'responsibility governance,guidanceand oversight,highlightsthe

importanceof policies, procedures,directives and similar recordsin "setting the

broad strategiesand major policies of the organisationand approvingthe overall

organisationalstructure. ,8 In particular the framework the

emphasises importance

of "operational procedures[that] are containedin clearly written documentation

that is madeavailableto all relevant personnel" for the purposesof establishinga

strong control culture in which "every employee [is aware] of the need to carry

out their to
responsibilitieseffectively and communicateto the approprIatelevel

in
of management any problems operations, instances of non-compliance with the

code of conduct, or other policy violations or illegal actionsnoticed" and to

establish"an appropriatecontrol structure ... defining the control activities at

every business level. "9

In a similar vein, the Bank of Jamaica's standards of best practice, issued in 1995-

1996, call for the establishmentof policies for eachareaof risk managementand

control as part of a bank's internal control system. These written policies,

to the provide
standards, the guidance
necessary to individuals
according

for the institution's proceduresand controls and assistin

responsible policies,
10
ensuringthat the controls used are authorised,adequateand current.

In contrast to the ideal internal control systemdescribedin the Basle Conu-nittee

framework and the Bank of Jamaicabest in

practicesguidelines, many casesthe

failed banks did develop and implement clearly definedbusiness

rules,
not

228
formally establishedand in writing, to set out control activities with respectto

various risk areas. In the words of one interview subject.

when I saw the decline in the financial sector in the past two years
...
that was the problem, you know. Theseguys had no system,they had no
I
procedures, meancredit analysis, mean I basic things to a bank, it was on
a very haphazard fashion. I do this, you do that. Do we coordinate?
Maybe we do. Do we have a pattern?Does the information flow to a
certain point, is it documented, is it kept, is it reviewed,is it audited? That
was the missing thing from the banks that failed."

This subject'sviews are supportedby the views of Wilbeme Persaud,Professorof

Economics at the University of the West Indies, who hascommentedthat the

banksthat failed did not clearly delineatetheir rules of operation,whereasthose

that remainedviable had well-establishedrule books.12

An interview subjectfrom a viable bank commentedon the problemsbanksface

when businessrules are not well documented:

If we didn't have the policies in place, first thing we wouldn't

even have an organisation because you have to have some level of
in
consistencies the way you deal with customersand the way you deal
with systems. If you don't have, the whole thing is gonna fall apart,
...
basically. One thing you don't want to do which I think is what has
happenedin the local market is to start dealingwith peopleon a
I
differential basis. In other words, am manager;you come to the bank as
I this for you. I deal with this documentation differently
a customer waive
becauseI know you,.type of thing. accept I this form of documentation
becauseof who you are and so on. That's the one thing you don't want to
do in a bank. Once you start to do that you openyourself up to risk
in
becausethere is no similarity the proceduresanymore. The next person
in I this. Why don't you use this piece of
comes you say okay will waive
documentation. You have to have a straight system. So if you don't have
documented, something that is thought through, something that
something
is tried and been tested, you are bound to then run into problemswith how
business down the road, you know. It's just got to
you are managing your
back to haunt at some point in time and check from just checks
come you
balances How do you check yourself? How do you know
and situation.
in fact on the right pageall the time. You do that because you
that you are
have a framework to check yourself against. So the framework is very
is
important and this why a lot of banks ran into trouble because they

229
 had no framework to checkthemselves.It was well I know [nameof
is
person], she good for it let me do this. That can't work.

In the absenceof clear, well-documented,current and accessiblepolicies,

proceduresand directives, accountability in all areasof the banks' operationswas

difficult to achieve. This situation ftielled a weak internal control environment.

Employeesapparentlyexperiencedconfusion about the needfor and how to carry

out different control activities, resulting in loss of control over bank 13

operations.

In addition, problemswith the documentationof businessrules in the failed banks

it for
made impossible directors and senior managersto determineif employees

by to in
were abiding establishedpolicy and prove any wrong-doing caseswhere

employeeshad deviatedfrom acceptablepractice.14 This situationpromulgatedan

in
environment which fraudulent activities could flourish.

The field researchclearly showsthat an absenceof written businessrules

contributed to the internal by

operating problemsexperienced the banksthat failed

linked to their internal 15 Even when suchdocuments

and was control problems.

did exist, however, performancestandardswere not being followed.

Commentators typically have pointed to weak managementoversight and control

coupled with a weak audit function in the failed banksto explainwhy even
16
documentedperformancestandardswere not properly implemented. While

is to
there certainly evidence suggestthat this was the case,it that
assumes

employeeswere sufficiently aware of and briefed on existing policies and

the failure to communicatepolicies effectively as a factor that

overlooks

prevented their proper implementation.

230
Evidence collected for this study neverthelesssuggeststhat weak compliance
with
internal operating rules and standardsof performancein the failed banks
alsowas
linked to problemswith how rules and standardsof performancewere managed

and communicated. In commentingon the communicationand managementof

the banks' written businessrules one interview subjectmadethe following

commentabout the problemsencountered:

In somecasesthey were there but you had to look for [them]. In that,
althoughthere is a proceduresmanual,a documentthat stateshow they
should operate,you find that there are severalamendmentsandthese
in
amendmentsare given the form of a memo. [They] do not necessarily.
hit the manualbut [are] in a separatefile. So the information is kind of .
.
sketchyin somecases.Where [there] is an issueyou haveto run the light
to someextent on the people involved in 17
the process.

Another interview subjectcommentedthat:

somebody coming into the organisation would take up the policy

...
manual and would certainly, when you look it,
at you would realise that it
is five years behind but the [amendments are] somewherearound in the
find. "
organisation which you cannot

Policies, proceduresand directives did not flow as they shouldhaveto those

responsiblefor their implementation. Nor were they regularlyreviewedto ensure

19
their continuing relevance. As a result, informal and predominantlyoral "the

way we do it around here"')

practicesprevailedwith resultantambiguityabout

organisationalstandardsof performance.

Problemswith the communIcationand managementof policies,proceduresand

directives can be linked to the fact that the failed bankswere not systematically

the creation, review, distribution and filing of thesedocuments. In

managing

other words, problems arosefrom weak of

management the record creation and

keeping processes. Each for

operational areawas separatelyresponsible codifying

231
policies, proceduresand directives relating to the functions it performed.

However, in the absenceof a central coordinating unit with responsibilityfor the

managementof the organisation's codified businessrules there was no way of

ensuringthat operating units codified consistentlyand regularly, and that they

systematicaflyreviewed existing documentationto incorporatechangesnecessary

to correct operating problems or addressnew product innovations.20

Furthermore,the site investigationsrevealedthat the bankshad no singleunit

for
responsible compiling all policies to maintain an official current version of the

various policy manualsas well as an historical record of supersededpolicies in the

event that questionsaroseabout past decisionsbasedon earlier rules. Nor was

there a single distribution fist to ensurethat all relevantpersonsreceivednew

versionsor that new employeesreceived important information about business

rules and operating standards. Moreover, for

no clear proceduresexisted updating

policy manualswhen amendmentswere issued,with the result that manuals

becameoutdated and new policies, proceduresand directiveswere difficult to

find. In many cases,individuals continued to work in accordancewith outdated

21
businesspractice.

As the banksgrew in size and cameto have more complexorganisational

structures,lack of control over the of

management their written business
rules and
22
operating standardsbecamemore pronouncedand detrimentalto operations.

There were more units creating policies and proceduresand an increasingnumber

to
of staff whom these documentshad to be distributed. In the of
absence any

over the developmentand communicationof documentedbusiness

coordination

232
rules and performancestandards,the banks' documentationof policies,

proceduresand directivesbecamemore erratic and uncontrolled. Moreover,

growth and product innovation also createda needfor rapid revision of existing

policies so that version control in this increasinglycomplex environmentwould

have beenof increasingimportance. As there was little to no formal control over

various versions of policy and procedural documentation,personnelwere unaware

of operational standardsand requirements,and managementwas unableto hold

to in 23
staff account order to enforce compliancewith operatingstandards.

In comparison,in one of the viable banksincluded in the field researchsample,

the creation, communicationand keeping of the bank's policy and procedural

documentation was highly controlled and systematically managed. The bank had

developedan intranet-basedcentralisedstoragesystemfor its policies and

procedures,which it updated on a monthly basis. had

Management organised

training coursesfor bank staff aimed at providing information about how to access

the systemto encourageits use. In addition, systemshad beenput in placeto

ensure that all employees were notified of policy and procedural changes;for

held
example,management regular meetingswith staff to updatethem on

amendmentsand sent out announcementsabout policy and proceduralchangesvia

electronic mail.24 As a result, this bank did not suffer fi7omthe samedegreeof

ambiguity in the structure of its internal accountabilityand control systemsand

communicationof its businessrules as in the caseof the failed Jamaican

commercialbanks. Not surprisingly, its internal accountabilityand control

systems were much stronger.

233
Weaknesses in the Creation and Keeping of Instrumental Records

Effective operation of formal internal systemsof accountabilityand control rely

not only on communicationof the structure of the systemand operational

performancestandardsbut also on timely communicationof trustworthy accounts

of decisionsand actions taken by accountablepersonsasthe basisby which their

decisionsand actions arejudged by those to whom they are accountable(eg,

managersand directors). Timely and trustworthy accountsprovide the basisfor

maintaining internal control by providing the information neededto monitor

compliancewith operating standardsand performancetargets as well as providing

directors and managerswith information neededto make sounddecisionsrelating

to the assessmentand managementof risks and the determinationof appropriate

businessstrategy.

Basle Conunittee framework Principle 8 specifies that senior managementmust

internal
ensurethat there are adequateand comprehensive financial,operational

and compliancedata, as well as external market information about eventsand

conditions that are relevant to decision-making. The Committeestatesthat such

information should be "reliable, timely, accessible,and provided in a consistent

25
format .,, f
In addition, the ramework specifiesthat internal information should

be part of a record keeping processthat includes establishedproceduresfor

Principle 10 that
establishes senior must
management put in
records retention.
information
place appropriate management systemscovering all activities of the

including
bank. These systems, those that use and hold data in electronic form,

234
must be secureand periodically tested. The framework acknowledgesthat data in

electronic form and computerisedinformation systemsalso haverisks that must

26
be controUed.

Echoing the Basle Committee framework, the Bank of Jamaica's

standardsof best

practice include a requirementfor managementinformation systemsto provide

qu ity i ormation at all levels within the institution to assistin making informed

businessdecisions,to facilitate the effective managementand control the

of
institution's operationsand to facilitate externalreporting. Moreover, the

standardsdocument calls for the establishmentand maintenanceof sufficient

appropnatecontrols over the accounting and other record keepingprocessesof

institutions. FinaUy, the Bank of Jamaica document states that information

technology controls are an important part of banks' internal control systemsas is

the managementof risk associatedwith loss of data or disruption of information

27
systems.

Evidencegatheredfrom four of the six failed Jamaicancommercialbanksreveals

that accounting and managementinformation was not availableor of sufficient

quality to support effective operation of their internal accountabilityand control

systems. For example,severalsubjectsinterviewed for this study expressed

frustration with the fact that information neededto monitor the banks' liquidity,

deposit base,assetquality and loan loss provisionswas not accessibleon a timely

basisor as far back as necessaryfor the purposesof trend analysis,and in some

28
casesnot availableat all.

235
 It is worth noting at this point that interview subjectsfrequently identified
these

accounting and managementinformation related problemsas being due to poor

C4
managementinformation systems." As discussedin chapterthree in relation to

the meaningascribedto records, what a given term signifiescan differ

dramaticallydependingon the context of its

usage. Typical theoreticaldefinitions

of managementinformation systems,for examp'le,associatethe term with

computer-basedsystems,as in the f6flowing definition:

a computer-basedsystemthat makesinformation availableto users

with similar needs. The usersusually composea formal organizational
entity - the firm or subsidiarysubunit. The information describesthe firm
or one of its major systemsin terms of what hashappenedin the past, what
is happeningnow, and what is likely to happenin the future. The
information is madeavailablein the form of periodic reports,
special
reports, and outputs of mathematicalsimulations. The information output
is used by both managersand nonmanagersin the firm as they
make
decisionsto solve problems.29

Subj ects' use of this terminology, however, indicatesthat they all had very

different ideasabout what managementinformation systemsactually comprise. It

also suggeststhat the banks' information related problemswent much deeperthan

what, by the definition cited above,can be describedas "management

information." For example,someinterview subjectsusedthe term to refer to the

30 Othersusedit to
banks' transaction processingand core accountingsystems.

refer to the reporting functionality of information systems(whether computerised

or manual) that supportedmanagementreview and decision-makingin the context

of hierarchical 31
organisationalstructures. Still othersused the term quite liberally

to refer to aHcomputerisedinformation in
systems the 32
banks. In manycases,

interview subjects' used the term managementinformation systems,therefore,to

encompasswhat, for the purpose of this study, are identified in chapterthree as

records, including types of documentstypically identified in the accounting

236
literature as sourcedocuments,accounts,and managementand financial

accounting reports.

Despite the different meaningsthat subjectsascribedto the term management

information systems,they all pointed out pervasiveproblemsin accessing

trustworthy accountingand managementInformation on a timely basisfor the

purpose of managementand financial accountingand accountability. In the words

of oneinterviewsubject:
I would haveto saythat one of the big problemsthat faced
Jamaicais the managementinformation systems were absolutely
...
atrocious; nobody could get anything out of them and if I was a manager
would not have in
a clue as to what was going on my bank ... 33

Lack of trustworthy accountingand managementinformation contributedto

problemsthat had seriousrepercussionsfor the banks. Without timely and

accurateinformation, bankershad no way of accuratelydeterminingtheir bank's

financial position, assessingthe quality of their assetportfolio, making adequate

provisions againstloss, between

preventing mismatches assetsand liabilities,

managingtheir cashflow, keeping down the costs of their funds, and maintaining

adequate levels of capital to support their operations. Here, it is appropriate to

reiterate that many bankersdid not undertaketheseimportant management

functions out of either self-interestor ignorance;nevertheless,evenwhen they

to
sought perform such functions, lack of appropriateinformation preventedthem

from doing so effectively. The banks' failure to perform thesecritical functions

effectively, or even at all in some in

cases, combinationwith market conditionsat

the time, resulted in a number of "life threatening" problems. For example,a

number of non-performing assetsfunded by short-term liabilities led to

rising

237
liquidity problems. The banks' profitability further declined
as overheadexpenses
increasedfrom lossesdue to fraud and the banks' inability to
managetheir cash
flow effectively, which led to penaltiesfor failing to adhereto
statutory deposit

ratios that again increasedcosts of operation. All of thesefactors taken together

spelleddisasterfor these commercialbanks.

Interview subjectsand commentatorshave tendedto identify three main reasons

to explain why the banks' information and communicationwas inadequate.One

of the reasonstracesback to the argument,discussedin the previous chapter,that

the banks' managerswere not experiencedenoughin new areasof risk to be

aware of the need to track certain types of transactions. In other words, they

failed to account for and, by extension,establishaccountabilityfor these

transactions.While the researchconductedfor this study supportsthe contention

that managersfailed to establishsystemsto prudently track and accountfor all

aspectsof their banks' business,

it still does not explainwhy accounting

information coming from well-establishedaccountingand management

information systems was of such poor quality.

Another theory that some commentators have advanced to explain why the banks1)

financial information and reporting was unreliablewas that their accounting

practices were suspect. In a paper presented at the Jamaican Institute of Bankers

1998 Awards Luncheon, the Governor of the Bank of Jamaica cited creative

accounting, particularly in respect of assetvaluation and income recognition, as

to the banks' financial 34 Similarly, at a

contributing unreliability of information.

symposium on the collapse of the Jamaican financial sector, financial

recent

238
analystJasonAbrahamspointed to the "liberal" interpretation of accountingrules

by
employed someJamaicanbankersas a factor in 35
the collapse. While there is

little question that the failed Jamaicancommercialbanksdid play fast and loose

with accounting rules and therefore produced somequestionablefinancial

reporting, this problem better explainswhy those externalto the banks-

shareholders,auditors, regulators and customers- were unableto obtain a clear

picture of the banks' financial positions and risk exposuresthan it explainswhy

the banks' own directors, managersand employeescould not accessreliable

recorded information. Moreover, it is not helpful in discoveringwhy even

disaggregatedfinancial information (eg, sourcedocumentationfor financial

transactions)was missingor unreliable,as was the casein the four failed banks.

Nor does it offer a basisfor understandingwhy non-financialrecorded

information was inadequateand unavailable. Thus, other explanationsmust be

sought.

Another of the reasons given to explain the poor quality of accounting and

information
management is that the banks' transactionswere not sufficiently

computerised. Proponents of this theory argue that greater use of computers

would have resulted in better quality accountingrecordsand management

36
reporting. It is certainly true that many of the banks still handled transaction

processingand accountingmanuaflyand that in the caseof those that

processes
,

were automated,the banks' computerisedsystemshad inadequacies,

such as poor

interfaces 37
communications that caused accounting
system-generated errors.

Nevertheless,the field researchindicatesthat in

problems the production of

be
trustworthy and timely accountscannot attributed solely to lack of

239
 computerisationor weaknessesin how the banks' transactionprocessingand core

0 accounting systemsfunctioned because,as will be discussedin more detail below,

many of the problemsarosefrom the absenceof or poor quality source

documentation. Thus, an understandingof the banks' information related

problems,and by extensionsolutions to those problems,are not necessarilyto be

found only with computerisation.

None of thesereasonsshould be discountedcompletelyas causesof weaknesses

in accountingand managementinformation supportingthe failed banks' internal

accountabilityand control systems,sincethere is evidenceto suggestthat all

contn ute to the poor quality of information in the failed banks.In and of

themselves,however, thesecannot fully explain the banks' information and

communicationrelated problems. The field researchdata point to manyother

contributing factors having to do with the in

way which the bankscreatedand kept

their accounting records. To fully understand the in

sources of weaknesses the

quality of the banks' accountingand information

management and how these

weaknessesaffected internal control, risk management,evaluationof financial

positions and the prevention of fraud in the banks, it is therefore to

essential

explore in detail how the banks produced their accounts. The following

discussionpresentsa high-level overview of the accountproduction process,

beginningwith a discussionof the banks' core businessfunctionsand touching

three different types of records involved in the production of the banks'

upon

accounting and information

management - source documentation,
accounting

records and financial and managementreports.

240
 In looking at how records were interpreted and re-interpretedto
produce particular

views of the banksfinancial positions and risks it would havebeenrevealingto

havebeenable to trace the processesof inscription, transmission

and

contextualizationfor a single document or group of documentsinvolved in a

singletransaction. This type of approachis usually associatedwith an internal

audit methodology,which is basedon detailed samplingof certaintransactions.38

However, given the limitations imposedby cultures of bank secrecy,the for

need

confidentiality in regard to pending litigation, and the impossibilityof gathering

data relatedto specific documentsand transactionsfrom ethnographicinterview

subjects,the researcherwas unableto use an audit methodologyand the

discussionin chapterssevenand eight is, of necessity,focusedat

a more systemic
level of analysis. This level of analysisis broadly consistentwith the archivist's

usual methodologicalapproach,which tends to focus more broadly on systematic

39
issues.

The bankshandleda wide range of financial transactionson behalfof a variety of

parties. Theseincluded processingof transactionsfor both customersand non-

customersconductedat ATM machines(in two of the failed banksonly) and

transactionson behalf of customersconductedat branchesor processedthrough

the branchnetwork. The majority of transactionsin the branchesresultedfrom

the banks' core functions of deposit taking and lending. However, with the

structural reforms that took place in the 1990s in the Jamaicanfinancial sector,

banks also becamelicensedforeign exchangedealersand tradersand so

consequentlyhandleda number of transactionsinvolving the buying and sellingof

foreign exchange. In addition, the bankspurchasedfunds and madeinvestments

241
to support their other activities. As such, the banks' main businesstransactions

included:

Opening and administeringvarious deposit accounts behalf

on of
customers(eg, current, savings,and time deposits)

Processingof cashand chequedepositsto and withdrawalsfrom

those accounts

Granting, disbursing,servicing and collecting credit,

suchas loans,
overdraft facilities and guarantees(ie, of commercialpaperfor
corporate clients)

SeUingand purchasingforeign exchange

Purchasingfunds and investing

In addition to their core functions) as noted earlier, throughout the period of the

Jamaicanfinancial crisis, the banks also increasinglybecameinvolved in non-core

functions such as art collection and, indirectly through their lendingactivitiesand

investments,real estatedevelopmentand other types of businessenterprisesin

which the banks had little managementexpertise. Although their involvementin

thesenon-core activities contributed to the problemsthat eventuallyled to their

failure, the focus of this discussionwill be on the production of accounting

records and managementaccountinginformation relating to the banks' core

functions for the reasonthat the field researchyielded a preponderanceof data

related to these areas. Despite the focus of the discussionon accountingrecords

accounting
and management information relating to the banks' core functions,the

field researchsuggeststhat similar conclusionscan be reachedabout the general

quality and effect on accountability and accountingrecords relatedto non-core

functions.

242
The processof accountingfor the banks' core financial transactions,and thus the

accountability for those transactions,beganwith the creation or receipt of records

documentingeachfinancial transaction. As discussedin chapterthree, these

records typically are referred to in the accountingliterature as source

documentation. The banks createdand receivedmany different types of paper

sourcedocumentsin the processof opening various types of deposit "

accounts.

Theseincluded application forms, agreementsregardingthe operationof the

account, copiesof customeridentification, deposit slips and signaturecards.

Other relevantrecordswere receivedfrom the customer,suchas letters of

in
reference the case of personal accounts or copies of certificates of

incorporation, memorandaof associationand articles of associationin the caseof

corporate accounts. Such documents in

generallywere placed customeraccount

files. The banks also generatedsignaturecardsthat were kept separatelyin card

41
files. In addition, at least one bank kept a customeraccounthistory card file,

in the banks 42
this information was savedin a computer e.
while another of

Throughout the operation of the account, the banksfiled recordsrelatedto the

history of the account on the customer's accountfile, which generallywas

retained in the customer's branch. Examplesof the type of documentsplacedon

the file include letters concerningthe printing and dispatchof cheques;stop

payment orders; copies of statements; letters concerning lost or stolen cheques,

drafts or passbooks;and letters concerningthe use of facsimilesignatures.

Severalsubjectsspoke of problemswith incomplete and inaccuratecustomer

those on computer. As one interview subjectexplained,

records, particularly

becausethe customer information files were incompleteand customer

243
documentationinaccurate,branch staff making credit decisionsdid have
not

accessto important information about customers' credit history

So you would So you would have a they would put

... ----- ---- at a
certain addressand ----- account. I would then quite easilygo to another
branch or eventhe samebranch and try to openup a sameaccount
and
they would never track that I had alreadyhad an accountwith that branch.
They would open up another account and sometimesthey would not even
fill out an addressor anything. So I could quite easilyhavea huge
overdraft or non-performing input in one accountand have somebalances
of funds in another account and walk out with that. 43

The method of filing customerdocumentationalso contributedto lack of accessto

important information about customers. Though it be

might expectedthat all

documentationrelated to a single customerwould be groupedtogether and placed

on a file relating only to that customer, the field researchrevealedthat this was not

the in
necessarily way which customer documentationwas organised. In one of

the branchesvisited, customer documentationwas simply placedon files

in
organised chronological order. Thus, retrieval of infonnation relatedto a

particular customerwas dffEcult if not impossible. Inadequatecontrol over and

organisationof customerrecords, coupledwith the of

absence a credit bureauthat

would have facilitated the exchangeof credit information among banks,

Jamaican

in
left the banks open to abusesthat, turn, exposedthem to increasedrisk of fi7aud,
44
credit risk and, ultimately, to losses.

On the credit side, the granting of a credit facility, for example a loan, overdraft or

guarantee,generatedsuch documentsas credit applications,credit assessments,

to the credit facility and, for corporate loans, notes on site

correspondencerelated

reports. The banks createdand maintainedcredit files into

visits and annual

they documentsrelating to the opening of the credit facility. In

which placed

244
addition, most of the banks' credit was securedso they also createdand kept

securitiesdocumentationconcerningcollateral on credit. This documentation

varied dependingon the nature of the credit but included suchitems as debentures,

mortgages,certificates of title, bills of sale insurance,loan agreements,

,
promissory notes, and exchangecontrol approval (in the caseof foreign currency

credit only). The bankskept thesedocumentsin separatesecuritiesfiles that they

generally stored in a safeareasuch as a branchvault. As with the depositaccount

files, throughout the operation of the credit facility any documentationrelatingto

the customer's credit accountwas to be placed on the appropriatecredit or

securitiesfile.

A number of interview subjects noted that an extremely high percentageof the

banks' securitiesand credit files were missingkey documentationor contained

45
documentationthat was incomplete. In 1999, even one of the failed bankswith

a comparatively well-managed system for its securities files could claim

46
documentation was complete on only up to 70 percent of these files. So poor

was the f"ed banks' record keeping that, in responseto concernaboutthe public

releaseof individuals' financial details as a result of the bankingcrisis, Jamaica's

Minister of Finance was prompted to remark of two of the banks that "Having

the
seen way that records were kept I have no doubt that they'd lose, if not all,
...
-)A7
at least most of the piecesof information.

Nfissing credit and securitiesrecords contributed to the problemsthe banks(and

subsequentlyFINSAC) experiencedwith effectively monitoring the credit-

of their customersand collecting on loans that had becomenon-

worthiness

245
performing. In the end, the high number of non-performingloanson which the

banks could not collect had to be written off thereby weakeningthe banks'
capital

adequacyand contributing to their downward spiral.

In addition, the banksmadea number of guarantees,suchas approvingoverdraft

facilities issuingletters of credit, and backing commercialpaper. Often bank

,

were madeat the officer level and not reported, securedor documented
Lniarantees
48
in the bank's official records. The failure to documentguaranteesopenedthe

banksup to a sourceof credit risk that, becauseundocumentedandunreported,

could not be assessedand managedproperly.

Documentationwas also poor in relation to other areasof the failed banks'

activities. In the investmentarea, in

inadequacies recordingfinancialtransactions

led to financial losses. In a single casealone,the inability to validatean

investment led to aA 100 million (US $2.3 million) loss for one of the failed

banks49 In anotherbank, an internal audit report noted that failure to properly

.
record transactionsin the treasury and foreign exchangetrading operations

resulted in fraud, late or non-booking of default

transactions, under contractual
50
obligations and exchangelosses.

The banks processednumerousfinancial transactionson a daily basiswith respect

to their deposit and credit accounts. Theseincluded cashand chequedepositsand

and credit disbursements

or paymentson loan accounts. Each
withdrawals,

transaction generatedrecords, for example:deposit slips, savingsaccount

withdrawal vouchers, internal vouchers, chequesand other types of source

246
documents. Depending on the type of transaction
and the way in which a

particular bank structured its transaction processing,branchand/or central

processingunit emp oyeesrecorded eachtransactionin various manualor

computerisedsystems. The field researchuncoveredthree separateproblems

associatedwith the processingof transactions.

First, source documentsoften were missing,inaccurateor

incompletewith

obvious consequencesfor the reliability of the information enteredinto the bank's

transaction processing systems. For example, incomplete vouchers often led to

51
in
errors recording and tracking inter-companytransactions. Suchtransactions

essentiallyremainedinvisible for accountingand accountabilitypurposes.

All bankswere microfilming cancelledchequesand,to varying degrees,other

types of source documents. In terms of the cheques,the banksmicrofilmedboth

those drawn on other bankswhich they receivedin the branchesand forwarded

via the Bank of Jamaica, the central clearing agency, back to the originating bank

Cout-clearings") and those of their own bank receivedvia the Bank of Jamaica

from other banks to be processedand then forwarded to customerswith their bank

statements ("in-clearings"). Microfilming of chequeswas important as, after the

chequeleft the bank, the microfilm copy constitutedthe only record of the cheque.

Unfortunately, the banks' microfilming practicescontributedto recordsretrieval

problems. Officers often were unableto retrieve microfilmed chequesand other

documentsbecauseof the poor quality of the microfilm (ie, completelyblack or

blank). Owing to their inability to retrieve microfilmed copiesof chequesas

247
evidenceof transactions,in many casesthe banks were unableto pursuecasesof
52
fTaud.

Third, recording of transactionsin the bank's manualor computerisedbooks of

account also often was inconsistent,inaccurateand incomplete. For example,

loans were issuedwithout being written up or booked (ie, recordingthe issuance

53
of the loan in the books of account). During intervention into the failed banks,

FINSAC also found unrecorded liabilities dating from 1993 approaching $J200

($US5 54 Due inadequacies

million million). to these of the source documentation

and original data input into the bank's accountingsystems,managementreports

often were incorrect and rnisleading. As a result, the bankslackedtrustworthy

information to identify and managetheir financial positions and risks. The

underlying reasonsfor thesethree problemswill be discussed

in greaterdepth in

the following chapter.

Each of the bankshad computerisedtheir transactionprocessingto varying

degrees. In somecasesthe item processingsystemswere standalonewhile in

others they were modules of the banks' core accountingsystems.Despitethe use

in
of computer systems the banks, many of the accountingrecordsin the branches

at the time of the bank failures, which, as noted above,is cited

still were manual

the factors contributing to poor accountingand information

management
as one of

in the failed banks.

The oldest of the banks' computeriseditem processingsystemscaptured

information relating to only a limited number of front office transactions,suchas

248
current and savingsaccount depositsand withdrawals. Due to the system's

limited functionality, the bank processedother transactions,suchas loan

payments,manually. As one interview subject explained:

in some caseshowever you had only a [computerised] system running

...
the front office. The back office was manual. You had a situation where
an entity was processing loan cards using a card system and you have a
loans clerk going each month and calculating on a calculator and
updating
a ledger card. So you had systems wherein only the front office where
they capture the information on the customer's account. regular savings or
)
current account or a CD account, but there are certain facets Re loans that
[were] manual 55
...

Thus, obtaining managementinformation relating to a customer'sportfolio of

servicesand products or the overall quality of the loan portfolio becamemore

complicatedand difficult. One FINSAC official who later had the job of

the
assessing banks' financial position and risks as part of a due diligenceexercise

commentedon the effects of these hybrid systemsas relatedto obtainingadequate

infonnation:

In terms of computerisationof the accounts. I think, I am trying to break

this down, in terms of different institutions. Each of them was
computerised differently and someone like [name of bank] really had no
computerisation, a lot of it was manual. So if you had to get any
information out, what would have to happenis that the information request
had to go out to eachof the branches.They would havecollatedthe
information manually -a time-consumingoperation- then it would be
to
collated and given you... You are given a sheetof paperwith numbers
which56is inadequate and a lot of people have put an awful lot of time into
that.

Although this hybrid accounting systemdid generateinformation of use in

tracking the of the bank's it

assets, was not easyto retrieve on a timely basis
status

comprehensive and available in a convenient form.

nor necessarily complete,

249
 An

Aner entering eachfinancial transaction,the banks posted entriesto various

accountsin double entry ledgers,for exampledeposit accountledgers,credit

ledgers,and generalledgers. Here again, someof theseledgers

were

computerised,forming part of the banks' computerisedcore accountingsystems,

while others were not. In the caseof the computerisedledgers,like the transaction

processingsystems,the banks' core accountingsystemsused different software

runrung on a variety o platforms. Two of the banks used EBM AS400-based

systems of approximately five years in age. Another used a DOS-based system.

Yet another had a system dating from the 1970s running on the
now outdated EBM

system 36 platform.

In eachbank the level and quality of integration betweenthe item processing

systemand the core accounting systemvaried. In the bank runningthe oldest

systemthere was no integration betweenthe two. Transactionsin the branches

were recorded online; bank officials then had to load thesetransactionsmanually

into the ledgersin the core system. Diskettes camedaily in the afternoonfrom

eachbranch into the bank's head office for batch posting to the core system. As

this was a manualprocess,it introduced opportunitiesfor errors. Moreover, it

presenteda problem in terms of the timelinessof information availableto head

office about the bank's financial position. At best, this information alwaysran at

least a day behind. At worst, when the branchesdid not finish their work and send

in their diskettes,the end of day position could not be determineduntil the

57
following day, which meantthat it was at leasttwo daysout of date. Ultimately,

lack of systemintegration preventedmanagersand staff in the banksfrom being

to
able accesstrustworthy information about positions and cashflows on a timely

250
basis. One interview subjectcommentedthat, as a result, staff often resortedto

handling many transactionsby fax and/or phone to obtain information they

to
required make 58
decisions. This further contributed to the information woes of

the banks, sincethe information upon which decisionsabout suchtransactionswas

basedfell outside the bank's normal information capture process.

One subject describedhow a recurring communicationsproblembetweenthe item

in
processingand core system one of the four failed banks affectedthe bank's

to
ability gauge the quality of its loan portfolio accurately. This interview subject

explainedthe systemintegration problem using the following example:A loan is

madeof $100,000 and interest of $20,000 is payableeachmonth betweenJanuary

and July. On the retail side,the item processingsystemshowsthe initial loan and

the interest payableeven though the interest is not being paid. At the end of July,

the system reclassifies the loan as non-performing and shows a balance of $0. It

then automatically goes back and wipes out the earlier data on the loan. On the

ledger of the core accounting system,however, the entry for the loan
general side

shows a value of $180,000 for April, but only $120,000 for July after the

transactionshad been wiped out on the retail side and the balances
were carried
59
across,as well as a final balanceof $200,000. This subjectpointed out that a

have known that the information in the generalledger is wrong,

managerwould

but would have beenunableto seethat it was as a result of a non-performingloan

becauseof the mannerin which the item processingand core accountingsystems

communicated. Such inaccuraciesobviously affected the reliability of

information about the bank'sfinancial position and level of credit risk.

251
Problemswith systemintegration also led to treasury managementdifficulties, for

without accurateinformation about their daily cashpositionsthe bankswere

unableto managetheir cashflow effectively. As one intervieweesaid-

what is one of the most important things in a bank?It is cash

...
management, knowing your cashposition at any point in time so that you
can place funds, get funds becauseyou find that Bank of Jamaicaonce you
are over a certain amount of money they are going to slapa penalrate on
you which was significantly high at the time. And it hasa ripple effect of
course because what happens is it pushesup your cost of fundsthroughout
is
your systemso cashmanagement one of the absolutelycrucial things
you must know. It is your pulse. You found that many banks never
knew their true cashposition until the following day 60 ...
...

Lack of timely information on cashpositions hamperedthe banks' efforts to

effectively manage statutory cash reserve requirements. Failure to meet these

requirementscarried expensivefines for the banksand increasedoperatingcosts

61
that reducedprofitabifity. However, more importantly, the inability to

accuratelydeterminecashpositions negativelyaffectedthe banks' efforts to

managetheir liquidity. Shortfalls from suchproblemsas non-performingloans

forced the banksto raise funds at market premiumsto cover operatingexpenses

and lossesand, eventually,to incur large overdraftswith the Bank of Jamaica,

which again pushedup the cost of their operationsand affectedprofitability and,

eventually, liquidity.

In another of the banks,the accounting systemhad in

seriousshortcomIngs how it

information, not having been designedwith the needto handle

presented

for such a high number of non-performing loans. The manner in

accounting

information left the bank with an inaccuratepicture of

which the systempresented

its loan portfolio, which ultimately contributed to liquidity problems.

the status of

As one subject explained-

252
 Subject: [I will] speakto the non-performing loans and the way the
bookings showedup there. Similar, the standard. was 180 days
.. past
due. Now it is switched to 90 days,but apart from accountingand
regulatory issuesthat I don't think will be addressedright now it is
...
very easyto evergreena loan; that is to say,that if you paid $ 1.00 of
interest then the loan was not considereda non-performingloan
even
though you owed $1 billion. They did not have an information systemto
track a percentageof interest that you had paid in order to track it and say
it was non-performing or performing and so, quite fi7ankly, just
people paid
$ 1.00 and it was never deemednon-performing All non-performing
...
loans needto be tracked and given to the Bank of Jamaica(BOJ). You
needto set asideprovisions accordingly for that, but if it is not considered
non-performing then you still accountfor it as an incomestatementitem
and therefore you seethe banks having huge profits andyet they are in
overdraft position with the BOJ.

Interviewer: So in other words it was on the books as a performing

...
loan which then gave a distorted picture of the total financialposition.

Subject: Basically. We have to have clarifications, as it showed up as

profit. Now, it was still functioning, and in terms of cash flow you still
had the cash flow to service.

Interviewer: So that [is how] we get into some liquidity problems.62

Had the systemfunctioned differently, the bank's managementmight have

detectedand taken much earlier action on non-performingloansand,therefore,

sufferedfewer losses.

In keepingwith standardaccountingprocedures,the banksundertookto balance

the double entries in eachof their ledgersresulting in the production of trial

balances,though admittedly many commentatorshave suggestedthat account

63
balancingseemsnot to have beendone with adequatetimelinessand regulanty.

Through the processof balancingthe accounts,the bankssoughtto verify the

accuracy of their books of account and detect any errors. The correction of

required bank employeesto researchindividual financial

account imbalances

transactions,which often necessitated

retrieval and examinationof original source

253
documents,such as vouchers. However, errors often remaineduncorrected
and

thus the banks' accountsremainedunreconciled.

Here again,the banks' inability to balanceaccountspartly stemmedfrom

inadequaterecord keeping. Retrieval of sourcedocumentsfor the purposesof

clearingup transactionentry errors, account imbalancesor to conduct

reconciliation of accountswas difficult to impossiblebecauseof the mannerin

which the banks kept theserecords. Many interview subjectscommentedthat

retrieval of transactionrecords, such as deposit slips and vouchers,was difficult.

In theory, transaction records were to be retained for a varying period (usually one

year) in the branchesor data centre. Interview subjectsnoted that retrieval of

transactionrecords was difficult becauserecords in the brancheswere

disorganised. Out of the four failed Jamaicanbanks,a structuredmethodof filing

had never existed in the two newer banks,while in the two older banksthe method

64
of filing had broken down over time as the banks expanded.

An
After in
a period of retention the branchesor data centre,sourcedocuments

generaHywere to be transferredto the banks' so-cafledarchivesfor retentionto

meet ongoing operationalneeds,such as customerquerieson accounts,and

legislative retention requirements. In reality, transfers took place erratically, if at

disorder time. 65
all, and the of these records only worsened over

Interview subjectsnoted that disorder in

of records secondarystorageareasstarted

the point at which the records were transferredfrom branchesand offices.

at

Often records were "turned over" and placed in boxes that, for the most part, were

254
not properly labeled. Poor practicesat the point of record transferto secondary

storage resulted in later retrieval difficulties. As one subjectcommented,'(what I

found when I went there by looking on the boxes [was] a pile of papersjust pulled

out of drawers dumpedin a box Regardlessof what was in the drawer because
...
I
found all sorts of things in the boxes, all sorts of personalStuff -)66

Theseboxeswere sentto the banks' "archives," which were often little more than

dumping grounds into which records were thrown in no particular order.

Interview subjectsfor the study describedthe state in which one of the bankskept

dafly transactionsvouchersas f6flows:

we went on this occasion.... because we needed to get some

...
documents for our lawyers, who had requested some specific files and we
went with the lawyers to see how it
easy would be to locate these
documents. On arrival we saw the door was open and a number of boxes
were scattered outside on the steps, We went up the steps and there was
one guy at the back leafing through stuff a in box So we actually went
...
there and what we encountered was a room filled with boxes, torn and
untorn, all dumped in the middle of the in
room no particular order ... So
we had to climb on top of the pile and try and re-arrange the boxes in some
sort of order to try and figure out what was what. We also had to compete
67
with the rats.

in
Another subject describedthe method of records storage one of thesefacilities

being like "how bonfire. 68

), Under theseconditionsof storage,
as you'd start a

retrieval of the records for and

accountverification purposes, thereforethe

trustworthy and timely accounts,was impededif not impossible.

construction of

In terms of the effect that records storage had on the banks' ability to reconcile

1999 Mnistry of Finance and Planning paper stated that FINSAC

their accounts,,a

discovered over 5,000 unreconciledaccountsin four of the failed Jamaican

banks 69 A former director of one of the failed banksattributed the

commercial .
lack of reconciliation of accountsdirectly to a problem with locating source

255
documents. While, arguably,part of the problem the failed banksexperienced

with account reconciliation related to the fact that bank directors and managersdid

not take stepsto ensurethat this function was being performedon a timely basis,

records related problemswere certainly a contributing factor. This director

commentedthat:

We have accounts here that haven't balanced.,been reconciled for years.

Mainly because they just can't get the source documents. They are
nowhere to be found. Either they were lost at the branches,they were not
maintained at the branches or in transit they were lost or they were filed
somewhere or destroyed. And we have had to write off millions. Literally
millions of dollars because we just do not have the information to
reconcile accountS. 70

In 1998 alone the bank had to write off $J120 million ($US3 mflhon) becauseit

to
was unable complete reconciliation of its accounts.71 Had the bank's directors

and managersensuredthat source documentswere properly maintainedsuch

lossesmight havebeen avoided.

In addition to forcing the banksto write off vast sums,their inability to reconcile

information
accountsmeant that their accountingand management lacked

integrity. As one subject remarked.

We are going back to the actual data that was in [the core accounting
system]. A lot of it was very, very poor and still is very poor. This is what
never ceases to amaze me. In terms of [name of bank], you have got so
it is
much of which unreconciled... For instance, if your bank balance is
X thousand dollars and you have paid a cheque out, which is in the
clearing system for Y dollars or whatever, the cleared funds will not add
to these things. There was actually unrecociliation [sic] between
up 72
everything ...

In many cases the underlying reason for the unrefiability of accounting

information produced by the banks' core accounting systemswas not due to any

failure on the part of information technology nor to bank officers' failure to

256
undertake timely transactionproofing and reconciliation but to an inability to

correctly balanceaccountsand correct accountingerrors becauseof the mannerIn

which paper-basedsourcedocumentswere organisedand stored.

Production of the trial balanceformed the basisfor preparationof the banks'

statementsof profits and lossesand, from this, the balancesheetsthat showed

their liabilities,,assetsand capital. Together, the profit and loss accountand

balancesheetcomprisedthe banks' final accounts. Many commentatorspointed

to the unreliability of the banks' financial reporting, blamingthe problemon

creative accounting on the part of the banks' directors 73

and managers. While

there is certainly evidenceto suggestthat bank directors and managersdid engage

in creative accounting,the to
extent which distortions and inaccuracies
in the

banks' final accountsare attributableto this kind of manipulationshouldnot be

overemphasised.Flaws in the processof producing theseaccountingreports

equally led to a deterioration in the reliability of the banks' As

accounts. such,

directors and managersoften lacked the trustworthy and timely accountingand

information
management they neededas the basisof maintaininginternal control,

making sound decisionsand meetingregulatory reporting requirements.

In addition to the production of profit and loss accountsand balance from

sheets,

information in their accountingrecords, other financial and reports

management

were neededto assistmanagersand directors to meet statutory requirements,

Someof the reports that the banksdid

control operationsand managerisks.

produce included liabilities with other institutions; assetswith other institutions;

257
assetdetails; currency positions; assetand liability maturities;interestaccruals,

passeddue loans; and non-perfbrnng loans.74

Production of financial and managementaccountingreports was problematicin

the failed banks, however. Though the accountinginformation generatedin the

banks' computer-basedcore accounting systemswas an important sourceof

information,
management managershad little hope of using anybut the most

recent information in analysisfor decision-makingsince"historical" datawas

either expungedor "archived" onto relatively inaccessible 75

tapes. One subject

describedhow the inability to accesshistorical managementaccounting

information underminedeffective financial and risk management.This subject

noted that a particular bank had no historical information on loan loss provisions-,

the bank could only give a rough figure. He also noted that the banks' interest

rate policies were being driven by competitors, not analysisof hard data over time

of the impact of interest rates on the bank's own product MIx. Thus, information

for liability 76
needed assetand managementwas not available.

Another reason for the poverty of the banks' managementinformation lay in the

fact that the banks' information

computensed. lacked
systems report-writing

functionality and therefore could not provide managerswith usefulpresentations

data to support management information requirements. As one

of accounting

subjectnoted-

The other major problem affecting the institutions even ones which were
[that] they had not got significant report-writing
computerised ... was ...
functionality within their management reporting tools. They could not get
data 77
management readily OUt.

258
 The difficulty of retrieving managementinformation in
meaningfulreports from

the banks' core accounting systemsoften discourageddirectors

and managers
from proactively seekingout the information they
should havehad for financial

and risk management.As one interview subjectnoted, "managementsuffered

with or just put up with what they actually had rather than actually demanding,

'this is the kind of data we wanted'. ).)78 Lack of report functionality caused
% writing
important gaps in management information with
serious implications for the

banks. As one subject explained:

if you have a gap there is a great risk becauseit meansthat I'm

... acting
on incomplete information becausewhat I have and what I believeis the
total fact is not so and so my decisionwill not be asinformed as it
... 79
be
should which leads to errors.

Not only did lack of report writing functionality hamper risk analysis and

managementdecision-making,in one caseit also preventedmanagersfrom

spotting irregularities that would have revealeda credit fraud involving a branch
80
managerwho was in collusion with borrowers.

Reporting limitations of the failed banks' existing systemsled managersto create

ad hoc management information systems using Excel or other spreadsheet

software. While these information

management systemsfacilitated somelevel of

analysis (eg, looking at ratios such as deposit base to what the banks were paying

out in interest to determinecost of sales),they did not provide the sophisticated

models and simulationsthat the banks' management

would have needed(had they

recogrusedthe need) to perform risk managementtechniquessuchas value-at-risk

(VaR) analysisor to preparebudget projections for different cost centres,products

and markets. Where the need for more sophisticatedanalysisand reporting was

259
identified, want of proper managementinformation systemslimited

management'sability to undertakefinancial and risk managementwith any degree

of sophistication,which ultimately reducedthe banks' ability to maintain

competitive viability.

Moreover, as these systemswere ad hoc creations,their

credibility was higWy

suspect. There were no controls over the input and output of information fi7Om

them, no controls to ensurethat they produced consistentand reliableresults,and

no controls over systemsecurity and backup. As standalonecreations,thesead

hoc systemsbecame"islands of technology" only availableto the single

user or

group of usersresponsiblefor their creation, althoughthe infonnation they

containedmay havebeenof benefit to the decision-makingprocessesof others.

Conclusion

Sound risk and financial managementis essentialto the competitiveviability of

any banking operation and is, in turn, dependent

upon proper accountabilitlesand

controls to identify and manage areas of risk and set appropriate businessstrategy.

Accountability, as a primary mechanismfor achievinginternal control and sound

decision-making,is therefore vital to the continuing viability of banking

operations. As the field researchfor this study has the

revealed, failed Jamaican

commercial banks' accountability and control systems suffered from many

weaknesses. Though commentators have typicafly attributed these system

to
weaknesses sharp practice, failure
management to establishappropriatecontrols

or weak managementoversight of establishedcontrols, the field researchindicates

260
that poor information and communicationalso contributed to weaknessesin the

banks' systemsof accountabilityand control.

Poor quality information and communicationpreventedbank directorsand

managersfrom effectively monitoring and enforcing compliancewith operating

to
standards,which was essential preventing fraud and maintaininginternal

control over operationsin the banks' increasinglydecentralised

operating

It
environment. also underminedeffective decision-makingwith respectto the

managementof the banks' financial positions and risks. Together,thesefailures

led to serious internal operating problems in the banks, such as the inability to -

sufficient capital to meet both strategic needs and regulatory

-Maintain
guidelines.

losses incurred through investment,foreign and

exchange
-Minimise
lending activities.

the availability of reasonably priced funds to meet ongoing

-Ensure
business needs and keep down operating costs.

both balancesheetand off-balance-sheet positions to meet asset-

-Manage
liability managementgoals and contain risk within overall policy
guidelines.

losses through unauthorised defalcations

transactions,
-Minimise Incurred
and the absenceof policy enforcement.

A full operational impact assessmentappears at Appendix 6 of this study.

The field researchalso found for

that explanations poor information and

the failed banks have tended to overlook poor record keepingas

commurucationin

factor. For example,poor communication of businessrules and operating

C)
a

typically was attributed to either a failure to establishwitten po icies

standards

261
 to
and proceduresor weak enforcementof those in existence. In contrast, the field

researchalso found that poor managementof the creation, distribution and

preservationof thesetypes of documentsalso contributedto problemsin the

communicationof the banks' businessrules and performancestandards.

Similarly, contrary to common conception, neither "creative accounting" practices

nor an inadequate level of computerisation fully explain the poor quality (ie, lack

of trustworthinessand timeliness) of the failed banks' accounts. By looking in

detail at what interview subjectsidentified as the sourceof the problem- that is,

weak "management information systems" - and what they actuaHymeant when

using this term as well as at how the banks' actually producedtheir the
accounts,

field researchhas shown that the sourceof the problem also stemmedfrom poor

record keeping. That is to say,the mannerin which the banks' records- from

to
policies and procedures, source documents,
to traditional accountingrecords,to

reports
management were created and kept. The banks' record keepingpractices
-
failed to support the production of the quality of accountsneededfor effective

operation of the banks' internal accountabilityand control systems. Inadequate

computensationwas just a specific aspectand manifestationof the broader

The next chapter exploresthe underlying reasonsfor the banks' poor

problem.

records creation and keeping practices, as it is only through root

understanding

causesof the problem that solutions might be found.

End Notes

1 Seefor example, "BOJ Governor Keynote Speakerat ROB Awards Luncheon, " JIOB News May
Jamaica, Ministry Finance and Planning, "Public Sector Response to
1999: 1+; Government of of
Financial Sector,
" Ministry Paper 13/98,8 April, 1998; Subject B-1, personal
the Problems of the
interview, Kingston, Jamaica, 20 May 1999.

Subject B-1, personal interview, Kingston, Jamaica, 20 May, 1999.

262
 Seethe discussion on this subject in chapter six.

4 Seefor example, the Governor the Bank

of of Jamaica's call to strengthen what he perceived to
be weak internal audit capacity in the failed banks ["BOJ Governor Keynote Speaker ROB
at
Awards Luncheon, " JIOB News May 1999: 1+1. In one of the failed banks, the internal
audit
function was not established until 1996 and even then the auditor reported directly to the CEO
of
the bank, which gave him very little independence [Subject A-10, personal interview, Kingston,
Jamaica, 17 June, 1999].

51 define "public debate" as any discussions

about the collapse of the Jamaicanfinancial sector
that has taken place in the media or in public forums, such as the conferencehostedby the
University of the West Indies in 1999.

6 Seefor example, subject A-1, personal interview, Kingston, Jamaica, 19 May, 1999;
subjectA-3,
personal interview, Kingston, Jamaica, 20 May, 1999; subject A- 18, personal interview, Kingston,
Jamaica, 3 August, 1999; and subject C-4, personal interview, Kingston, Jamaica,30 September,
1999. At the time of writing, the Jamaica Bankers' Association had put forward a proposal for the
establishment of a credit bureau that is still under discussion. Removal of the secrecyprovisions
in the current Banking Act will be neededbefore this proposal can be implemented, however.

' FINSAC strategies to improve the failed banks' information

and communication have included
the following: In the area of finance and treasury, cleanup of old reconciling items; consolidating
BOJ reporting processof all banks; consolidating financial statementpresentation;booking
unrecorded assetsand liabilities discovered in the different institutions; merging treasury
functions, producing single deposit rate sheets,loan rates, interbank borrowing and lending rates
and foreign exchange rate sheets,loan rates, interbank borrowing and lending rates and foreign
exchange trading rates; reviewing and rationalising from 70 correspondentbank accounts;
managing the closure and transfer of the business of three building societies;establishing systems
for forecasting and cash management; analysing liquidation/divestment of over 40 subsidiaries. In
the area of credit, reviewing and upgrading documentation standardsfor credit files; developing
policies and procedures for credit personnel; establishing consistent collection efforts and
methodology across institutions; establishing single securities department; perfecting securities
being held but not registered. In the area of operations, consolidating the back office operationsof
the four banks at 16A Half-Way-Tree Road; automating operations of Workers Bank; Installing
new Y2K compliant ATMs; establishing and documenting policies and procedures;establishing a
branch rationalisation plan; performing a product mapping exercise;determining product retention
from menu acrossbanks. In the area of Information Technology, conversion of ATM and credit
cards; facilitating CONFIDA IT Audit; presenting conversion plan and Y2K Plan to Bank of
Jamaica; configuring and delivering user report requests;documenting computer operating
procedures; establishing IT plan; establishing coordination and integration between IT and
Operations; establishing detailed inventory of hardware and software; and formulating and testing
disaster recovery plan [Source: Nlinistry of Finance and Planning, Nfinistry PaperNo. 6 1, "Update
on the Operations of FINSAC, " 7 December, 1999].

8 Basle Committee on Banking Supervision, "Framework for the Evaluation of Internal Control
Systems," January, 1998,10.

Basle Conunittee Framework, 12 and 14.

10Bank of Jamaica, Standards of Best Practice, Internal Control, c. 1995,12.

11Subject C- 1, personal interview, Kingston, Jamaica, 14 September,1999.

12Wilbeme, Pemud, "Financial Sector Growth, Innovation and Crises: The Links, " Symposium
Crisis the Jamaican Financial Services Sector, University of the West Indies, Kingston,
on the of
Jamaica, 27 November, 1999, author's transcription of taped proceedings.

263
13Subject A-10,
personal interview, Kingston, Jamaica, 17 June, 1999.

14Ibid.

15Seefor
example, Subject A-10, personal interview, Kingston, Jamaica, 17 June, 1999; Subject
C- 1, personal interview, Kingston, Jamaica, 14 September, 1999; and Persaud
passim.
16Seefor example, subject A-16,
personal interview, Kingston, Jamaica, 30 July, 1999; "BOJ
Governor Keynote Speakerat ROB Awards Luncheon," JIOB News May 1999: 1+; Government
of Jamaica, Ministry of Finance and Planning, "Public Sector Responseto the Problemsof the
Financial Sector," Ministry Paper 13/98,8 April, 1998; SubjectB-1, personal interview, Kingston,
Jamaica, 20 May 1999.

" Subject A-2, personal interview, Kingston, Jamaica, 19 May, 1999.

18Subject A-10, personal interview, Kingston, Jamaica, 17 June, 1999.

19Subject C-1, personal interview, Kingston, Jamaica, 14 September,1999.

20Seefor example, Subject A-14,

personal interview, Kingston, Jamaica,22 July, 1999. The fact
that policies and procedures for different operations (eg, credit, operations, human resourcesand
so on) were found in separatemanuals prepared by the different units within the organisational
structures of the banks also speaksto the fact that there was no centralised coordination of policy
and procedures [Subject A-15, personal interview, Kingston, Jamaica,22 July, 1999 and subject
A-16, personal interview, Kingston, Jamaica, 20 July, 1999].

21Seenotes 18 and 20 above for citations

of sourcesto support theseobservations.
22Seefor example, subject B-1,
personal interview, Kingston, Jamaica,20 May, 1999 and subject
A-14, personal interview, Kingston, Jamaica, 22 July, 1999.

23Seethe comments made by subject A-10 regarding the importance of policies and proceduresin
the internal audit processand the detection of fraud and referencesto the fact that most policies
and procedures in the failed banks were badly out of date [Subject A-10, personal interview,
Kingston, Jamaica, 17 June, 1999.

24Subject C-1, personal interview, Kingston, Jamaica, 14 September,1999 and Subject C-3,
personal interview, Kingston, Jamaica, 29 September, 1999.

25Basle Committee Framework, 4.

26Basle Committee Framework, 18.

2' Bank of Jamaica, Standards of Best Practice, 13-18.

28Subject B-1, personal interview, Kingston, Jamaica, 9 June, 1999 and SubjectB-6, personal
interview, Kingston, Jamaica, 20 July, 1999.

29 Raymond McLeod, Jr., Management Information Systems,Sixth Edition (Englewood Cliffs,

New Jersey,Prentice Hall, 1995), 383

30As for example, subject A-16, personal interview, Kingston, Jamaica,30 July, 1999. "Subject:
That's what we need one management information system. One loan system,one platform and we
[system name] gets on board so we can do all this. "
can't wait until

31For example, inten, iew subject A-3, personal interview, Kingston, Jamaica,20 May, 1999 who
"As a manager sitting there looking at your management information systems and all the
asked
things for your IT systems, how do you get behind these numbers then as a manager
numbers and
to the pulse of what is happening in your orgaiusation behind some of those soft
and really get

264
issues? " Or, subject A-6, personal interview, Kingston, Jamaica, 6 June, 1999 who said "The
whole idea of, my idea and philosophy of MIS is to [flatten] the organisation chart so that there are
the reporting is simple to understand and that you shorten the lines of communication between
...
the people who are dealing with the customers and the ultimate decision-maker."

32Subject A- 1, personal interview, Kingston, Jamaica, 19 May, 1999: "In terms of computerisation
of the accounts. I think, I am trying to break this down, in terms of different institutions. Each of
them was computerised differently and some one like [name of bank] really had no
computerisation, a lot of it was manual. So if you had to get any information out, what would have
to happen is that the information request had to go out to each of the branches. They would have
collated the information manually; a time-consuming operation, then it would be collated and
to
given you. So was that was the in
worst example terms of [name of bank]. The other major
problem affecting the institutions even one, which were computerized, like [name of bank], was
the actual quality of the data They had not got significant report-writing functionality within
...
their management reporting tools. They could not get managementdata readily out. Management
suffered with or just put with what they actually had rather than actually demanding, 'this is the
kind of data we wanted'. " He later goes on to discussvarious templatesthat had been createdto
provide managers with information about profits and losses and other information required for
monitoring and decision-making.
33
Ibid.

34"BOJ Governor Keynote Speakerat ROB Awards Luncheon," JIOB Mews(May 1999): 1+.

35Jason Abrahams, "The Need for Restructuring of the JamaicanFinancial Architecture and the
Way Forward, " Symposium on the Crisis of the JamaicanFinancial ServicesSector,University of
the West Indies, Kingston, Jamaica, 27 November, 1999, author's trascription of taped
proceedings.

36Seefor example subject A-2, personal interview, Kingston, Jamaica, 19 May, 1999.

37Subject B-1, personal interview, Kingston, Jamaica, 20 May, 1999.

38Philip C. Bantin, "The Indiana University Electronic RecordsProject: LessonsLearned," The

Information Management Journal 35,1 (January 2001): 19.
39
Ibid.

40The source of the information in this section of the discussionprimarily derives from on-site
inspection of records and record keeping systemsat the failed banks.

41Subject A-2, personal interview, Kingston, Jamaica, 19 May, 1999.

42Seefor example, subject A-1, personal interview, Kingston, Jamaica, 19 May, 1999 and subject
Kingston, Jamaica, 9 July, 1999. Evidence that one of the banks kept
A-15, personal interview,
derived from the schedulefor the records of that bank.
customer histories on cards was retention

43Subject A-1, personal interview, Kingston, Jamaica, 20 May, 1999.

bureau has
44Note that, although Jamaican bankers have recognisedthat the absenceof a credit
and, in recognition of this fact, the
hindered the effectivenessof their credit risk management
has forward to establish a Jamaican credit bureau,
Jamaican Bankers' Association put a proposal
the Banking Act have hampered implementation of the proposal.
secrecy provisions of current

Kingston, Jamaica,20 May, 1999.

45See, for example, subject A-3, personal interview,

46Subject A-12, personal interview, Kingston, Jamaica, 6 July, 1999.

265
47Omar Davies, "Introductory Statements," Symposium
on the Crisis of the Jamaican Financial
Services Sector. University of the West Indies, Kingston, Jamaica, 27 November, 1999,
author's
trascription of taped proceedings.

48Nfinistry of Finance and Planning Paper No. 6 1.

49Subject B-1, personal interview, Kingston, Jamaica, 20 May, 1999.

50Bank D, Internal Audit Report, n. d., and Subject A-10,

personal interview Kingston, Jamaica, 17
June, 1999.

51Subject B-1, personal interview, Kingston, Jamaica, 20 May, 1999.

52Subject A-18, personal interview, Kingston, Jamaica, 3 August, 1999; SubjectA-17,

personal
interview, Kingston, Jamaica, 2 August, 1999.

53Persaudand subject A-1, personal

interview, Kingston, Jamaica, 19 May, 1999.
54Ministry of Finance and Planning Paper No. 61
and subject A-1, personal interview, Kingston,
Jamaica, 19 May, 1999; subject A-15, personal interview, Kingston, Jamaica,22 July, 1999 and
subject A-16, personal interview, Kingston, Jamaica, 30 July, 1999.

55Interview with subject A-2, Kingston, Jamaica, 19 May, 1999.

56Interview with subject A-1, Kingston, Jamaica, 19 May, 1999.

57Interview with subject B-3, Kingston, Jamaica, 25 June, 1999.

58Subject B-3, personal interview, Kingston, Jamaica, 25 June, 1999.

59Subject B-1, personal interview, Kingston, Jamaica, 20 May, 1999.

60Subject A-2, personal interview, Kingston, Jamaica, 19 May, 1999.

61SeeLaws of Jamaica, The Banking Act, L. N. 42/1995, s.14.

62Subject A-1, personal interview, Kingston, Jamaica, 19 May, 1999.

63Seefor example, Nhnistry of Finance and Planning Paper No. 61 and "BOJ Governor Keynote
Speaker at BOB Awards Luncheon," passim.

64Subject B-1, personal interview, Kingston, Jamaica, 20 May, 1999.

65Subject A-17, personal interview, Kingston, Jamaica, 2 August, 1999.

66Subject A-4, personal interview, Kingston, Jamaica, 20 May, 1999.

67Subject A-4, personal interview, Kingston, Jamaica, 20 May, 1999.

68Subject B-6, personal interview, Kingston, Jamaica, 2 June, 1999.

11NIinistry of Finance and Planning Paper No. 61 passim.

70Subject A-18, personal interview, Kingston, Jamaica, 3 August, 1999.

" Ibid.

72Subject A-1, personal intervievv. Kingston, Jamaica, 19 May, 1999.

266
73Seethe discussion this issue in the previous chapter.
on
74In addition to the has been
empirical data, this section informed by Frank Wood and Alan
Sangster, Business Accounting 1,8hEdition (London: Financial Times ProfessionalLtd, 1999);
Anthony Saunders,Financial Institutions Management: A Modem Perspective,Ped. (Boston,
MA: McGraw-Hill, 2000); Geoff-reyLipscombe and Keith Pond, Banking: The Business, 3ded.
(Loughborough: Loughbourough University Banking Centre, 1998); ShelaghHeffernan, Modem
Banking in Theory and Practice (New York: John Wiley & Sons, 1996); and Diana McNaughton,
Banking Institutions in Developing Markets, Volume I (Washington, D. C.: World Bank, 1992).

75Subject A-17, personal interview, Kingston, Jamaica, 2 August, 1999; subjectB-1, personal
interview, Kingston, Jamaica, 20 May, 1999.

76Subject B-6, personal interview, Kingston, Jamaica, 13 July, 1999.

" Subject A-1, personal interview, Kingston, Jamaica, 19 May, 1999.

Ibid.

79Interview with subject A-10, Kingston, Jamaica, 17 June, 1999.

Subject B-6, personal interview, Kingston, Jamaica, 13 July, 1999.

267
 Chapter Eight: Explaining Record Keeping in Failed Jamaican Commercial
Banks

Introduction

The previous chapter iflustrated how poor records creationand keepingpracticesand

systemscontributed to an absenceof quality accountingand managementinformation

in the failed Jamaicancommercialbanks. As a result, this information presenteda

misleadingaccount of the banks' financial positions and risk exposures.This

weakenedthe banks' systemsof internal accountabilityand control and, alongwith

other factors, led to operational inefficienciesin failed banksthat contributedto their

demise. The previous chapter did not, however, explore in any great depth

explanationsfor the failed banks' record creation and keepingpracticesand systems.

Why, for example,did the banks' directors and managersallow record creationand

keepingthat underminedthe quality of information neededto support effective

accountability and cpntrol? Would it not have beenin their best interests,or at least

the best interests of their banks, to ensurethat record creation and keepingsupported

this important aim? This chapter seeksto answerthesequestionsby discussingfield

268
researchdata that accountsfor records creation and keeping in the failed Jamaican

commercialbanks.

In discussingthe reasonsfor the banks' records creation and keeping

practicesand

systemsthis chapteralso aims to use the field researchdata to illustrate how, as

discussedin chapterthree, social and technological influenceson the inscription,

transmission,and contextualizationof records over time shapethe meaningof records

and how that meaningmay be lessthan what is required to support organisational

accountability. In doing so, the chaptergoes againstreceivedwisdom that

in
weaknesses the banks' accountingand managementinformation in respectof what

was required to support the banks' systemsof internal accountabilityand control were

primarily the outcome of deliberateefforts on the part of somedirectorsand managers

to concealevidenceof sharppractice or to presenta rosier picture of their banks'

financial positions.' Instead,the chapter argues,in keepingwith the ideaspresented

in chapterthree, that becauserecord creation and keepingwas relativelyuncontrolled

in failed Jamaicancommercialbanks, individual, group and societalvalues,beliefs

and norms influencedbank officers choicesabout if and how the banks' recordswere

inscribed,transmitted and contextualized,the technologiesusedin doing so, and how

thesetechnologieswere deployed. Thus, the meaningof the banks' accounts- that is,

the misleadingpicture theseaccountspresentedof the banks' financialpositionsand

risk exposuresasjudged in the aftermath of the bank failures - was not alwaysthe

result of deliberateefforts on the part of directors and to

managers manipulate

accountingnumbers. Rather, the meaningof the banks' accountswas actually the

consequence of a collectivity of individual unmanaged and uncontrolled record

269
creation and keeping decisions,some deliberately self-servingothers not, in
made the

context of decentralisedorganisationalsettings.

Sincethe explanationof the banks' record creation and keepingput forward in this

chapterrelies upon an understandingof social actors' motivations, it raisesquestions

about the to
extent which the field researchdata, mainly interviews, can be depended

to
upon reveal underlying beliefs, values and attitudes. Appendix 2 includesa

discussionof this issue,arguing that, though providing no definitive answers,the

interview data provide important clues and valuableinsightsabout how socialactors

viewed and ordered their social world. It is to a discussionof this data that the

chapternow turns, beginningwith an exploration of sharppracticeas an explanation

of the banks' record creation and keeping and then to

moving on explore lack of

organisationalcontrol over record creation and keeping as an alternativeexplanation.

Considering Sharp Practice as an Explanation for Record Creation and Keeping

Practices in Failed Jamaican Commercial Banks

This chapterbeginswith a discussionof self dealingbehaviouron the part of directors

failed Jamaicancommercialbanks as an explanationfor the banks'

and managersof

keeping practices, as this is widely acceptedas having beena

record making and

factor often to the exclusion of other reasons. Many of those interviewedfor the

researchproject, as well as public commentators,governmentofficials and others

have pointed to the fact that directors and managersin failed banksengagedin

that was motivated by a desireto circumvent Jamaica'sbank regulatory and

practice

framework or reap benefits for themselvesand their As

-)72
"cronies. a
supervisory

270
result, at all organisationallevels,there were times when individuals deliberately

avoided the creation of an accurateand completerecord, or evenavoidedthe creation

of any record at all, in order to keep the details of a transactionfrom being known. As

one interview subject stated,there was a certain deliberatevaguenessin

documentation,the root causeof which was that directors and seniormanagerswere

out to "feather their own nests.

One type of decisionfor which this failure to give accountwas most evidentwas the

granting of loans. In many instances,

loans were not properly documentedand

booked (ie, recorded in loan books of original entry). As revealedby one interview

subject:
There are certain cases. I won't mention any names. There are caseswhere
directors would take out loans to themselves and never pay at subsidised
interest rates and it is very hard to find it on the books. Because of course the
directors know the system and know how to beat it. 4

In some casesthere was "wilful intention" not to document to get away with things.

Othersknew what was going on (eg, financial controller) but were instructedto turn a
5
blind eye by senior managers. The failure to documentandbook loansmadethese

loans"invisible" to those whosejob it was to track the credit risks of the banksand to

ensure assetsand liabilities were appropriately matched and risks adequately covered

by sufficient capital and liquidity. The absenceof proper recordsof loan transactions

contributed to a distorted picture of the banks' risks, the health of their loan portfolios,

and their overall financial positions. This, in turn, prevented directors

managers, and

bank regulators from taking action to correct operatingproblems. Such problems

could not be corrected sincethey were not known.

271
Not only must records be inscribedin order to support the operation of internal

accountabilitiesand controls, they must be kept until suchtime as they are no longer

neededto fulfil the requirementsof organisationaland broader societalaccountability

relationships. Severalsubjectslooking to hold directors and managersto account

after the collapseof the indigenouscommercialbankshave pointed out that records

for
needed accountability purposeswere missing. Theseinterview subjectsstrongly

suspectthat records were deliberatelydestroyedto cover up wrongdoing.

Though the field researchclearly supportsthe argumentthat sharppractice

contributedto record creation and keepingpracticesin fadedJamaicancommercial

banks,it still leavesimportant questionsunanswered.How, for example,could sharp

practice on the part of a relative few explain the magnitudeand pervasiveness

of the

banks' accountingand managementinformation problemsand the degreeof non-

compliancewith establishedrecords managementpolicies and procedures?Why did

the banks' employeesand managersneglectto managesourcedocumentsevenwhen

theserelated to perfectly legitimate transactions? Given that the argumentof sharp

practice does not offer answersto these to

questions,other reasons explainthe banks'

record creation and keeping be

practicesmust explored.

Organisational Anomie and its Effects on Record Creation and Keeping

Practices in Failed Jamaican Commercial Banks

When an organisationhas clearly definedvalues,beliefs and normsusuallytheseare

articulated as businessrules in written policies, procedures, guidelines

standards, and

similar forms of documentation. The field researchconductedfor this study revealed

272
that each of the failed Jamaicancommercialbanks lacked a clear set of sharedvalues,

beliefs and norms concerningrecords creation and keeping as evidencedby an

absenceof well defined written businessrules concerningall aspectsof records

creation and keeping. In other words, as discussedin chapterthree, they suffered

from organisationalanomiewith respectto creating and keepingrecords.

Instead of clearly definedbusinessrules, in the failed Jamaicancommercialbanks

there existed no written policies and proceduresconcerningmanyaspectsof record

creation and keeping. For example,one interview in

subjectnoted relation to

computerisedcustomer information files, "You will find that there was no

standardisationof inputting data. So what you find is a CIF (customerinformation

file), [they] were extremely variously inputted at random by different people. .)7 This

led to critical errors and omissionsin customerinformation recordsas discussedin the

previous chapter. Moreover, even those policies and proceduresrelating to records

creation and keeping that had been establishedwere fragmented,and poorly

and enforced. Theseproblemscontributedto gapsin

communicated.,monitored

coverageand confusion in implementation. The result was poor internal

keeping which
processes, ultimately led to the
accountability and control of record

information of quality insufficientto

production of accountingand management -a
internal over many areas of the banks' operations
sustain accountability and control

and neededto provide directors and managerswith information to support effective

decision making.

in
As mentioned chapter three, organisationalanomie often comesabout as a result of

that disrupts traditional values and norms of behaviour. This is a

rapid change

273
situation that definedthe environmentin which the failed Jamaicancommercialbanks

found themselvesimmediatelybefore and during the financial sector problems. As

in
noted chapter six, throughout this period most banksunderwentrapid growth,

decentralisationand specialisationspurred on by Jamaica'schangingeconomic

environment.

In discussionsrelating to inadequaciesof credit and securitiesfiles in the failed banks,

interview subjectshave indicated that rapid growth, decentralisationand

specialisationwere factors in the absenceof clear record creationand keeping

businessrules. Very often as the banks' branch networks expandedin responseto

competitive pressures,old businessrules and structuresno longer worked. 8 In many

casesthe banks failed to in

put place appropriatenew business
rules and structuresor,

in caseswhen they did, failed to monitor how well thesewere beingimplemented,

being busy with other pressingoperationalpriorities becauseof the expandedscopeof

their activities.

An account of what happenedin one of the failed banks is instructive on this point. In

this particular bank, credit administrationwas during

decentralised a period of

expansionin order to facilitate more efficient processingof loansin a growing branch

Under this systemeachbranch had a securitiesclerk, reporting to the branch

network.

manager,who was responsiblefor loan documentation. However, with

in
decentralisation,securitiesclerks the branchescould no longer apply the banks' old

businessrules for handlingthesetypes of records. Thus, securitiesclerks created

in their custody according to individualised level

preferences, of
and managedrecords

knowledge and priorities. Moreover, branch managers- being for

responsible

274
operations, credit administrationand marketing - had little time and incentiveto

monitor the work of their securitiesclerks. Tbssituation eventuallyled to a

breakdown of order and consistencyin the organisationand managementof the

bank's credit related records. The quality of credit and securitiesfiles rapidly

deterioratedand loan documentationbecameincompleteand inconsistent.'

In 1994,to addressgrowing loan documentationproblems,the bank undertook a

study that led to the re-centralisationof its fragmentedand poorly managedcredit

related records storesas part of an exerciseto re-centralisethe approvalof credit and,

thus, to strengtheninternal control of credit administration. The bank's experiences

with respectto this re-centralisationexerciseindicate that it was not only

centrafisationthat improved the bank's loan documentationbut the re-establishment

of clear businessrules backed by a strong record keeping"regulator" to ensure

acceptanceof and compliancewith those rules. In this bank, in

as others, documents

concerningloans to customerswere filed on both the customer'scredit file and a

separatesecuritiesfile, which held legal documentation With

suchas mortgages.

restructuring, the bank its

moved securitiesfiles from out in the branches
to a

centralisedrecords store - the securitiesdepartment- overseenby an experiencedand

trained securitiesmanagersupportedby an assistantmanager,a securitiessupervisor

and eight securitiesclerks. In addition, the bank detailed

established operating

proceduresfor the to
unit ensurethat securitiesdocumentationwas completeand

'O In three of the other four failed banksexaminedfor this

reliable. comparisonwith

the centralisationexercisethis bank's secuntiesfiles were relatively

study, after

reliable and complete.

275
The samebank's approachto handlingits credit files differed notably, althoughit

centralisedstorage of thesefiles as well. At the time of the review conductedfor this

study, a single low level clerk without experienceor training in either credit

administrationor records managementwas responsiblefor the operationof the

in
registry which thesefiles were housed. A physical inspectionof the registry

conductedby this researcherrevealedthat files from a numberof branchesand

by
subsidiariespreviously absorbed the bank had not beenintegratedinto the

registry's sequenceof file arrangement, thereby complicating retrieval of information.

Securitywas also lax: on one visit to the bank the researcherwas ableto enterthe

registry and explore without detection. Only just prior to the site visit conductedfor

this researchproject the bank had establishedsomeproceduresconcerningthe

organisationof the documentsin the credit files, finally recognisingthat lack of a

clear policy and proceduresfor the operation of its credit files' registry was

in
contributing to problems the organisationand retrieval of theserecords. The bank

had incorporated the new policy and proceduresinto its credit policy manual. At the

had been implemented " As a

time of the site visit theseprocedures only partially.

result, the quality of the files was poor and many were "missing in action.")

This bank's experienceiflustratesthat, despitecentralising.credit administrationand

files storage,the files remainedpoorly controlled in the absenceof clear written

record keeping businessrules and standardsand a strong records management

As the bank experiencedcontinuing difficulty in retrieving

regulator. a result,

information loan 12 In strong

contrast.,
complete concerningparticular arrangements.

regulation in conjunction with centralisationof records stores

records control and
in
brought about improvement the quality of the bank's securitiesfiles. Clearly

276
documentedbusinessrules and a strong records managementregulator formed
an

essentialpart of the bank's successin regaining control over its securitiesfiles.

Though there was an absenceof clear businessrules concerningmanyaspectsof

record creation and keeping in the failed banks, over time the banksestablisheda

number of policies and proceduresaddressingaspectsof the creationand keepingof

records. Nevertheless,the linfited scopeand fragmentationof the banks' record

creation and keeping policy and procedural fi7ameworksleft many"potholes" in

records accountabilitiesand controls.

Appendix 7 provides a summaryof the records managementpoliciesandprocedures

of four failed Jamaicancommercialbanks. As the summaryindicates,only three of

the four failed banks had establishedrecords managementpolicies andprocedures.

Recordsmanagementpolicies generallywere of limited scopein terms of the types of

records for which they set standardsof record keeping in

asweHas terms of the

phasesof the records' life cycle that they covered. The for
policies, example.,

pertained strictly to paper records. Provisions concerning records generated by the

banks' computer systemswere limited to addressingthe retention of computerprint

in
outs paper form. That left a whole host of electronic records, such as the many

spreadsheetscreatedusing office productivity software suchas Excel, outsidethe

provisions of any record keeping policies and procedures. Moreover, the banks'

policies
records management did not extend to cover even all paper records,but were

limited to records generatedas a result of specific functions in

or particular business

such as customerrecords, internal bank transactions, branch

operations,
areas,

data centresand, in one case,an executive office. Record keepingin respect

records,

277
of other functions and areaswithin the banks remainedoutsidethe provisions of the

banks' records managementpolicies. In addition, most of the recordsmanagement

policies only included provisions for the managementof recordsafter they had

alreadybecomenon-current. Only one bank had a recordsmanagementpolicy that

containedprovisions to establishcontrol of recordswhile they were still in active use.

Controls over record creation, such as existed,were not generallyto be found in

recordsmanagementpolicies and proceduresbut in policies and proceduresrelatedto

particular businessfunctions or operational areas,as in the caseof one bank where the

creation of records linked in

to credit analysisand risk managementwas encompassed

13
the credit administrationmanual. Managersof the specificfunctional areasto which

thesepolicies and proceduresrelated had responsibilityfor the content and

administrationof suchpolicies. The field researchuncoveredno evidencethat the

banks systematically integrated their records managementpolicies - for example,

through cross-referencingor inclusion in a unified manual- with policiesrelating to

the creation of records found in operational manuals.

Finally, in somecasesthe banks had establishedseparatepolicies and procedures

aimedat controlling computerisedsystems. Again, thesepoliciesand procedures

those for
were neither integrated with operational policies and proceduresnor with

Staff with information technology expertisehad responsibility

recordsmanagement.

for the content and administration of thesepolicies.

The fragmentednature of the banks' information related policy and procedural

frameworks as well as fragmentation for

of responsibility implementationand

278
compliancemonitoring of record keeping businessrules and standardsindicatesthat

managementdid not basetheseframeworks on any systematicexaminationof the

banks' overall information requirements. Instead,policies tendedto "sprout" from

different areasto addressparticular aspectsof records creation and keepingasthe

needbecameobvious. For example,records management

policies seemto have

to
arisen addressmounting paper records storageproblems. Consequently,

of
establishment a records policy
management camerather late in the day in three of

the four failed banks included in the study and not at all in the other.

In terms of the requirementsof effective accountabilityand control, the result of the

banks' gap-ridden and fragmentedpolicy and proceduralframeworksand regulation

was undesirable. Fragmentationas well as the limited scopeof their records

managementpolicies and proceduresencouragedan unevenand splinteredapproach

to controlling records creation and keeping processes.Creation and keepingof some

categoriesof records were subjectto corporate while

standards, there existedno

formal accountabilitiesfor the creation and keepingof other categories,suchas

form. In the caseof records not coveredby the policies,

spreadsheetsin electronic

keeping was left to the discretion of records

managementof records creation and

information technology staff or others into whose handsthe records

creators,

variously fell in the course of their existence.

of
consequences
As important as it is to understandthe negativeorganisational the

keeping frameworks,it
banks' fragmentedrecord creation and policy and procedural

banks established,and later failed to

is equally important to understandwhy the

illogical structures. This can, in part, be

change,such apparently and inefficient

279
explainedby the fact that no singleperson or group within the failed bankshad

responsibility for establishingor coordinating accountabilitiesand controls for

recorded information. In other words, there was no strong recordsmanagement

regulator in the failed banks. Rather, this responsibility fell to different groups of

operationalmanagersand information technology specialistswho, as noted above,

promulgatedrecords related policies and proceduresas they saw the need. Each of

thesegroups had only their own, arguablylimited, perspectiveon the controls

necessaryto support the banks' operations. With increasingdecentralisationand

specialisation,their perspectivesgrew more and more focused. No one in thesebanks

had "the big picture" and therefore information related problemswent undetected,or

evenif detectedthe sourceand nature of such problemswere not well understood.

The shortcomingsof the banks' policy and proceduralframeworksworked againstthe

production of trustworthy and timely accountingand managementinformation.

Another factor contributing to the fragmentationof the banks' policy andprocedural

framework lay in the mindset of the banks' operational managers. The vast majority

level
of those at the managerial in the failed Jamaican banks
commercial camefrom a

14
businessand accountingbackground. Thus, it is possibleto surrmsethat their

conceptualisationof the kinds of documentation in

produced. the courseof accounting

for the banks' financial transactionsreflected the accountingperspective.From this

perspective,as already mentionedin chapter three, vouchers, and

correspondence

other paper-basedrecords are viewed as source documents. Though theserecords

form a basisfor the accountingprocess,they are a pre-cursorto it in the sensethat

formal accounting for a transactiontraditionally beginswith the making of aj ournal

15 As the creation of source documents comes before what is traditionally

entry.

280
conceptualisedas the start of the accounting process,it is possibleto seewhy, in the

failed Jamaicancommercialbanks,the managementof sourcedocumentscameto be

dealt with in distinct records managementpolicies and proceduresand not as part of

operationalpolicies concernedwith accounting and financial management.

Nor did the vast majority of those responsiblefor managingthe failed Jamaican

commercialbanks have much of an understandingof information 16

technology. With

increasingcomputerisationof the banks' transactionprocessingand accounting

information
systems, technology specialistsdrove the policy and procedural

framework governing management of the banks' computerised systems. As a result,

this aspectof the banks' records related policy and proceduralframework became

quite distinct from financial management processes and policies. Naturally, these

policies and proceduresreflected the preoccupationsand concernsof the specialist

infonnation technology group, concerns such as the ability to protect the organisation

againstloss of data in the event of systemfaults and from lossesdue to breaches

of

systemsecurity rather than with the keeping of records as evidenceof business

transactions.

As the above discussionindicates,there were almost divides

insuperable in the banks'

internal regulatory framework for managingrecords creation and keepingprocesses.

Policy and procedural divides had the effect of fi7agmenting

the banks' approachto

control
processes- over source
paper-based documents
managingrecords related

fell to operationalmanagerswho delegatedthe work to low level clerical

generally

over information in fell

systems
cOmputerised to information
staff, while control

technology specialists.

281
As the regulatory fi7ameworksuggests,there existedno overall coordinated
approach

and set of values,beliefs and norms concerningrecord creation and keepingin the

banks,but rather group approaches,values,beliefs and norms. Far fi7om

generating

clear rules of behaviour basedon a systematicassessmentof the information required

to support internal accountability and control for their organisationsas a whole, the

banks' fragmentedpolicy and regulatory frameworks produceda confusingtangle of

directives. Theseproved ineffective in guiding and constrainingindividual record

creation and keepingbehaviour and ensuringthat suchbehaviourmet the

requirementsof internal accountability and control.

Poor communicationand weak compliancemonitoring and enforcementof corporate

policies also renderedthe banks' records creation and keepingpolicies and procedures

ineffective and largely meaningless.Thesepolicies and proceduressufferedfrom the

sameweaknessin their communicationas other operationalpolicies and procedures,

discussedat length in the previous chapter. Site visits conductedduring the courseof

the field researchrevealedthat records related policies and proceduresoften were

in in
observedmore the breachthan the rule.17

Why was monitoring and enforcementof the banks' recordsrelatedpoliciesweak?

As discussedin chapter seven,monitoring and enforcementof all types of policies

and proceduresin the failed banks was weak, not just those relatedto record creation

and keeping. Rapid growth and decentralisationcertainly contributedto the problem.

It is possibleto sunnisethat thesechangescreatedan operatingenviromnentin which

managershad more difficulty obtaining the information they required to effectively

282
supervisethe extent to which a growing number of staff were complyingwith the

banks' businessrules. As mentionedin the previous chapter,a weak to non-existent

internal audit function in the failed banks generallytendedto exacerbatealready

weakenedpolicy monitoring and enforcement.

Recordsrelated policies and procedures,however, appearedto suffer fi7omextremely

weak monitoring and enforcement,if the degreeto which the banks' management

tolerated breachesin thesepolicies and proceduresis any indication. The particularly

poor track record with respectto records related policies and proceduresdemands

explanation. The reasonis that, in a growth situation, managers,who were under

to
greater pressure make decisionsand process had
transactions, to prioritise their

activities. Control of record creation and keeping processeswas not a top priority, as

indicated in this commentfrom one of the researchsubjects:

Simply becauseI don't think that records managementalthoughit's probably

one of our most, one of our highest it's
risk areas not something that is looked
at as a very important, I
although as said once you can't find a document
everybody starts to jump all over each other, but the time, the moneyet cetera
is not somethingthat I think people focus enoughto saythat this is suchan
important project let us carry it through to the bitter end. You. see? ...
Somethingis alwaysmore important. There is alwaysanothermajor blaze
has to this to the back end. 18
that somebody go and out and put

Managers' low prioritisation of record keeping likely was linked to their

understandingof it as separatefrom the banks' core accountingand financial

functions
management and as a function concernedprimarily with the storageand

documents. In addition, with increasingdecentralisation

and
retention of paper source

fragmentation of responsibility for record keeping in the banks,no singlepersonor

group had the ability to seethe combinedeffects that poor record creationand

keeping practices were having on the quality of the banks' accountingand

283
managementinformation and, ultimately, their internal control and decision-making.

This lack of insight preventedmany managersfrom moving the function higher up on

their fist of priorities. The low importance managersgenerallyassignedto the record

keepingfunction contributed to the low priority assignedto monitoring and enforcing

records-relatedpolicies and procedures.

Contrasting Record Creation and Keeping Practices in Failed Jamaican

Commercial Banks with those of Viable Jamaican Commercial Banks

So far, this chapterhas advancedthe argumentthat organisationalanon-e- the

absenceof widespreadacceptanceof a clear set of sharedvalues,beliefsand norms-

with respectto record creation and keeping contributedto the record creationand

keepingpracticesof failed Jamaicancommercialbanks. If this is so, then we might

expect to find that viable banks exhibited better accountingandmanagement

information, as measured against the requirements of effective internal accountability

and control systems,and had stronger and less fragmentedrecord keepingpolicy and

proceduralframeworks. Yet, surprisingly, in the one viable bank includedin the

researchsamplethat did not suffer from the records relatedproblemsof the failed

banks,the policy and procedural framework appearsnot to havediffered significantly

from those of the failed banks.

While this bank's records managementpolicy dated from much earlierthan those of

the failed banks 1991, as opposed to 1996 being the earliest of the records
-

in the failed banks it was similar in scopeand coverage(see

managementpolicies -

Appendix 7). Also like the failed banks, this viable bank set out business
rules

284
concerningrecord creation in operational policies and proceduresand rules

concerning systembackups and security in separateinformation technologypolicies

and procedures,not in its records managementpolicy nor in a unified policy on

mattersrelating to records and information.19 Similarly, this bank had no strong

recordsmanagementregulator; rather, as in the failed banks,regulationof the

function fell to various operational managers,the internal auditor, and internal

information technology specialists.

Basedon interviews with managersof this bank, it is possibleto concludethat the

overall scopeand structure of its records related policy and proceduralframework did

not differ significantly from those of the failed banksbecausecertain aspectsof the

ideology of its managementdid not differ significantlyfrom the ideology of

in
management the failed banks. As in the caseof managersof the failed banks,this

bank's managersalso primarily camefrom an accountingbackgroundandtherefore

sharedsimilar conceptualisationsof records. They also held similarviews about

for
records management; example,one of its in
managerssaid responseto a question

"Of
about records management- courseyou recognisethat recordsmanagementper se
720
is not seen as a prionty item by US.

Nevertheless,there were someimportant differencesbetweenthe viable bank andthe

failed banks. First this bank had not experiencedthe samerapid growth,

decentralisationand specialisationexperiencedby the failed banksduring the period

of the financial crisis but had remainedrelatively small in size and scopeof

operations. As a result, it can be arguedthat the bank had not the

experienced same

level of disruption in well-establishedbusinesspracticewith respectto record keeping

285
and, moreover, was much lessreliant on the promulgation of written policies and

proceduresto conununicatenew record creation and keepingvalues,beliefsand

norms of behaviour. In its relatively small operating environmentit was still possible

to communicatethesevalues,beliefs and norms orally and by personalexample,even

when they were not expficitly recorded.

Second.,the bank closely monitored and enforced all of its policies,includingthose

to
related record keeping. The bank's internal audit arearegularlyauditedrecord

keepingpractices,as thesewere viewed as being part and parcelof the bank's other

21
internal controls. The findings of internal audits were reportedto the managerof the

auditedunit as well as to the bank's chief executiveofficer. It was expected,and

required, that any deviations from established policy or any operational problems

needingcorrection be dealt with expeditiously. Moreover, being a foreign-owned

bank, the local operations were subject to inspection by the parent company, which

also apparently took seriously the establishment of proper controls over records

creation and keeping. Commentsby the bank's indicate

managers that oversightby

the parent companyset the tone of the bank's internal control culture at the local

level, a culture dictating that local managerstake recordscontrol seriously. This may

seemat odds with the apparentlylow level priority managersassignedrecords

however, the apparentcontradiction can be explainedby the fact that

management;

did associaterecords control with records but

management
managers not necessarily

internal 22 That the bank remainedrelatively smallalso

rather with control systems.

level of monitoring and enforcementthat the much larger failed banksdid

permitted a

not have the management capacity to maintain.

286
That being said, at the time of the field researchthis bank was coming under
someof

the samepressuresof growth and decentralisationthat the failed bankshad

experiencedearlier. This was due, in large part, to taking up someof the businessof

the collapsedindigenouscommercialbanks. With an increasein the scopeand

number of its transactions,the bank was beginningto show signsof someof the

records related control strains evident in the failed banks. Managerscomplainedof

increasingfragmentationof information related to customersand of missingor

inconveniently slow flowing information. 23

It was in their reaction to the emergenceof theseproblemsthat managersin the viable

bank differed from those in the failed banks. Exhibiting a clearunderstandingof the

negative effects these problems were having on their ability to managetheir risks and

provide good customerservice,managersin this viable bank actedrelatively quickly

(a matter of months)to devise strategiesto addressthe bank's emergingrecord

keepingproblems. At the time of the interviews for this study,the bank's managers

were in the processof centralisingrecord keeping under a singleniddle-level

managerwith lengthy experienceat the bank and developingnew business

rules for

the operation of a proposed centralisedregistry unit. They were also exploringthe

24
possibility of imaging their documentationto aid in its managementand retrieval.

The reasonsfor quick action on the part of the viable bank's managementmust be left

to speculation,though at least three possibilitiespresentthemselves.First it

of all, is

to that becausethe bank was still relatively small, were

managers in a
possible argue

better position to make a connectionbetweenemergingrecord keepingproblemsand

operational inefficienciessuch as weakenedrisk analysisand customerservice. n

larger, more decentralisedorganisations,wherein severaldifferent processorsworking

287
in a number of discrete departmentsor units may handlea singlebusinesstransaction,

managementcan experiencegreater difficulty in seeinghow records relatedproblems

produce operational inefficiencies. Again, as statedearlier, they may lack "the big

picture." Secondly,it is possiblethat the bank's managerssimply had a greater

awarenessand sensitivity to the effects of records related problemsthan managersin

the failed banks due to exposureto foreign operations. Finally, it might be argued

that their accountability to foreign managers,which was taken very seriously,

prompted them to act quickly to addressany threat to the efficient performanceof

their bank and its competitive position. A combinationof any of theseexplanations

may well have beenin operation as well.

Social and Technical Influences on Record Creation and Keeping Practices in

Failed Jamaican Commercial Banks

In the failed banks,there being no clear organisationalrecord keepingvalue system

and internal regulation, social actors createdand kept recordsaccordingto their own

motivations and interests. Behind their individual motivations and interestslay a

multitude of individual, group and societal values, beliefs and norms. While some

by
people obviously were motivated self-interestand therefore to
willing engagein

record creation and keeping practicesthat deliberatelyflouted organisationalpolicies,

many more had no consciousintention of subvertingthe internal accountabilitiesand

controls of the banks in which they worked; they were trying to do their best.

Regardlessof underlying motivations, the influencesthat drove how individuals

createdand kept records, and the technologiesthey used in doing so, often produced

sub-optimal results in that they led to deviationsfrom the conditions of record

creation and keeping that would have produced the quality of accountingand

288
managementinformation neededto support effective operation of organisational

systemsof accountability. This, in turn, weakenedthe banks' internal control and

decision-making. Someexampleswill serveto illustrate this dynamic.

Influences on Record Creation

Though it cannotbe saidthat the failed bankshad establishedan organisational

culture of record keepingin any premeditatedand systematicway, to a certaindegree

the value systemof the banks' directors and operationalmanagersas a definable

group naturally influencednorms of record creation and keepingbehaviour

throughout the failed banks. Managers' value system,often unconsciouslyheld,

formed a de facto record keeping organisationalculture. Ironically, this de facto

culture conflicted with the value systemunderlying the banks' written policiesand

procedures. Moreover, rather than encouragingrecord creationand keepingpractices

supportive of the production of trustworthy and timely accounting and management

information, thesevalues and beliefs subtly encouragedrecord creationand keeping

behaviourthat led to the production of lesstrustworthy and timely recorded

information.

As noted above,the banks' managementgenerallyviewed record creationand

keeping as a back office function lacking in importanceand glamouras comparedto

25
the front office functions of banking operations. Consequently,they generally

directed little attention and resourcesto controlling processesof record creationand

keeping. Field researchhasindicated, for instance,that the creationof initial source

documentation for financial transactionswas a duty that managementgenerally

289
assignedto lower level clerical staff with little or no training on the proper completion

of the documentation. Managementattitudes that record keepingprocesseswere a

low priority filtered down to these staff. As a result, they took little careto create

accurateand complete documentation. For the most part, the overriding concernof

staff involved in the creation of initial documentationwas an immediateneedto

processthe transactionas expeditiously as possible. They exhibitedlittle appreciation

of the need for adequaterecording of transactionsto meetthe requirementsof internal

accountabilityand control. Nor did supervisorsof the junior staff insist on accuracy

and completeness, as they often were equally ignorant of the effects of poor

documentationon internal accountability and control, more interestedin core front

office functions, to
and often under pressure market financial productsand servicesas
26
well as perform administrativeduties.

Group values,beliefs and norms also influencedchoicesaboutthe technologyof

record creation. In turn, this technology had its own mediatingeffectson the quality
)

of the banks' accounts. The inadequacies

of the banks' computer in
systems terms of

producing the kinds of information that needed

management to maintaineffective

internal accountabilityand control have been discussedat length in the previous

chapter. Far from being simply a technological failure, the resultsof this study

be
indicate that the failure of thesesystemscan also attributed to the valuesand ideas

of the banks' operationalmanagers. As one interview subjectnoted, the systems

just from the -

systems "There [were] also management
related problems arosenot
, 27
issues.

290
What were theseissues? The shortcomingsof the banks' systemscan be traced to the

fact that they had beenmodified in a piecemealfashionthroughout the yearsto

maintain minimum servicelevels but had not kept pacewith technologicalchange.

Somebankswent through three different systemsin two years. Many had been

forced to upgradebecauseof the Year 2000 issue,but insteadof taking the

opportunity to completely modernisethe banks had been"patching" and changingthe

systemsso as to be 28
merely compliant while the overall systemremainedinefficient.

One interview subjectaccountedfor the banks' short-sightedinformation technology

function lack funds to develop 29 This

strategy as a of of purchase or new systems.

is
explanation not entirely compelling given the amount of money that the banks

found for other, very capital-intensive, projects such as construction and acquisition

of office buildings. More is by

convincing an explanationoffered anotherrespondent,

who commentedthat the banks had not spentthe money because

is
there a lack of appreciation for systems and technology. You found that
... Using
managers and even personnel didn't appreciate the value of technology.
30
a PC was relegated to either a teller or a secretary.

This lack of appreciation,which started at the very top of the failed institutions and

j in
filtered throughout, according to this sub ect, turn stemmed om a generallack of

understandingabout information technology that the

charactefised attitudesof "old

bankers.

The responsesof interview subjectsalso suggestthat attitudes

management toward

technology in the four failed banks lay in the insularity of their managers.As

in chapter six, thesebankerslacked exposureto new financial

previously mentioned

and the latest methodsfor managingand controlling the risks

servicesproducts

291
associatedwith such products. Although they were moving into new businessareasin

a liberalisedmarket, they were not up-to-date on how to managethe new complexities

of their business. On this basis it is possibleto arguethat the strengthof the banks
,
under foreign ownershipmay have been the extent to which they were exposedto the

use of information technology in the managementof risks through the practicesof

their parent companies. Certainly, the much greater level of sophistication and system

integration in one of the viable Jamaican banks supports this theory.

Conflicting interestsand attitudes among operationalmanagersand information

technology specialists, on whom the banksI management increasingly relied, also

shapedhow the banks" computerisedsystemsoperatedand the kinds of recordsthey

produced. Operationalmanagement'slack of understandingof information

technology encouragedthem to delegateconsiderationof information systemsissues

to information technology specialists. In many cases,these specialistswere

consultants with an interest in selling their particular technology solution regardless of

whether this solution addressedthe businessinformation requirementsof the bank.

As somesubjectshave suggested,information technology specialistsrecommended

the wrong systems or ones that did not support the complexity of businessfunctions.

In the words of one interviewee.,

the software companies,they have done a lot of systems for different

... idea information by
banks so they have an that these are the general required
the organisationand so thesereports are normally generated by the system. It
into my bank. We have our own peculiarities and we don't like the
comes
reports structured that way and we don't like this report, but instead of getting
it changedwe acceptthesereports and we use them. 32

As a result, transactionprocessingand accounting systemslacked appropriate

functionality and therefore produced sub-standardaccountingand management

292
information. For example,one interview subjecttold of a bank in which the general

ledger systemdesignedfor retail banking was not sophisticatedenoughto handle

complex foreign exchangeand treasury functions. This necessitatedhavingtwo

systems,one for the retail banking side and one for the more sophisticatedgeneral

ledger functions, a situation that contributed directly to the system interface problems

in 33
noted chapter seven.

Over time, the banks employedin-house systemsstaff to managetheir computerised

transactionprocessingand accounting systems. Just asthe bank's directorsand

managersrelied upon information technology specialistsin the initial selectionor

development of their computerised systems, so too did they come to rely upon these

specialiststo make changesand adjustmentsto the banks' systems.As the banks

the
expanded range of their in
products and services a changingeconormc

environment,the gap betweenorganisationalinformation requirementsand the

functionality of the banks' systemscontinuedto grow. This increasedoperational

managers' reliance on information technology specialists to make necessarysystems

changes. However, the interests of the two in

groups often collided ways that limited

the quality of availableaccounting and managementinformation. One subjectcited a

in
case which a new report was required to addressa seriousproblemwith fraud and

forgeries-

we were having a problem with forgeries and ffauds to do with accounts

... lodging forged to Now,
that were openedwhere they were cheques account.
we designed a report that allowed us to detect those things the day after [they
were] processed And, in fact, when we went to IT and we said we needed
... because
to
this report, they said us "we do not seewhy you need this report
nobody else has ever asked for this." But we insisted [and] we have saved
... 34
I
over, would think conservatively, $JlOO million ($US2.5 million) ,

293
It is clear that information technology staff, with their own motivations and interests,

to for
were not responding management'srequirements accountabilityand control of

financial transactions. Managersinterviewed for this study suggestthat one of the

reasonswhy information technology specialistswere not responsiveto their demands

was that these staff lacked an understandingof the business. As one subjectstated:

you [are] sitting in the back end in IT, [are] picking a system that has
...
authorisation, for argument sake, online. You are not certain of all the steps
[in the process]. All the steps that take place in processing a cheque. You are
not privy because you have never worked in a branch. You work in IT all
...
you know is that there is a module called cheque authorisation online, but you
don't understand the processesthat would take place before authorisation can
happen. 35

Whateverthe reasons,there emergedan increasingrift betweenthe attitudesand

interests of operational managers and the banks' information technology specialists.

Often, the information technology specialists, with their monopoly on technical

knowledge, won out, which led to a situation in which the banks' information

technology strategieswere driven by than

more technologicalconsiderations by

businessrequirements. It is, therefore, not surprisingthat thesesystemsin manyways

performed sub-optimally in terms of providing the kind of trustworthy and timely

information the banks' managersneededto maintain effective control over t eir

banking operations.

is
It also evident, however) that the banks' failed
management to clearly articulate

their information requirementsto information technology consultantsand in-house

The of the problem was not only that managementfailed to

specialists. root

the importance and application of information technology but also that

understand

failed to understandand appreciatethe banks' record keepingrequirements.

managers

Stepping back to look at the problem from the wider perspectiveof the general

294
 to
approach managingrecords and information, it is possibleto seea failure on the

part of the collapsedbanks' to

management consider the implications and

for
requirements records and information upon entry into new areasof business

activity or products, or when changeswere madeto existing businessactivities or

products. Had they done so, identification of the records and information requiredto

the
manage risks associatedwith new areasof businessmore likely would have

determinedthe information technology requirements. Instead,the requirementsof

existing information technology drove the records and information availableto

support new businessactivities and the managementof their associatedrisks. And, as

have
many respondents pointed out, the records and information that were available

proved insufficient.

Not only group cultures, but the culture of the wider Jamaicansociety also gave rise

to the motivations that produced individuals' record creation and keepingbehaviour.

There are two ways in which the field researchrevealedthat Jamaicanculture was a

factor in the banks' record creation practices,particularly in the failure to document

financial transactions. First,, somecommentatorsarguethat becauseJamaicais a

small society many deals were made on the basis of personal contacts. In

this Jamaica's Minister of Finance, Omar Davies, has

commenting on phenomenon,

stated that in a small community, decisions cannot be made dispassionately,noting

that you can have rules but "sooner or later you get a call. ).
)36 He also has observed

that the tendencyto do businesswith fiiends or known in

associates the context of a

the documentation(ie, because

the other party is
small society undermines creation of

known to the banker and there is greater trust), adding that this was the reasonwhy

documentationin failed banks 37

incomplete.
some of the loan the was non-existentor

295
Thesecommentspoint back to the discussionof accountabilityin chaptertwo where it

was noted that both hierarchicaland lateral forms of accountabilityco-exist in

organisations. Though the literature on the subject portrays lateral forms Of

accountabilityin terms of an informal relationshipwith co-workers, it is possibleto

arguethat bank officials' informal relationshipwith externalpartiesalso constituteda

forni of lateral accountability. Recalling that accountabilityis the liability to give

accountof, and answerfor, the dischargeof duties or conduct, there in

exists such

relationshipsan obligation on the to

part of one party another. In informal lateral

accountabilityrelationshipsthis obligation tends to be implied. It is, nevertheless,

arguablyno less compelling as a determinantof action on the part of accountable

persons. For example, a person may have strong familial obligations arising fi7om

socialvalues. In the Jamaicancontext, there also exist strong bonds of social and

political community that give rise to implied obligations. Thus, it is possible to

in
speculatethat many casesfamily or community memberswould havehad

expectationsof bank officers and would have held informally

them accountable for

confom-lingto those expectations. In addition, bank officers' failure to act in

accordancewith implied obligations may have resultedin family or community

In these forms of accountability appear to have had a greater

censure. many cases,

influenceon individuals' record making behaviourin the failed banksbecause

the

more compelling. Specifically, in an

consequencesof non-compliance were

organisational culture where the enforcement of policies and procedures was weak,

individuals in the failed banks had a greater incentive to in

act accordance with

in order to avoid the more imminent possibility of farnily,

external accountabilities

repercussions. Theselateral forms of accountability,underpinned

social or political

296
as they were by values and norms of behaviour that contradictedbehaviourin keeping

with the production of trustworthy and timely documentation,servedto underminethe

banks' internal systemsof accountabilityby discouragingproper documentation

of
businesstransactions.

In addition to the effects of a smaHsociety on the creation of documentation,some

to
subjectspoint a generallyheld belief that Jamaicanpeoplefavour oral forms of

communicationand therefore are lesslikely to make records. As one interview

subjectremarked:

it is very difficult to get [employees] to put this information down on

...
paper. Maybe it is becausewe are not very literate in that we don't like
writing letters and writing memos and that sort of thing. We just don't do it. 38

This cultural aversion to record making was clearly evident among the Jamaican

employeesin the banks that failed. In contrast, the researchdata revealsthat

Jamaican employees working in foreign-owned banks that remained viable created

documentswhere their counterpartsin the failed banksdid not.

This difference in behaviour among peoplefrom the samecultural backgroundcanbe

attributed to the fact in

that the foreign-owned banks the cultural valuesof the foreign

in
parent company, part reflecting the broader cultural values of a North American

society more oriented to making records, placed greater and

emphasis importanceon

documentingtransactions. Moreover, the field has

research indicatedthat in at least

foreign-owned bank these cultural valueswere unequivocally in

embedded the
one

bank's businessrules of operation and that theserules were clearly communicated,

Additionally, adherenceto theserules was well monitored and enforcedin this

foreign-owned bank. In other words, the bank did not suffer from the samelevel of

297
organisationalrecord creation and keeping anomie characteristicof the failed

Jamaicancommercialbanks. The researchalso suggeststhat the seriousnesswith

which this bank took the making of records may, in fact, havebeenencouragedby the

fact that it was subjectto the oversight of a foreign regulatory and supervisory

authority with more stringentrequirementsthan those of the Bank of Jamaica. Thus,

the bank's organisationalculture reflected a value systemthat encouragedand

required the making of records and the bank promulgatedand enforcedclear rules and

structuresto ensurethat proper documentationwas madeand kept. In the failed

banks,where documentationwas poor, it was the cultural predilectionnot to

documentcoupledwith an organisationalabsenceof effectiveaccountabilityfor and

control over the making of records that led to failures 39

to account. Without polices,

procedures,standardsand guidelinesin this areaor becauseof weak communication

and enforcementof those that existed, individual motivationsand cultural

disincentivesto record making had full play.

Influences on Record Keeping

While it may be apparentthat the failure to make a record or to do so adequately

preventsthe giving of an account and the effective operation of it

accountability, may

be less obvious that the mannerin which records are kept equallyinfluencesand

forms an inseparablepart of the meaningin records and thereforeof the account

The meaningin source documentsand books of original entry, for

giving process.

to be communicatedacrossspatial and temporal in

distances
example,must continue

to the view of organisationalactions and decisions in

represented
order verify

derivative accountingrecords.

298
In order for sourcedocumentsand other financial transactionrecordsto be available

they must be stored. Storageis both one meansby which recordsare contextualized

(that is, linked to the financial transactionsthat they documentand to other records

documentingthe sametransaction in order to give them meaningin relation to that

transaction)and transmitted acrossorganisationalspaceandtime. The mannerof

records storage,therefore, as the meansof contextualizingandtransmittinga record,

hasan impact on the record's communicatedmeaning. As is the casewith the initial

inscription of records, social and technical factors influencemethodsof records

storage.

Turning to look at contextualization of records, significance imbues meaning and the

context of records imbues In

significance. other words, information revealingthe

relation of a documentto the transactionthat it documentsand the organisational

context and significanceof that transactiongives a documentmeaningas a record. In

a traditional paper record keeping environment,contextualizationof documents

entailsadding them to files, in which are kept other documentsrelatingto the same

transactionor a similar group of transactions,and the placementof those files in an

keeping system, such as a registry, according to a logical schemeof

official record

arrangement. The analytical process of developing a logical structure or system of

files in (ie, the development of a file classification plan)

arranging the records stores

business the followed by the

that reflects the functions and processesof organisation,

link between documentsand the transactionsthey documentby

establishmentof a

placementof the documentsin files accordingto the logical

meansof physical

299
 schemeof file arrangement(ie, the act of classifyingdocuments)revealsthe

significanceand thereby meaningof the documentsas records.

In an electronic environment,the sameprmciples apply, though the link is

not
establishedby physicalplacementof the documentsin relation to one anotherbut by

the establishmentof a logical link betweenthe systemdeterminedphysical

storage
location of the digital document or componentparts the document
- of - and relevant
metadata,such as a logical classificationplan mirroring the organisation'sfunctions

and processesand the significanceof thesefunctions and processesin relation to one

another.

Thus, meaningis not somethinginherentin the record but is engenderedby the

social

and technologicalmode of contextualization. It is dependentupon the mannerin

which the logical method of arrangingdocuments,whether paper,digital or in some

other form, representsthem in relation to organisationalfunctionsand processes,or

whether it does so at all. This representationwill, of course,reflect individual or

of the significanceor use the recordshavefor the organisation. In

group assessments

turn,,it dependsupon choicesrecord keepersmake in creatinglogical file structures

that represent organisational functions and processes,or whether they do so at all. For

example,they must make choicesabout how particular transactionsrelateto

organisationalfunctions and their significancein relation to thoseffinctions. In

addition, they must decide to

where place or how to fink particular documentsin

to
relation a constructed logical file to
structure, or whether placeor link them at all.

Contextualization of the documentalso dependson the limitations or possibilitiesthat

300
the technology of record creation and storagepresentfor linking documentsto

businesstransactions.

If we look at the act of contextualizingthe account in the failed Jamaicancommercial

banks.,we seethat, in many cases,staff at all organisationallevels chosenot to add

documentsto official records stores. There were a numberof reasonswhy this was so

related to bank employees'own perceptionsand motivations as well asto the absence

of organisationalvalues and systemsthat might have overriddenindividual incentives

and the limitations of the technology in

of record creation and storage establishing

logical links. Bank officials' approach to keeping management accounting reports

producedusing spreadsheetsoftware illustrates this point.

As the environmentin which the banks operatedbeganto changeto demandmore of

the banksin terms of assetand liability managementand control over operating

expenses,as already noted, they increasingly began to employ computer technology

to assistthem with thesefunctions. Sincethe banks' existing computersystems

lacked functionality required to produce the types of reports managersneeded,

managers tended to create and rely upon ad hoc reports using popular spreadsheet

(eg, Excel). 40 For example, a site investigation conducted for this study
software

uncoveredthe fact that the FinanceDepartment in one bank stored a numberof

its The departmentrelied on these for

spreadsheets
spreadsheetson server.

completion and control of one of its core accounting the

processes, reconciliationof

These arguably
spreadsheets accountedfor how the department
performed
accounts.

and provided important evidenceof that business

process. As
account reconciliation

these electronic documentswere integral to accountability.

such,

301
Though many of thesespreadsheetsprovided important evidenceof decisions

concerningcritical bank businessffinctions such as assetand liability management,

budgeting,loan loss provisioning and the like, there were no organisationalpolicies

and proceduresgoverning the creation and keeping of this type of record. Thus,

inscribersof thesedocumentscreatedand kept them informally. The informal way in

which theserecords were created and kept often led to dissolutionof their meaning

over time as evidenceof particular financial transactions.

This problem was due partially to the limits of individuals' choiceof technologyin

creating and keeping the records. Specifically, the spreadsheetsoftware had no

featuresthat automaticallylinked spreadsheetdocumentswithin their structureand

content to the financial for

transactionsand processes which theserecordshad been

created. Sincethe meaningof records derives not only from contentand form but

also from context, over time as memoriesfaded in

the context which individualshad

createdthese records becamemore distant and the significanceof the recordsand

their meaningbecamemore obscure,evento those who had createdthem. Moreover,

it is possibleto speculatethat the records' meaningand significanceoften were lost

completely becauseof the easewith which the technology for storing

-used

spreadsheetspermitted alterations and deletions of computerfiles, though no specific

instanceswere cited by interview subjects.

in
Furthermore, the absenceof clear corporate definitions of the term records, implicit

the value of these documentsdeterminedtheir creators' choices

assumptionsabout

whether to add them to more permanentand stable record

organisational stores,
about

302
and by doing to
so elevatethem to the statusof official fix
records and their meaning

through contextualization. Jamaicanbankersfound themselvesin the midst of a

shifting documentarylandscape. Financialprocessesand accountsthat oncewere

documentedin paper form were recorded increasinglyin electronicform to facilitate

transactionprocessingand the convenientmanipulationof data for reporting

purposes. Most individuals working in Jamaicancommercialbanks,however, still

conceivedof a record as being in

something paper form. The f6flowing statementby

one interview subject illustrates this point:

Primarily when we think of records and files we think of a record and a

...
file and we know that there are other records and files. We all are awareof
that but it doesn't meanthat we haveto let go of, you know, the record and the
file. Which is why we probably would print this piece of paperratherthan to
send it, the message,next door [via email]. The day win comewhen we will
it,
stop printing the paper, but I can tell far
you as as [name of bank] is
concerned probably for about a decade now we have been talking about a
paperless office etc. There is no such thing as a paperlessoffice. Forget it. It
doesn't exist. We get, you know, we improve our technology and we
41 ...
create more paper.

One of the most striking aspectsof this statementis that the idea of the record was so

integrally linked to the paper format in the subject'smind that he consistentlysaw

paperas the only medium of "official"' records.

Even subjectswho were more comfortablewith conceptualisingof recordsin

form, as one information technology specialist,saw legal limitations

electronic such
business 42
transactions.
to adopting electronic documentationas official records of

Significantly, the legal constraintsto which somerespondentsreferredare lessa

than might be imagined, as under Jamaicanlaw computer generated

problem

documentsare admissibleas evidencein both criminal and civil legal proceedingsas

303
long as they satisfy certain clearly specified standardsof trustworthiness. These

provisions have yet to be in

widely tested a court of law, 43
however.

Vague notions about records coupled with lack of recognition of the value of these

types of documentsto the organisationin terms of accountabilityand control

preventedbank officials from viewing spreadsheets

and other documentationcreated

in office productivity application software as official recordsand from therefore

ensuringthat they were addedto logicafly organisedrecords stores,whetherelectrork

or manual (eg, to
printed out and added a hard copy file). In hindsight,their failure to

add these to
records appropriaterecord keeping systemsobscuredthe significanceand

meaningof many of these documentsin relation to the transactionsthey documented

and left gaps in the account of organisationaldecisionsand actions.

In contrast, individuals in the failed banksgenerallyviewed paper sourcedocuments

as records. There were, therefore, policies and procedures specifying that such

be
records should addedto organisedrecord keeping systems.The low level of

importance that management assigned to properly controlling stores of source

documentation,however, generallyled them to delegatethis function to untrained,

low level clerical staff who were iII-equipped to manage such records effectively.

This was primarily becausetheseclerical officers had receivedno formal training in

records managementprinciples and practices and had little to no or

understanding

the keeping requirementsneededto support the banks' business

appreciation of record

functions and accountabilityrequirements. AdditionaHy,branch and unit managers,

the record keeping function as a low priority, provided little to no oversight

who saw

how well clerical staff performed their record keepitig duties. As a result,
of

304
individuals chargedwith the oversight of records storeshad little incentiveto ensure

that records were properly managed,even if they did identify ways in which the

organisationor managementof the storesunder their control might be improved. in

fit
contrast,when managerssaw to assignresponsibilityfor a record store to

experiencedand trained staff, as in the casediscussedaboveof the securitiesunit in

one bank, organisation,indexing and henceretrieval of recordswas much 44

improved.

Also typical of the valuesthat underpinnedthe failed banks' organisationalcultures

was the view that paper-basedrecords were less useful than thosein electronicform

and therefore that energyand resourcesshould be directed not towards controlling the

creation and keeping of paper records but towards digitisation of paperrecordsor

computerisationof A information. As one respondentnoted: "Who wants to wade

-)-)45
through the paper? Another commentedthat the stereotypicalview of manual

is
records that "if you have a manual system chancesare the information is not as

timely as you want it. The level of accuracy might not be as good."46 It must be

emphasisedthat no systematicassessmentof the relative value of different record

in to or
stores relation risk management the financial health of the banks,whether in

those storeswere in paper, electronic or other form, was being carriedout in the failed

Jamaicancommercialbanks. Thus, beliefs about the relative value of varioustypes of

recordswere unsubstantiated. These beliefs

unsubstantiated had the effect of

diverting attention and resourcesaway from the managementof paperrecordsstores,

becamemore and more disorganisedthereby fuefling the perceptionthat

which then

paper-basedrecords were less useful.

305
The logical and physical arrangementof traditional paper recordsand files
also
impacted upon the significanceand meaningof records over time for the
purposesof

accountmg or decisionsand actions in failed Jamaicancommercialbanks. Even

when manualrecord stores are well structured, no singlemethod of organisationcan

anticipateor satisfy all the possibleways in which usersmay want or needto access

information. This is becausedifferent decisionsand actionsrequire different

information. A particular way of ordering a store of information, which reflects

underlying assumptionsabout the significanceand meaningof recordsin the store,

will permit users to retrieve the information from that store more readily than other

ways of organising records. As an organisation's external environment changes,

however new challengesmay arise in responseto which new decisionsand actions

be
may required. When this is the case,records may take on new meaningand the old

view of the organisation that a particular ordering of the records presents may no

longer be appropriateor sufficient.

In the failed Jamaicancommercialbanks,,for instance,one researchsubjectdescribed

frustrations experiencedwhile trying to retrieve information from the banks' credit

files on connectedparty lending, which did not becomean issueof significanceuntil

well into the financial crisis and, indeed,until bank regulatory authoritiesintroduced

limiting the practice. 47 Registry staff had organised the files by

new remilations
C7
branch and thereafter by customernamein order to facilitate transactionprocessing

and customer account queries;however, becausethe records took on new significance

after the bank's failure, the existing organisationof records no longer supported

information requirements. Similarly, at somepoint during the financial

managers'

crisis when the banks beganto experiencelossesdue to managers

guarantees,

306
recognisedthe needto track contingent liabilities in order to control credit risk more

effectively. Sincemanagerspreviously had not identified theserecordsasbeing

significant, however, no meansexistedto assistthem in "mining" this information

from records once they saw the importance of monitoring guarantees.One interview

subjectexplainedthe difficulties as follows:

But the real issueis how do you go back and identify [guarantees]that are out
there that you don't know about when you have to go file by file by file 48
...

One remedyto this problem is indexing. Traditionally, manualor computerised

indexeshave provided multiple points of accessto information in recordsstoresand

are an important means of overcoming the limitations posed by the physical

arrangementof paper records. The creation of indexesto facilitate tracking of and

accessto information requires, however, that users first identify their information

requirementsbasedupon a systematicassessmentof the meaningof the recordsin

relation to their information

organisational requirementsand the accesspoints that

will support obtaining the required information. This in

was an areaof weakness the

managementof the failed Jamaicanbanks. Many of the personsinterviewedfor the

researchproject madethe observationthat the banks' failed

managers to recognisethe

significanceof tracking their commitmentsand exposurelevels. Commentators

attribute this failure to the fact that managers- who were "old style" bankers- were

not equippedto deal with the types in

and complexitiesof risks a liberalisedmarket.

Many managerstherefore failed to identify new areasof exposureand risk for their

banks. Not having identified exposuresand risks, they could not haveforeseenthe

need to develop and maintain systemsto monitor these risks, including the

identification of information requirementsand the related of

establishment indexes

that might have allowed them to retrieve relevant information from the banks' files.

307
That being said, those tasked with the managementof the banks' recordsalso

contributed to the absenceof either manual or computerisedindexesthat hampered

the retrieval of relevant information. In the failed banks,as alreadydiscussed,

for
responsibility the managementof many records storeswas assignedto low-level

clerical staff. For example,as previously indicated, the personin chargeof the

in
registry which the credit files in one of the banks were kept in
was untrained record

keepingprinciples and techniques. Neither had this personreceivedanytraining in

the basicsof credit administration. Thus, this clerical officer had little capacityto

appreciate the significance of information in this record store and the retrieval

requirementsof the bank's credit administratorsand risk analysts. Even assuming

this level of understanding,this individual had little if any understandingof the value

of, and techniquesfor, creating indexesto information

support managers'

requirements.

Of course,ultimate responsibility for the problem lay with the banks' managersas

they madethe decisionsabout who to assignto managetheir records. The fact that in

many casesthey assignedlow-level, untrained clerical staff to managethesestores

reflects the generallylow level of importancethat to

assigned
managers most classes

of paper records and the function of keeping suchrecords,aswell as their lack of

appreciationand understandingfor record keeping as a disciplinecomprisedof

techniquesand methodsin which those with responsibilityfor recordsin

specialised

their banks should have receivedtraining.

308
Ironically, the absenceof appropriateindexesto paper records storesfurther fuelled

managers'perception of paper records as being less efficient than those in computer

form. This has led the banks' managersto focus on computerisedinformation and

imaging systemsas solutionsto information retrieval problems. Many managers

assumed,and stifl do, that once an information is to

store converted electronicform,

information retrieval difficulties will disappear,as for examplein this exchangewith

one interview subject:

Researcher: [The information] was there but [the retrieval system] wasn't
functioning as it should
...
Subject:Becauseof too much paper. A lot of it is basedon a document,
written rather than a processthat is automated. That you can actuallygo and
It is down but it is 49
not automated.
automate... written

While computerisationof records storesdoes facilitate faster retrieval of information

in
and, many cases,easier"re-presentation" of information in recordsstores,as with

if for
manualstores, the requirements particular accesspoints are not identified at

early stages of system acquisition or development and continually reviewed in light of

a changing business environment, the resulting system will in all probability lack the

required fields, structuresor functionality to permit the desiredview of the

orgarusation. Thus, computensation does not automatically make the retrieval of

relevant information any easier,as illustrated by interview subjectswho complained

the lack of "reporting functionality" in the banks' core accounting systemsand the
of

difficulties of getting information technology specialists to make requested system

changesso that useful presentationsof data be

could retrieved.

309
Conclusion

Many commentatorson the collapseof the Jamaicancommercialbankshave

attributed the failed banks' problems,including poor record keeping,to sharp

practice. In this chapter, an alternative explanationwas presented. Though sharp

practice was a factor in how individuals within the failed bankscreatedand kept

records and thus the poor quality of the banks' accountingand management

information, the self-dealingmotivations that underlay sharppracticewerejust one of

manyvalues,beliefs and norms that influencedhow individualswithin thesefinancial

institutions createdand kept records. Thesediversevalue systems,often

unconsciouslyheld and deeply rooted in the psycheof individual or groups of record

creatorsand keepers,influencedbank officers to make choicesabout inscribing,

transmitting and contextualizingrecords in the production of accountsof the banks

financial transactions. In the aftermath of the banks' collapses,it is possibleto see

how thesechoicesoften underminedthe production of the quality of accountingand

management information required to sustain effective internal accountability and

control. This by
was no meansalways the intention of individual record creatorsand

keepers,though obviously In the caseof those involved in sharppracticeit was

deliberate. More often, the resultant poor quality recordedinformation arosebecause

directors, managersand officers of the failed Jamaicancommercialbankswere

unawareof the overall effects of their record making and keepingchoices. From this

perspective,the failed Jamaicancommercialbanks did suffer from a management

failure. However, this was not only a failure on the part of the bank's managementto

identify and effectively managetypical banking is but

risks, as commonlysupposed,

also a failure to systematically assessthe quality of accounting and management

310
information required to sustaineffective internal control and decisionmaking and

then to establishand ensurewidespreadacceptanceof a set of sharedorganisational

values,beliefs and norms of behaviour that would have encouragedor constrained

individuals to createand keep records in such a way as to producethe necessary

quality of information. This was a failure that managementin the collapsedbanks

by
could not redresssimply reorganisingeither their reporting relationshipsor their

records stores,as revealedby the exampleof the failed bank that soughtto solve

credit information deficienciesthrough first decentralisingand later re-centralisingits

credit related records stores. Nor could the problem be solvedby introducing

computer technology, in
as exemplified the difficulties the bankscontinuedto

in
experience obtaining and retrieving relevant, good quality managementinformation

long after the introduction of computerised information systems. It was a failure that

the banks could only haveredressedby establishingsoundsystemsof internal

accountabilityand control for the processesof record creationand keepingwithin

their financial institutions. That the banks failed to pursuethis strategyand instead

focusedon restructuring record storesand computerisationto solveinformation

problemsreflects how managers'preconceivedideas about recordsandrecords

management often prevented them from fully appreciating the causesof information

problemsand therefore devising and implementingsolutions and that

strategies may

havebeenmore effective.

End Notes

1 See,for example, subject B-1, personal interview, Kingston, Jamaica, 20 May, 1999, subjectF-1,
interview, Kingston, Jamaica, 9 May, 2000 and subject F-2, personal inteniew, Kingston,
personal
Jamaica, 9 May, 2000.

' See, for example, Government of Jamaica, Nfinistry of Finance and Planning, "Public Sector
Responseto the Problems of the Financial Sector," Nfinistry Paper No. 13/98,8 April, 1999; "BOJ

311
Governor Keynote Speaker at ROB Awards Luncheon, " J10B News (May 1999): 1+; Omar Davies,
"Introductory Statements" Symposium on the Crisis of the Jamaican Financial ServicesSector.
University of the West Indies, Kingston, Jamaica, 27 November, 1999, author's transcription of taped
proceedings; seeDennis Boothe, "Case Study of SelectedFinancial Institutions, " Symposium on the
Crisis of the Jamaican Financial Services Sector, University of the West Indies, Kingston, Jamaica,27
November, 1999, author's transcription of taped proceedings and other presentersat the same
Symposium.

3 Subject B-1, personal interview, Kingston, Jamaica, 20 May, 1999.

Subject A-1, personal interview, Kingston, Jamaica, 19 May, 1999.

Subject B-1, personal interview, Kingston, Jamaica, 20 May, 1999.

6 Subject B-1, personal interview, Kingston, Jamaica, 20 May, 1999, subject F-1, personal interview,
Kingston, Jamaica, 9 May, 2000 and subject F-2, personal interview, Kingston, Jamaica, 9 May, 2000.

Subject A-1, personal interview, Kingston, Jamaica, 19 May, 1999.

8 Seeon this point subject B-1, personal interview, Kingston, Jamaica,20 May, 1999; subject A-12,
personal interview, Kingston, Jamaica, 6 July, 1999; and subject A-15, personal interview, Kingston,
Jamaica, 22 July, 1999.

Subject A-12, personal interview, Kingston, Jamaica, 6 July, 1999.

10Bank D, "Centralized Securities: Legal/Credit Administration Division, " photocopiedreport, January

19,1994.

" Subject A-15, personal interview, Kingston, Jamaica, 22 July, 1999.

12Ibid. This subject points out that files did have a tendency to go missing from the credit files registry.

13Subj ect A-15, personal interview, Kingston, Jamaica, 22 July, 1999. Unfortunately, the researcher
to
was not able gain access to the actual credit administration manual to review the contents of the
policy provisions referred to by the interview subject.

14All interview subjectswere asked about the educational background and experience(seelist of
interview questions in Appendix 1). Thirteen out of sixteen interview subjectsworking for the failed
Jamaican commercial banks came from either a business or accounting background.

15Frank Wood and Alan Sangster,BusinessAccounting 1,8 thed., (London: Financial Times
Professional Ltd., 1999).

16For example, interview subject A-2, personal interview, Kingston, Jamaica, 19 May, 1999. This was
in to about their formal education and experience(seelist of
also evident subjects' responses questions
interview questions in Appendix 1).

17For example, in one of the newer banks, lack of order in the arrangementof recordsobtained despite
fact bank had a policy and procedures that specified how records should be
the that the established
filed. The policy document read.

be
In order to ensure that original records can produced satisfy to legal requirements,
and to facilitate retrieval for confirmation of past transactions, all vouchers.
forms and other documents which comprise the records of branches,
correspondence,
Data Centre and General Manager's Office must be filed carefully and in prescribed
i. [Bank C,
sequencein accordancewith each class of records, e. retention period
Records Management Guidelines, 9 May, 1996].

12
 This is the very bank in which, as described in the previous chapter, respondentsfound that employees
simply had dumped records, together with other office "junk" in boxes destined for off-site storage.
Numerous similar examples of policy and procedural breachesin all of the failed banks can be cited

18Subject A-17, personal interview, Kingston, Jamaica, 2 August, 1999.

'9 Subject C-1, personal interview, Kingston Jamaica, 14 September, 1999

and subjectsC-5 and C-6,
personal interview, Kingston Jamaica, 5 October, 1999.

20Subject C-5, personal interview, Kingston, Jamaica, 14 September, 1999.

21Subject C-7, personal interview, Kingston, Jamaica, 6 October, 1999.

22See,for example, subjects C-5 and C-6, personal interview, Kingston Jamaica, 5 October, 1999;
Subject C-7, personal interview, Kingston, Jamaica, 6 October, 1999 and subject C-2, personal
interview, Kingston, Jamaica, 29 September, 1999.

23Subject C-1, personal interview, Kingston Jamaica, 14 September, 1999 and subjectsC-5 and C-6,
personal interview, Kingston Jamaica, 5 October, 1999 and subjectsC-5 and C-6, personal interview,
Kingston Jamaica, 5 October, 1999.
24
Ibid.

25See,for example, Subject B-1, personal interview, Kingston, Jamaica, 20 May, 1999 and subjectA-
17, personal interview, Kingston, Jamaica, 2 August, 1999.

26Subject B-1, personal interview, Kingston, Jamaica, 20 May, 1999

27Subject, A-5, personal interview, Kingston, Jamaica, I June, 1999.

28Subject B-1, personal interview, Kingston, Jamaica, 20 May, 1999.

29Ibid.

30Subject A-2, personal interview, Kingston, Jamaica, 19 May, 1999

31Ibid.

32Subject A-10, personal interview, Kingston, Jamaica, 17 June, 1999

33Subject B-1, personal interview, Kingston, Jamaica, 20 May, 1999.

34Subject A-10, personal interview, Kingston, Jamaica, 17 June, 1999.

35Subject A-2, personal interview, Kingston Jamaica, 19 May, 1999.

36
Davies passi.M.
37
Ibid.

38Subject A-18, personal interview, Kingston, Jamaica, 3 August, 1999. Seealso the interview with
subject A-14, personal interview, Kingston, Jamaica, 22 July, 1999.

39in support of this argument, seesubject A-14, personal interview, Kingston, Jamaica, 22 July, 1999.

40Subject B-3, personal interview, Kingston, Jamaica, 25 June, 1999; Subject B-6, personal intervieA'.
Kingston, Jamaica, 13 July, 1999.

313
41Subject C-5, personal interview, Kingston, Jamaica, 5 October, 1999.

42Subject A-13, personal interview, Kingston, Jamaica, 9 July, 1999.

43Laws of Jamaica, An Act to Amend the Evidence Act. L. N. 12-1995. There is only one caseof
which I am aware focusing on the legal admissibility of computer-generatedbank records, that is,
Zachary Sheriffe v. NCB. The case is unreported, so no reference can be given.

44Subject A-12, personal interview, Kingston, Jamaica, 6 July, 1999.

45Subject C-4, personal interview, Kingston, Jamaica, 30 September, 1999.

46Subject A-7, personal interview, Kingston, Jamaica, 10 June, 1999.

47
Ibid.

48Subject A-16, personal interview, Kingston, Jamaica, 30 July, 1999.

49Subject A-2, personal interview, Kingston, Jamaica, 19 May, 1999.

314
Chapter Nine: Record Keeping in Failed Jamaican Commercial Banks Its
-
Impact on the Effectiveness of Bank Supervision, Intervention and
Rehabilitation

Introduction

The previous chaptersexplored the impact of the failed Jamaicancommercial

banks' records creation and keeping on their ability to producetrustworthy and

timely accounts of financial transactions for the banks' own internal purposes, that

to
is, produce them in support of effective operation of systemsof internal

accountability. The banks relied upon these to

systems control banking

operations,assessand managerisk exposures,monitor the banks' financial

positions and prevent fraud. The discussionillustrated how the banks' records

creation and keeping practicesundemlined internal accountabilityand control and

decisionmaking and how this, in turn, underminedthe banks' competitive

viabflity.

Tbschapter looks at the implications of the banks' recordscreationand keeping

for external agencies involved in banking supervision, and after the bank failures,

intervention and rehabilitation of the failed banks. The discussionbeginswit an

315
exploration of the effects of the banks' record creation and keepingupon

supervisoryefforts. It then discusses

the governmentintervention that took place

in the aftermath of the bank collapsesand the implications of the banks' record

creation and keeping upon intervention and subsequentrehabilitationinitiatives.

In addition to the empirical data discussedin the previoustwo chapters,the

findings presentedin this chapter draw upon information suppliedby the Bank of

Jamaicaand interviews conductedwith the Financial SectorAdjustmentCompany

(FINSAC) Limited forensic auditors. Although the researchplan had included

conducting interviews with Bank of Jamaicasupervisoryauthorities,this proved

to be impossible. After two yearsof making requeststo the Bank for interviews

with key supervisorystaff, the researcherwas advisedthat the requestfor

interviews could not be granted becauseof the supervisorydivision's "heavy

workload and extremelytight "'

schedules/deadlines. Instead,the Bank

subsequentlyagreedto respondin writing to a fist of questions(seeAppendix 1).

The Bank did not answera number of questionsrelatedto specificbanks"due to

confidentiality and other legal v)2

and professionalconstraints. One is inclined to

surmisethat the Bank's reluctanceto releaseperformancedata on individual

in
failed banks is at least part due to the fact that the data be
would also very

the Bank's own supervisoryperformance. In light of

revealing on the subject of
information, the discussionin this
the Bank of Jamaicas refusal to releasecertain

have been. Nevertheless,

the research
chapter is not as comprehensiveas it might

to
data are sufficient make a number of observationsabout the relationship

between record keeping and Bank of Jamaicasupervisionof the failed banks.

316
Weaknesses in Effective Supervision of Jamaican Commercial Banks

The reasonsfor banking supervisionwere discussedin chapterfive and a

number

of factors with the potential to undermineeffective bankingregulationdiscussed.

To reiterate, thesefactors include: a weak regulatory framework, government

in
interference the operation of bank supervision,and a weak or ineffective

supervisoryauthority. As discussedin chapter six, many commentatorson the

Jamaicanfinancial crisis seethesefactors as having contributedin one way or

another to ineffective regulation of the Jamaicanfinancial sectorandthe eventual

collapseof severalJamaicancommercialbanks. Governmentinterference,for

is
example, cited as having been an issue,in particular with respectto the

independenceof the Bank of Jamaica.3 In addition, manycommentatorsargue

that the Bank of Jamaicasupervisorydivision did not havethe capacityto

supervise the sector effectively. The Bank had too few staff to monitor a growing

banking sector and also lacked staff with the technicalcompetencyto monitor

4
increasingly complex corporate conglomerates. Finally, commentators and

analysts also point to shortcomings of the legislative framework for the

Jamaican banks having been 5

supervision of as problematic.

It is beyond the scopeof this study to assessthe degreeof impactthat the above-

noted factors had on the efficacy of banking supervisionand, by the

extension,

the quality of banking on

super-vision the health of individual banksand
effect of

the entire Jamaicanfinancial sector. Suffice it to say that all of thesefactors

to problemswith effective supervisionof the banking sector. That

contributed
is
being said, there still another factor that be
cannot overlooked in the
assessing

317
effectivenessof the bank supervisoryauthorities, that is, the quality of information

that was availableto them.

Information is critical to effective banking supervisionbecauseof the agency

problem. As discussedin chapter three, agencytheory, which essentiallydraws

upon Hegel's and John Stuart Mill's philosophicalideas,holds that in a

relationshipbetweena principal and an agent,the agentwill take advantageof the

6
principal unlessthe principal is fully informed The theory of agencysuggests
.
that principalsneedfall and complete information aboutthe actionsof agents.

That is to say, the actions of agents must be "transparent" to the principal. This is

the case whether the agent is a government banking supervisory authority, as

when there is legislative regulation of an industry, or corporate shareholders,as

when market discipline is to

used regulate a sector. Without suchinformation, the

principal is unableto assessthe performanceof the agentandto hold that agent

for to In
accountable adhering acceptedstandards. referenceto banking, society

requiresthat bankersconduct their business in

according certainstandards the
to

best interestsof depositorsand overall econon& and socialwell-being. Banking

supervisorsact to hold bankers for

accountable adheringto thesestandards.

Effective banking supervision,however, is dependentupon the supervisor's

accessto good quality information about bankers' activities. The Jamaican

supervisoryauthorities were no different in this regard.

318
The Relationship between Bank of Jamaica Supervisory Practices
and Failed
Bank Record Keeping

According to information provided to this researcher&om the Bank Jamaica,

of

the statedpurposebehindthe Bank of Jamaica'ssupervisionof commercialbanks

and other deposit-taking financial institutions is to: 1) promote their safetyand

soundnessso as to protect the confidencein, and integrity of, the bankingsystem

and 2) promote an efficient and effective banking systemthat financeseconomic

growth, allocatescredit and meetsthe needsof customersand the communityat

7
large. Towards realisingtheseobjectives,the Bank assesses
how much risk each

bank is undertaking;the resourcesavailableto managetheserisks, suchas capital,

internal control systems,and managementexperienceand competence;and

whether the identified level of resourcesis sufficient to managethe risks. The

Bank's supervisory activities include. ensuring compliance with all applicable

laws and regulations;enforcing guidelinesand performancestandards;providing

guidancethrough promulgation of best practice standards;verifying and assessing

the quality of activities through at least annual on-site examinations and ongoing

off-site monitoring; and seekingto achieveas much disclosureas possible. The

Bank maintainsthat, "Although regulationsand guidelinesare important, the

cornerstoneto the bank is

supervisoryprocess through on-site examinations

conductedannually,along with off-site surveillanceon an ongoing basis.

).
)8 Thus,

the efficacy of the Bank's supervisory programme is highly dependent on the

availability of trustworthy and timely information as the basisof holding bankers

to account for their banking operations.

319
According to the Bank, "Off-site supervisionprovides an important
complement
to on-site examinationsby providing early warnings to actual or potential

problems, and a meansof assessingbroader patternsand trendswithin the systems

as a whole."9 A review of Bank of Jamaicaannualreports indicatesthat from at

least 1987, the bank was taking this approach.10 The inspection
off-site process
involves collecting data and verification checks;data
analysis;reporting findings

to the Governor of the Bank of Jamaicaand the NEnisterof Finance;making

recommendationson corrective action and monitoring of correctiveaction.

Data are obtained from a variety of sources, the primary one being regular (ie,

weekly, monthly, quarterly and annual) prudential returns. The particular data the

Bank of Jamaica supervisory authorities require the banks to supply have varied

over time. In 1988, according to the Banks annual report, it required the

following: the reporting of loans, advancesand discounts,accountsreceivable,

investmentsand fixed assets,net provisions for lossesand depreciation;the

reporting of all forms of credit extensions,including leasingbusinessunder one

category "Loans, Advances and Discounts; " the reporting of total liquid holdings

in the absenceof statutory liquid assetsrequirements; monthly reporting of

delinquentand non-performing loans; and more detailedreporting of contingent

accounts and other off-balance sheet business. In the 1992 Banking Act, the Bank

of Jamaicastipulated that banks submit the following returns:monthly statements

of assetsand liabilities; non-performing loans; renegotiatedloans amountingto a

certain percentageof the bank's capital base;and analysesof customers'liabilities

with the bank in respectto bills discounted,loans and as

advances well as annual

for
statementsof income and expenses the year; all debtspayablein Jamaicaand

320
elsewhere;outstandingunpaid cheques,drafts, and bills of exchan91
e; all dividends

remainingunpaid in excessof five years; and land acquiredby the bank in the

satisfactionof "
debts.

As of 1996 an enhancedset of financial returns

was required. Theseincluded

more detailedreporting on certain critical areasof bank operationssuchas:

foreign currencytransactions,non-performing and

renegotiatedloans,connected

party exposures,and connectedparty credit breaches.12 At November2000, the

types of reports required by the Bank and specifiedin the financiallegislation

included: balancesheets;details on contingent and prospectiveliabilities; details

on passeddue loans; sectoral distribution of loans and advances;and quarterly and

annual statements of earnings and expenditure. The law also currently allows the

Minister of Financeto prescribeadditional returns in order to provide more

detailedinformation on certain balancesheetitems. At the time of writing, banks

were expected to supply information relating to cash reserve and liquid asset

returns (domestic and foreign); maturity profile of assetsand liabilities;

distribution of assetsby maturity; foreign currencyassetsandliabilities;updateon

breachesof credit and investmentlimits; renegotiatedcredits;connectedpersons

exposure;and interest rates payableon depositsand loans. Other than the returns,

data currently are obtainedfi7omfindings of on-site examinations;correspondence

with the banks; audited financial statements;mediareports; and various local and
13
international publications.

As noted in a Ministry of Finance and Planning paper, written in the aftermath of

the financial sector coflapse, and in the 1996 Bank of Jamaica annual report, many

321
of the returns submittedto the Bank of Jamaicaimmediatelybefore and during the

financial sector crisis were not done so on a timely basisand were unreliable.14

The fact that as of 1997 the Bank of Jamaicarequired that quarterly balancesheet

data suppliedby banks now had to be certified as presentinga true and fair view

of the state of banks"'

operationsat the respectivereporting datesin addition to the

customarymonthly declaration of accuracyof prudential data submittedto the

Bank provides someindication of what the Bank supervisoryauthoritiesthought

of the data being suppliedby the banks. Again, to ensurebetter quality financial

the
returns,, Bank stipulated that, where a licensee'sauditedfinancial statement

significantly differs from earlier data submittedto the bank, licensees

were now

to
required provide detailed notation indicating the natureof the discrepancyand
15
the reasons.

As noted in previous chapters,there hasbeena tendencyin the public debate

surroundingthe problems experiencedin Jamaica'sfinancial sectorto lay blame

for the untrustworthinessof the bank's financial reports at the door of the bank's

external auditors or to attribute the problem to the "creative accounting"practices

of Jamaicanbankers.16 No less than the former Governor of the Bank of Jamaica

that the failed banks' problems among

stemmed, other things, from
publicly stated

particularly with respect to asset valuation and income

creative accounting,

let these 17
recognition and that their auditors them get away with practices.

However, as is evident from the results of the field researchdata presentedin

chapterssevenand eight, while both of thesefactors contributed to the

of the bank's financial accountingreports, the mannerin which the

unreliability
in
banks' accountswere produced resulted often unintentional distortions and

322
omissionsin accountsof their financial positions and risks. Theseunintentional

distortions and omissionswere the result of largely uncontrolled record creation

and keeping practicesin the banks which allowed individuals within the banksto

inscribe,,transmit and contextualizerecords in accordancewith their own

In
motivations and standards. conjunction with limitations of the technologies

for
chosen record inscription, transn-ission
and contextualization,theseunchecked

record creation and keeping behavioursled to a level in

of capriciousness the

formation of views of the banks' financial transactionsas presentedin their

accounts.

Based on the field research,it is possibleto surniisethat the poor quality of

financial information suppliedby the banksmust have madeit very difficult for

to
the supervisoryauthorities obtain a clear picture of the banks' financial

positions and risk exposures. Given the unreliability of the supplieddata it is

-
questionablewhether bank supervisorsalways had a full appreclationof the

degreeof difficulty someof thesebankswere facing.

This must be viewed as a seriousshortcomingin the bank

Jamaican regulatory

the Director 11-1, at the Central Bank of Nigeria M. Ojo

system since, as of v-search

indirect instrumentsof monetaryand credit control (ie,

explains,in a systemof

instrumentssuch as cashreserveand liquidity ratio

which relies on market-based

to regulate the monetarybaseand

requirementsand open market operations

the banks' money creation capability), there is a needfor prompt

therefore

data the liquidity 18

banks. As the Jamaican
availability of reliable on position of

the type of systemthat Ojo describes,

the importanceof reliable
systemmatches

323
and prompt liquidity information from the banks is clear. Ojo goeson to note that

"Furthermore, one would expectthat, sincethe effective use of instrumentsof

indirect monetary and credit control would require prompt supplyof reliable data

from banks,bank executivesmust have to ensurethat the accountsof their banks

are balancedproperly." 19 As the field researchrevealed,the banks' accountswere

not properly balancedand the banks could not obtain timely and reliablebalance

sheetinformation. Moreover, they lacked clear and timely information relatedto

their cashpositions. Given what is known about the quality of the accountingand

information
management that was availableto the failed banks' directors and

managers, one can only form a very gloomy picture of the quality of the

information that the bankswere supplyingto the Bank of Jamaicaand,by

extension, of the impact of poor quality financial information on the efficacy of

bank supervisionand regulation.

Even in the best casesof financial reporting, which was certainlynot the situation

in
that obtained the failed Jamaicancommercialbanks,as Chris Barltrop and

Diana McNaughton observe,the publishedfinancial statementsof a bank should

be treated with scepticismbecauseit is in

not the interestsof a bank to disclose

information. Baltrop and McNaughton maintainthat bankswill alwaysuse

to a favourable light on their profitability. For

accounting practices creatively cast

this reason, they insist that inspection of the veracity of financial reporting Is

20 Barltrop's and McNaughton's assertionsare supportedby banking

essential.

expert Gerald Corrigan who, in respect of and

assessing managingcredit risk

that banks and banking supervisorsneednew and forward

exposures,argues while

looking loan classificationschemes,this can only be implementedby a loan by

324
loan review.21 In Corrigan's opinion, "On the supervisoryside, only
effective, on-

site examinationcan provide reasonableassurancethat the loan classification

processand the systemof reservesand provisions are working satisfactorily.

As statedby the Bank of Jamaicain its responseto questionsposedby the

researcher,on-site examinationsconductedby Bank supervisorystaff involved the

collection of "on-the-spot" information indicating the current financial condition

of a bank and the situation obtaining in its various operationalareasand

portfolios, verification of financial data alreadyfurnishedto the Bank of Jamaica

in the form of financial returns, as well as review of a bank's compliancewith

laws, regulationsand standardsof best practice. The goal of suchreviewsis to

evaluatethe bank's overall exposureto risk by uncoveringpossibleareasof

capital inadequacy;
credit and investmentrisks and poor assetquality; poor

quality board, managementand internal controls; weak earnings;and insufficient

liquidity. In doing so, the Bank uses the "CAMEL system" of evaluation.23 This

system includes reviewing five aspects of a bank's operations with an emphasison

internal control; theseare:

adequacy - ratings are basednot only on a bank's capital relative

-Capital
to the capital of other banks,but also on the riskinessof bank assets,
for
prospects growth, managementstrength,and the ability to augment
capital through earningsretention.

ratings are determined by such considerations as the

-Asset quality -
volume of and severity of classified assets, asset yields relative to market
rates and risks, diversification of asset risks, and the bank's lending and
investment policies.

ratings are assessed according to banking knowledge and

-Management-
experience,proficiency in setting and following internal policies, ability to
follow regulationsand statutes,the avoidanceof self-dealinga, and service
to the community in general.

325
 -Earnings- ratings include consideration of factors such as the overall
level of earningscomparedwith other banks,the compositionof such
earnings,such as whether income is largely accruedor actually realised,
whether the bulk of income is extraordinary income,for examplegain on
disposalof an assetor proceedsfrom the saleof an insuranceclaim, and
the adequacyof such earningsin supplying internal capital and meeting
possiblelosses.

-Liquidity - rated according to the maturity structure of the bank assets,

stability of depositsand accessto additional funding.

In their responseto the researcher'squestions,Bank of Jamaicaofficials noted

that the Bank's on-site assessments

currently concentrateon the credit and

investmentsportfolios, both being areaswhere the highestrisk of loss is

encountered. However, greater focus also is being placedon the quality and

adequacy of risk management systems in key areas of operations such as capital

adequacy; asset portfolio management; earnings; liquidity; internal controls, and

overall management.The Bank also notes that, with growth in the numberof

financial conglomeratesand banksthat form Part of corporategroupings,andthe

resulting increasein the risk of financial lossesor damagedreputation due to the

(.(.contagion" effect, relevantinformation about relatednon-bankcompaniesis also

24
required on a regular basis.

Unfortunately, no precise information was forthcoming from the Bank as to

it on
whether concentratedon-site assessments the credit and investments

portfolios immediatelybefore and during the period of the financial crisis

(roughly 1992-1998), though the 1992 Bank of Jamaica annual report does make

particular reference to capital adequacy; asset quality; managementexpertise;

liquidity as being focal points of the activities of its inspection

earnings;and
25 Nevertheless,it is difficult to saywith exactitudewhat information the
staff.

326
Bank's supervisorystaff may have beenlooking for during on-site investigations

throughout this period. This is becausethe focus of the Bank's inspection

programmediffered slightly for eachbank so that the Bank's supervisorystaff

looked for specific and different information during eachbank's on-site

examinations. For the sakeof argument,this discussionwifl assumethat the

Bank's supervisoryinspectionsconcentratedon credit and investmentduring the

penod that is the focus of this study.

In terms of other areasof attention, the Bank of Jamaica'sresponseto questions

from the researcher suggests that supervisory attention to the quality and adequacy

in
of risk management systems respect to capital adequacy, portfolio management,

is
and related non-bankcompanies relatively new and thereforeit is assumedthat

the Bank's supervisorystaff did not pay close attention to evaluatingthese

systems during on-site examinations from 1992-1997. Since the 1997 amendment

to the Banking Act required additional reporting on connectedparty relationships,

Bank supervisorystaff may have turned someattention to assessingconnected

party risks during their on-site examinations from 1997 onwards.

The Bank's written response to the researcher's questions indicates that its on-site

examinations entail a number of phases. During the planning phase, supervisory

division officials determinethe scopeof the examination,the extent of testing and

verification to be done, the human to

resourcesneeded completethe inspection

and other factors. At this point, the relevant Bank staff review a numberof

records in their custody, including directors' and committeeminutes;previous

inspection reports or any specialreports; memorandaand working papersrelated

327
to earlier examinations;and the latest ComprehensiveFinancialand other returns.

During the planning phase,the examinersalso make a formal requestfor records

and other information that the bank should have for

available examinerson

arrival. Theserecords might include: a compilation of policy directives;

proceduresmanuals;balancesheetand income statement;credit files;

information
management reports; and internal and externalaudit reports.

The secondphaseof the examinationis the actual on-site inspection. This phase

is led by an examinerin chargeof a team leaderwho is responsiblefor developing

the main focus points for the team. The review proceedson the basisof

evaluatingselectedareasof the bank's operations.

The final phase of the on-site examination involves reporting the results. This

entailsthe completion of a written report outlining the findings and,where

stating required corrective action and the time lines for completion.
necessary,

is
This report sent to the board of directors of the bank. In extremesituations,

where seriousproblems exist, the bank's board of directors and executive

managementare put under an "undertaking" to correct deficiencies. This

legal the parties concernedto take required action. The

representsa obligation on

bank's board and managementalso are required to issuea formal responseto the

report on the exaniinationwithin a specifiedtime frame.

Assuming that the focus of on-site inspectionsprecedingand during the bank

on credit and investmentsand given the types of recordsthat the

collapseswas

Bank's examinersgenerallyrequest, the state of the commercialbanks' record

328
 keeping in theseareasshould have given Bank of Jamaicasupervisory
authorities

causefor concern. Here again,whether they encounteredany difficulties in

obtaining the information they sought or what their reaction was to the quality of

the information that was availableto them must be left to speculation,as

no

commentwas forthcoming from the Bank. Nevertheless,it is possibleto conclude

that supervisoryauthorities should have beenalarmedat the stateof the records.

Given what is known from the field researchabout record keeping

with respectto
the failed banks' policies and procedures,it must haveproven difficult for bank

staff to supply supervisory authorities with a complete and accurate version of

operating rules. Assuming the bank being inspected was able to pull together a

policy and procedures manual fi7omdisparate sources, if the supervisory

authorities had taken the time to comparethe suppliedinformation with what was

availableto branch or operating staff, they would surelyhavefound that the

documentationdiffered. Supervisorystaff should also havebeenconcernedthat

the bankswere not able to supply up-to-date balancesheetsand incomestatements

on a timely basis,but 26
only rough estimates. Moreover, they might also have

been sceptical of the management information reports they received, generated as

they were in an ad hoc manner using standalone spreadsheetpackages. The

disorder of the failed bank's credit files and incompletenessof their secuntiesfiles

should have indicated to the supervisoryauthoritiesthat there were problemswith

the banks' records and information. As such,they shouldhaveconcludedthat

accountsand financial returns related to the quality of the banks' loan portfolio

coming from such disorganisedand incomplete be

recordsmust treatedwith

suspicion and that, given a high number of non-performing loans,the bankswere

to
going run into trouble recovering their lossesin the absenceof proper evidence

329
 27
of collateral. As observedby Gerald Corrigan, in caseswhere banksare unable

to presentsupervisorswith loan files or information about them, this in itself can

be used as an early warning signalthat the bank is not effectivelymonitoring its

credit systems,policies, and proceduresand that its loan classificationmay be

28
erroneous. At the very least, the state of the credit relatedrecordsshouldhave

causedthe supervisoryauthorities to question the banks' internal control systems.

It is possibleto draw similar conclusionsrespectingthe investmentarea,where

documentationof investment 29
transactionswas also incomplete. Supervisory

authoritiesmight also have been concernedabout the observationsof one of the

bank's own internal audit units, which noted that improper documentation,in

combinationwith other problems,was leading to lossesin the treasuryand foreign

exchangetrading 30
operations. In short, the state of the bank's recordsshould

have served as an early warning sign for the Bank of Jamaicasupervisory

authorities of the banks' operating problems.

As the abovediscussionindicates,the absenceof trustworthy andtimely

information from several Jamaican commercial banks very likely hamperedthe

Bank of Jamaica'sefforts to monitor the sector and shouldhavegiven early

indications that the bankswere experiencingseriousproblems. It is evidentfrom

Bank of Jamaica annual reports that as early as 1994, despite the poor quality of

financial returns bank supervisoryauthoritieswere receivingfrom someof the

in
banks,that the Bank was aware of problems a numberof the financial

institutions. The Bank's report for that year notes that unnamed institutions went

"watch fist" to be closely monitored due to in

breaches statutory requirements
on a

for capital adequacyand liquidity and that there were also breaches
of statutory

330
credit exposurelimits and capital adequacyas a result of the 1992 legislative

31
requirements. This suggeststhat the absenceof trustworthy and timely

information cannot, in itself, account for the in

manner which the supervisory

authoritiesrespondedduring the Jamaicanfinancial crisis. Suchinformation

relatedproblemsshould have raised alarmswith supervisoryauthoritiesthat the

banks' managementwere not in control of their portfolios, managementreports,

and assets. Thus, other factors, such as regulatory forbearanceor the absenceof

strong regulatory sanctions, may also explain the Bank of Jamaica's inaction.

Notwithstanding, it is possibleto infer from the field researchdatathat the quality

of information availableto the supervisoryauthoritiesdid hampertheir efforts to

regulatethe sector properly and should, at least, have alertedthem that all was not

right with Jamaica'sdomestic commercialbanks.

The Aftermath of the Financial Sector Collapse - The Relationship between

FINSAC Intervention and Rehabilitation and Record Keeping in the Failed
Jamaican Commercial Banks

As previously mentionedin chapter six, the Governmentof Jamaicaestablished

the Financial Sector Adjustment Company (FINSAC) Limited in January 1997 to

intervene in the ailing Jamaican financial sector. Upon its formation, FINSAC

embarkedon a three-phasedcourse of action'.intervention,rehabilitationand

divestment. The intervention phaserequired FINSAC to infuse additionalcapital

failed banks in for

exchange equity and board seats. This which
phase,
into the

largely by April 1998, left FINSAC with equity and/or board seats
was completed

four island's 32
banks. FINSAC's first phasealso aimed
in of the rune commercial

what it describedas the "unhealthy pattern"'of commonownershipand

at ending

331
control and connectedparty lending between Jamaica'sbanks and insurance
33
compares.

The objective of FINSAC's secondphasewas the rationalisationand

reorganisationof the in it
entities which had intervened. Its goal was to sustain

depositor and policyholder confidencein the country's bankingand insurance

sectors. When FINSAC initiated this phase, it recognisedthat it was necessaryin

order to build greater confidence,greater transparencyand improve the capability

of financial institutions to assessmarket conditions and make appropriate

decisions. This entailedrequiring the banksto strengthentheir credit evaluation

systemsand loan portfolio management,and to implementimproved accounting

controls. As part of the rehabilitation plan, FINSAC also purchased non-

34
.-Jo-
performing loans from banks receiving assistance. With purchaseof the loans,

FINSAC assumedresponsibility for monitoring thesenon-performingportfolios.35

The final phase of the FINSAC action plan involved divestment of FINSAC assets

to private hands. At the time of writing, this is

phase ongoing and entails seeking

potential purchasersfor its bank and insurancecompanyholdings and certain

At 30 June, 1999, FINSAC had completed the sale of $J2.6

collateral assets.

billion ($US65 million) worth of assetssuchas motor vehicles,art work, furniture

hotels, 36 In March 2001,

and equipment,properties, resorts and companyshares.

the saleof the four collapsedbanks that were mergedto form Union bank went
38
37
FINSAC aims to complete this phase of its operations by 2005
through. .

332
Upon intervention in the failed financial entities, FINSAC inunediatelyhad to

undertake a "due diligence")exerciseto review the accuracyof the banks7

financial statementsso as to determinethe total extent of the entities' holdingsand

39
the net presentvalue of all assetsand the entities as a whole The information
.
gatheredduring the due diligence exercisewas extremelyimportant from the

standpointthat it was on this basisthat international consultantsMcKinsey and

Companyand FINSAC officials together madedecisionsaboutwhetherto

immediatelyliquidate certain holdings or rehabilitateand later mergeor divest

40
them. As one FINSAC official observed,"' when you make somedecisions
...
-)741
like that you haveto be so right becauseit impactsthe entire company. The
..
decisionnot only impactedthe entire company,but the economicand social

welfare of the entire country, sincewith intervention in the failed Jamaican

financial entities FINSAC had come to own 60 percent of all the country's

banking assets.

The process of due diligence, as explained by one FINSAC official, included an

overall net presentvalue and cashflow analysisto determinewhich strategy

would be better to pursuewith respectto the failed banks:liquidation, merger and

42
rehabilitation, or rehabilitation of each entity and sale. As part of this analysis,
.

FINSAC officials had to develop an ongoing cashflow model to simulatethe

The results of the analysisindicatedthat mergerand

merger and rehabilitation.

better option. As explainedby a FINSAC offic,al,

rehabilitation was a slightly

the merger and rehabilitation was less of a loss [net presentvalue]-

-. going with
, 43
wise than the liquidation option.

333
Clearly, given the importance of thesedecisionsit was necessarythat FINSAC

officials have to
access reliable information on which to basetheir analysesand

decision-making. When askedabout the quality of datato which they had access,

one FINSAC official commentedthat, "Quite frankly, the information availableto

us was awful. It really was awful. "44 One interview subject explained that

becausethe quality of the data was poor, FINSAC officials had to review it line by

line and try to accesssupporting data about assetsand liabilities. This entailed

searchingin boxes or files to verify information in the banks' financial statements.

In some casesthe information was not complete. As one subject noted, they

experienceddifficulties tracing transactionsbecausethesetransactionshad not

been properly documented. For example, in the case of inter-company

the
transactions, amount of the transfer might havebeengiven but the instructions

on and origination of the transfer were not clear. This subjectalso statedthat

in
there were problems veridng information because systemswere mostly

manualand somescheduleswere on Excel. This official further observedthat

information was difficult becausethe banks' filing structurehad

verification of

broken down. Within one year information was getting "turned over" and placed

in boxes,which for the most part were not properly labelledand from which

retrieval was difficult if not impossible. As a result, information on a

from back be foun 45

correspondentaccount two or three years could not .

Owing to difficulties experiencedwith verifringthe banks' financial information,

in somecasesFINSAC officials had to undertakea time-consumingand costly

to gather the quality of information needed to undertake proper analysis.

exercise

334
In relation to decisionsabout what to do with the failed Jamaican
commercial
banks, this entailedforming,

templates that we needed to input and we mandated all the

...
different institutions try and fill out these templates. At best
we
also had to go on what was in there. We did an awful lot of
research in terms of some of the larger accounts. We ordered the
statements and things like that in terms of looking and then we did
an analysis of what we should write off in terms of assets We
...
certainly tried to go through the major items and make some form
of account for that 46
.

This interviewee noted that in somecases,the work of collectingreliable

information involved a manualprocessof collecting datato enterinto the

templatesfrom individual bank 47

branches.

In addition to gathering reliable financial information, FINSAC officials also had

to unravel the complex corporate structuresof the collapsedbanks. Financial

in
conglomerates Jamaica had an extremely complicated and intricate ownership

structure. In some instances, it took FINSAC officials a substantial amount of

time to uncover all the links betweenconnectedinstitutions in order to assessthe

true extent of the financial support neededfor theseinstitutions. This was due to

the fact that information about obligationsto connectedpartieswas extremely

difficult to locate. One interview subject statedquite plainly that the failed

financial conglomeratesactually had no accurateidea about eventhe numberof

t hey 48 He also remarked that these

subsidiary companies actually owned .

companieshad no central repository for the legal documentationon their

subsidiarycompaniesand that there were no minutesor board recordsavailable.

The poor state of record keeping on subsidiarycompaniesand connectedpartiesin

335
the failed banks createda needto identify all subsidiariesand connectedparties

and to uncover the extent and amount of the banks' obligationsto theseentities.

Each new discovery about a connectedparty as FINSAC officials

sifted through

the availabledocumentationtended to lead to an increasein the total assistance

packageto the failed banks. The continual upward shift in the figures did nothing

to reassurethe Jamaicanpublic that FINSAC knew what it was doing and had the

financial crisis under control.

The additional work sorting out the failed banks' accountsand connectedparty

relationshipsaddedto the overall cost of resolving the financialcrisis in Jamaica.

FINCAC debt as of July 2000 stood at V127 billion ($US 3.1 million), making

the Jamaicanbank failure resolution exerciseone of the most expensiveto date.

In the final analysis, FINSAC simply had to make its decisions about the best way

to deal with the financial crisis on the basisof the best information it could put

together in the availabletime. As one intervieweecommented,"My satisfaction

with the be
numberswill never as good unlessI know that it hascomefi7oma
')-49
solid database is
where everything reconciled. Lingering questionsaboutthe

quality of the information used in the decision-making cannotbut leave

-process

some doubt about whether FINSAC's decisionto mergeand divest the failed

bankswas really the best courseof action.

As part of the rehabilitation process, FINSAC purchased non-performing loan

portfolios fforn three banks $J12.7 billion ($US317 million) from National
-

Commercial Bank, $J800.9 million ($US20 million) from NCB Trust and

336
Merchant Bank, and $JI. 7 billion ($US42.5 million) from CitizensBank (and its

subsidiariesincluding Citizens Building Society, Horizon Merchant Bank and

Horizon Building Society) - in exchangefor FINSAC bonds.50

In the initial phase,FINSAC askedthe banks to act as agentsto collect the loans,

but later it establishedits own collection unit. 51 Poor documentationof assetand

has
collateral on assets preventedthe banks and later FINSAC from collecting on

many of theseloans. As describedin the the

previous chapters, banks' loan files

often lacked key documentationor contained documentationthat was

52
incomplete. According to one subject:

when someone wants a loan you take security such as a

...
guarantee, a mortgage, a lien on the house, a chattel mortgage
something like that [and] they sign a promissory note. You then
arrange to debit their account for the payment, or the interest
payments. You have agreed on the interest In
rates. some of the
records we received on the loans we took over the
53 ...
documentation of loans was [poor]
...

This subjectwent on to note that, even when the documentationwas created

and/or gatheredinitially, that

sometimes [we are ] not even being able to find the files on
... [loan files] did have
thoseloans Some not signednotes ...
... had been lost they had taken it to
[For] somethe title or the title,
the Title's Office to have the assignmentnoted and it is not
the Title's Office or it got lost. Or it was never
computerisedat
there. So as a banker you would have no proof that you took that
Or it had gone down to the Bureau to have the stamp duty
security.
it it back. Or it got stuck in the black box
put on and never came
becausethe branchesmay be computerisedbut they are totally
the supporting agencies on the lateral security side for
reliant on
their, to havetheir security in order. 54

FINSAC,
The banks, and subsequently often were unableto recover on their

documentationin files." The

assetsdue to inadequate their credit and securities

337
inadequacyof their documentationwas due to the banks'
poor record keepingin

combination with the inadequaciesof record keeping in governmentagenciesto

which someof the documentationhad to be sent. The result was that a high

number of non-perforn-fingloans on which the bankscould not recover have had

to be written off, which has pushedup the cost of the Government Jamaica's
of
bank bail out exercise.

As the Jamaicanfinancial crisis unfolded, the governmentalso

recognisedthat
fraud and corruption had contributed to the problems
of severalinstitutions. To

addresstheseallegations it establisheda team of foreign and local forensic

,
auditors to work with the police fraud squadto reveal and take action on instances

of fraud. Due to inaccessibilityof sourcedocumentationand other accounting

records, however, the auditors have found their work extremelydifficult. As one

forensic auditor commented,"What you are finding is that our work is being

severelyhamperedby the record keeping or the lack thereof -)-)56

The subjectwent

on to observethat the work of reconstructingwhat in somecaseswere very

convoluted financial transactionswas madeextremelydifficult by the fact that

critical records, such as generalledgersfor specificperiods,journal entry files and

57
chequedisbursementregisterswere missing. This intervieweefurther saidthat.

I am looking at a particular company now where I thought that I was told

that all the servers there that I could run off the information. When
somebody attempted to do that they realised that the diskette was bad or
something. I can't it
remember what was. The information was
contaminated. So you have a whole year's gone by that you cannot access
I have tried so I have now left to do, is to utilise some of the
...
hardcopies. But it is not consistent. You have one month, you can't find
two months and you have another month. So it is gonna be very difficult to
trace these transactions.

338
Explaining the consequencesof poor record keeping, this subjectwent on to state

that

The court demandsthat you have certain types of evidenceand if you don't
have that,it jeopardisesthe whole casesupport, literaRyup front
supporting documentation. They needto seethe books and all that sort of
information and if you don't have things like returnedchequesthen you
know it goes a long way in subvertingthe whole process.58

FINSAC hasbeenableto pursue legal action againstvery few of the owners,

directors and managersof the failed commercialbanksas a result of the lack of

59
documentaryevidencewith which to build cases.

Conclusion

This chapter hasexploredthe implications of the banks' recordscreationand

keepingfor externalagenciesinvolved in banking supervision,and after the bank

failures, in intervention and rehabilitation of the failed banks. It hasbeenargued

that the failed Jamaicancommercialbanks' inability to producetrustworthy and

timely accountsof financial transactionsfor the banks' own internalpurposes,a

result of their record creation and keeping practicesand systems,also hampered

Bank of Jamaicasupervisors'efforts to monitor the banks' financialpositionsand

risks and reign in directors and managersengagingin ill advisedand risk taking

behaviour counter to the continuing viability of the banksand the overall healthof

the Jamaicanfinancial system. The banks' poor record keepinghas also

hamperedFINSAC's to the
efforts accuratelyassess banks' value and decidean

appropriate course of rehabilitation, to recover losseson non-performingloans

and to pursue casesof fraud. Theseproblems also have complicatedefforts to

339
 return the banks and the Jamaicanfinancial systemto a stateof competitive

viability and health.

End Notes

' Letter to researcherfrom Mrs. Gayon Hosin, Financial

Institutions SupervisoryDivision, Bank of
Jamaica, 29 January, 1999.

2 Letter to researcherfrom Mr. Noel Shippey, Assistant Director,

Financial Institutions
Supervisory Division, Bank of Jamaica, 2 November, 2000.

3 Indeed,
it was only in 1992 that responsibility for banking supervision was formally placed with
the Bank of Jamaica and that responsibility formally ensconcedin the new Banking Act (source:
Bank of Jamaica, Annual Report, 1992).

4 Seefor example, Omar Davies, "Introductory Statements," Symposium

on the Crisis of the
Jamaican Financial Services Sector. University of the West Indies, Kingston, Jamaica,27
November, 1999, author's transcription of taped proceedings and Claremont Kirton,
and Moya
Leiba-Barnes, "Financial Sector Crisis in the 1990s: Macro-and Micro-Economic Roots,"
Symposium on the Crisis of the Jamaican Financial ServicesSector,University of the West Indies,
Kingston, Jamaica, 27 November, 1999, author's transcription of taped proceedings.

5 See,for example, Ansord Hewitt, "An Assessment the Regulatory Framework

of of the Jamaican
Financial Services Sector," Symposium on the Crisis of the JamaicanFinancial ServicesSector,
University of the West Indies, Kingston, Jamaica, 27 November, 1999, author's transcription of
taped proceedings and Derinis Boothe, "Case Study of SelectedFinancial Institutions, "
Symposium on the Crisis of the Jamaican Financial ServicesSector,University of the West Indies,
Kingston, Jamaica, 27 November, 1999, author's transcription of taped proceedings..

6John Toye, "The New Institutional Economics

and Development Theory," TheNew Institutional
Economics and Third World Development, John Harriss, Janet Hunter and Colin M. Lewis, eds.
(London: Routledge, 1995): 49-68.

7 Document entitled "Bank

of Jamaica Supervisory Practices" accompanyinga letter to researcher
from Mr. Noel Shippey, Assistant Director, Financial Institutions SupervisoryDivision, Bank of
Jamaica, 2 November, 2000.
8
Ibid.

9 Document entitled "Bank of Jamaica Supervisory Practices" passim.

10Bank of Jamaica, Annual Report, 1987,30-31

1'Laws of Jamaica,The Banking Act, L. N. 42/19 95, s. 16 and 17.

12Bank of Jamaica, Annual Report, 1996,42.

13Document entitled "Bank of Jamaica Supervisory Practices" passim.

340
14Government Jamaica, N&nistry Finance and Planning, "Public Sector Responseto the
of of
Problems of the Financial Sector, - Nfinistry Paper 13/98,8 April, 1998, and Bank of Jamaica,
Annual Report, 1996,3545.

15Bank of Jamaica, Annual Report, 1997,22-25,66.

16See,for example, Jason Abrahams, "The Need for Restructuring of the JamaicanFinancial
Architecture and the Way Forward, " Symposium on the Crisis of the Jamaican Financial Services
Sector, University of the West Indies, Kingston, Jamaica, 27 November, 1999, author's
transcription of taped proceedings; "BOJ Governor Keynote Speakerat ROB Awards Luncheon"
JIOB News 2,1 (May 1999): 1,6 and subject A-1, personal interview, Kingston, Jamaica, 19 May,
1999.

" "BOJ Governor Keynote Speaker at ROB Awards Luncheon" JIOB News 2,1 (May 1999): 1,6.

24 0
j 0, M. O.
"Deregulation in the Nigerian Banking Industry: A Review and Appraisal"
Deregulation in the Nigerian Banking Industry: Directions, Challenges, Problems and Prospects,
Proceedingsof the Bank Directors Seminar (Lagos, Financial Institutions Training Centre, 1991),
119.

Ibid.

20Chris J. Barltrop and Diana McNaughton, Banking Institutions in Developing Markets, Vol. 2:
Interpreting Financial Statements (Washington, D. C: World Bank, 1992), 22-24.

21Robert Till notes that he has found that the best way to cross check loan quality is
to not necessarily examine each loan individually. If staff or management
are trying to cover up poor loans then it is quite easy to "hide" the
problem from examiners. It is better to have the loan book quality
by
automated generating aged receivables in the credit department that is
inaccessible to the loans department. This combined with dynamic
provisioning createsa dual control system that is free of "surprises". [Robert Till, email to author,
25 September,2001].
22
Corrigan, 320.

23Document entitled "Bank of Jamaica Supervisory Practices" passim.

24
Ibid.

25Bank of Jamaica, Annual RepoM 1992,56-67.

26Ministry of Finance and Planning, Ministry Paper 13/98, Kingston, Jamaica, 8 April, 1998.

27
Seechapter seven.
28
Corrigan, 320.

29Subject B-1, personal interview, Kingston, Jamaica, 20 May, 1999.

d.,
30Bank D, Internal Audit Report, n. and Subject A-10, personal interview Kingston, Jamaica, 17
June, 1999.

31Bank of Jamaica, Annual Report, 1994,32-37.

32Ministry of Finance and Planning, Ministry Paper 13/98 passim.

33
Ibid.

341
34As at September 30,1999, FINSAC has acquired $J28.8 billion ($US720
million) in non-
performing loans from intervened entities. This represented 10,290 accountsand included the
portfolio acquired from Workers Bank when it was intervened. As of that date, FINSAC and its
affiliates have collected approximately $J2.8 billion ($US72 million) in respectof these loans.
The total amount of outstanding interest and principal that has been written off is $J403.8 million
($US 10 million), of which principal is $J141.7 million ($US3.5 million and interest is $J262
million ($US6.5 million) [Source: Ministry of Finance and Planning, Ministry Paper 61/99,
"Update on the Operations of FINSAC, " 7 December, 1999].

35Ministry of Finance and Planning, Ministry Paper 13/98

passim.
36FINSAC, Annual Report, 1999,7.

37 "Union Bank Sold," The Gleaner Wednesday,March 14,200 1, online, internet

wvvw.Jamaica-
gleaner.com, II September,200 1.

38Ministry of Finance and Planning, Ministry Paper 13/98

passim.

'9 Subject A-1, personal interview, Kingston, Jamaica, 19 May, 1999; subjectB-1, personal
interview, Kingston, Jamaica, 19 May, 1999; and subject A-2, personal interview, 19 May, 2000.

40Subject A-1, personal interview, Kingston, Jamaica, 19 May, 1999; subjectA-2, personal
interview, Kingston, Jamaica, 19 May, 1999.

41Subject A-3, personal interview, Kingston, Jamaica, 20 May, 1999.

42Subject A-1, personal interview, Kingston, Jamaica, 19 May, 1999.

43
Ibid.

44Subject A-1, personal interview, Kingston, Jamaica, 19 May, 1999.

45Subject B-1, personal interview, Kingston, Jamaica, 20 May, 1999.

46
Ibid.

47Subject A-1, personal interview, Kingston, Jamaica, 19 May, 1999.

48Subject B-2, personal interview, Kingston, Jamaica, 9 June, 1999.

49
Ibid.

'0 Nfinistry of Finance and Planning, Nfinistry Paper 13/98 passim.

51Ibid.

52Subject A-3, personal interview, Kingston, Jamaica, 20 May, 1999.

53Subject A-3, personal interview, Kingston, Jamaica, 20 May, 1999.

54
Ibid.

55"FINSAC documents disappear: Big loans could remain uncollected, " The Gleaner, Sunday, 20
May, 2001: A I, A3. This article actually leaves the impression that the unavailability of loan and
documentation might have been the result of deliberate tampering, though it does refer to
collateral
fact that many loans were given without collateral. This study contends, on the other hand,
the
such deliberate tampering with the records may have been a factor, lack of record
that, though
keeping controls has actually led to the problem by failing to encouragethe creation of adequate

342
documentation in the first instance and then failing to ensure its proper preservation
and
accessibility.

56Subject F-1,
personal interview, Kingston, Janiaica, 9 May, 2000.

Ibid.

58Subject F-1, personal interview, Kingston, Jamaica, 9 May, 2000.

59As of September,200 1, the

status of FINSAC's caseswas as below (information supplied by
FINSAC, August 30,2001). Note in particular, numbers 6 and 7 under criminal cases
as evidence
of the difficulties FINSAC has experienced owing to poor quality information.

Civil Cases

1) Blaise Group of Companies

-A number of suits were consolidatedand action was set for
trial in March of 2001 following dismissal of an appeal to have the matter staid until after
completion of the criminal proceedings against the defendants.
2) Century - The matter went to the Court of Appeal in July, 2000 (Suit #s CL1996c-330
and CL1997c-050). It was ruled that Donovan Crawford and his companiesare liable to
pay SJI billion (SUS25 million) with interest to Financial Institutions Services(FIS).
3) Ciboney -A settlement agreement was reached in December,2000 before the matter
went to trial. The agreement was that Neuson's claim of a loan of $US4 million and V90
million together with interest equalling WS 7.7 million and V220 million at the time of
litigation was settled fully and finally by acceptanceof $USI million. In turn, Neuson
releasedand discharged their debenture mortgage and other chargesof assetsof Ciboney
Group which was security for the loan. Also, the time share contracts of Caribbean
Vacation Club Inc. were transferred to Ciboney Group Ltd.. $US250,000was paid to
Ciboney Group Ltd. to procure Ciboney sharesheld by International Villas Ltd. These
shareswere transferred to a Ciboney entity. There was a mutual releaseof claim, counter
claim and a discharge of injunctions held.
4) Eagle - In the matter Eagle Merchant Bank v Paul Chen Young (CL I 998c-095), Chen
Young was being sued for breach of fiduciary duty, breach of contract, conversion and
fraud. At the present, a pre-trial application by the defendantsmust be resolvedbefore a
trial date can be set. The defendants have indicated that they intend to appeal the matter
to the highest level (eg, the Privy Council), so the matter is likely to drag on for much
longer.
5) Workers/Friends Group Share Issue - This matter has not reachedthe courts as affidavits
have yet to be filed.

Criminal Cases

1) Blaise Group of Companies - The criminal proceedingshave been delayedas a result of

two constitutional motions filed by the defendants. Both are set to go before the Privy
Council.
2) Century - The Government's investigator presentedfindings on the criminal investigation
to the Department of Public Prosecutions (DPP) in April of 1999. The DPP is
determining whether criminal offences were committed and criminal prosecution is
warranted. The matter is still under review.
3) Ciboney - In light of the civil settlement, it is unlikely that criminal matters will proceed.
4) Eagle-The criminal investigation has been finalised. Meetings were held with the DPP in
August to brief its staff on the issues. Formal briefs are near completion and should be
handed over shortly.
5) Workers/Friends Group Share Issue - The matter is with the DPP for a ruling on how to
proceed and against whom.
6) Mutual Life Corporate Sector - There is insufficient evidenceto proceedbecauseof lack
of critical information. A report prepared by consultant architects has advised that to
gather all the evidence that would be neededwould be too time consuming and expensive
becausethe evidence is so scatteredand also becausesome of it has been destroyed.

343
 Therefore, new consultants would have to be hired to re-cost the project, which would be
too expensive and time consuming.
7) Horizon - FINSAC is discussing the investigator's report with legal counsel. Legal
counsel is saying that the evidence is not good enough or not of the right type. Work
continues to gather better evidence.

344
Chapter Ten: Lessons from Experience and Future Directions

Introduction

The previous chaptershave sought to define the set of relationshipsamong

competitive viability, accountability and record keeping. Chapterstwo and three

discussedtheserelationshipsfrom a theoretical perspective. Chapterfour looked

to researchon the role of record keepingin public sectorreform initiativesin

Africa for initial empirical evidence in support of the argument for relationships

among competitive viability, accountabilityand record keeping. Chapterfive,

prefatory to looking at the experiencesof failed Jamaican banks,

commercial

found somesupport in the literature on banking for links amongcompetitive

viability, internal control, accountability and record keeping. Finally, chapters

six, seven,eight and nine were used to illustrate how record keepingis implicated

in the failure of Jamaica'sindigenouscommercialbanksand therebyto provide

empirical evidenceof the theorisedrelationshipsamongcompetitiveviability,

accountability and record keeping.

345
The aim of this chapteris threefold. Firstly, it seeksto provide a summaryof the

findings of the Jamaicanfield researchin relation to the theoreticalframework

outlined in chapterstwo and three. Secondly,it aimsto comparethe results of the

field researchwith the initial assumptionsof this study and the conclusionsof the

public sector researchwhile drawing out from thesecomparisonslessonsabout

record keeping its

and relationshipto accountability and competitiveviability.

Finally, the lessonslearnedwill be followed by, and form the basisof, a proposed

record keeping control framework. The aim in this sectionwill be to suggesta

model approachthat in
organisationsmight adopt order to avoid recordsand

information related problemssimilar to those experiencedby the failed Jamaican

banks and to ensurethat record keeping practicessupport effectiveaccountability

and, by extension,continuing competitive viability.

Competitive Viability, Accountability and Record Keeping and the Dynamics

of the Jamaican Commercial Bank Failures

As defined in chaptertwo, competitive viability is the ability of a firm to operate

to
with sufficient efficiency avoid failure in
and ensuresurvival a competitive

market. This, all but one of Jamaica'sindigenous banks

commercial was unable

to do. Data for

gathered the study clearly indicate that the banks"record creation

and keeping practicescan be implicated in their spiral of decline. The field

data have shown how record creation and keepingpracticesof directors

research

and officers of the failed banks underminedthe banks' and externalregulators7

accountability systems by failing to produce the quality of accounting and

information these systemsrequired to operateeffectively. Weakened

management

of accountability led to poor decision making and loss of control over

systems

346
bank operationsthat, in combinationwith other factors, underminedthe banks'

competitive positions.

As noted in previous chapters,the tendencyhasbeento accountfor the poor

decisionmaking of directors and managersand operatingproblemsof the failed

banks as being the result of either senior managementself-dealingand corruption

or managementfailure to establishappropriate accountabilitiesand controls for

new businessareasand risks. Nevertheless,self-dealingor corrupt actionson the

part of somedirectors and managersdoes not provide a full explanationof the

extent of the banks' internal operating problems. Similarly, though the banks'

directors and managersdid fail to establishappropriateaccountabilitiesand

controls for all their businessareasand risks, eventhose accountabilitiesand

controls that they had in place failed to operateeffectively. In the face of these

facts, it is clear that other factors also contributed to weaknessesin the banks1)

systemsof accountability and control.

This study has arguedthat one of the triggers for the banks' downward spiral of

declinewas their expansion,both in size and type of business,in the period

leading up to their collapse. Ironically, the very expansion that helped trigger

their eventualcollapsewas viewed as being equally essentialto their ultimate

survival in the economic environment at the time. Liberafisationopenedthe door

to new types of business,

such as foreign exchangetrading, and new entrantsto

the financial sector. Banks had to innovate and expandor face being pushedout

of the market. The opening of new branchesand the creation of subsidiaries

347
required a greater degreeof decentralisationwhile the banks' foray into new

products and lines of businessled to more specialisation.

Greater decentralisationand specialisationled to increaseddelegationof decision-

making and action to a growing number of employees. At the sametime, the

banks also beganto computerisetheir operationsin order to handlegrowth in the

number and diversity of transactionsfor processing. Together,thesechanges

resulted in the types of operational inefficienciesdiscussedin chaptertwo as

arising from decentralisationof information decentralisation

processing, of

information, and decentralisationof incentives,that is, information asymmetry

and bounded rationality. Theseinformation problemsunderminedthe banks'

control of their operationsand the effectivenessof their decisions.

Strong systemsof accountabilitymight have reversedthe downward direction that

the banks' internal controls and decisionmaking were taking. Unfortunately,

r

these systemseither were not establishedor not functioning well. The field

researchdata indicate that the failed banks" accountabilitysystemssufferedfrom

severalweaknesses:Directors and managers,someof whom were engagedin

sharppractice, failed to set a tone of high ethical standardsand integrity, which

would have been to

needed encourageand support to
adherence operating

standards. In somecases, also

management overrode existing operating standards

which had the effect of undem-iiningthe efficacy of the banksI

and controls,

accountability systems. Managementoften failed to monitor to

adherence and

effectiveness of accountability systems as well.

348
While there is clear evidenceto indicate that all of the abovefactors weakenedthe

effectivenessof the banks' accountability systems,the field researchdata also

clearly point to the fact that weaknessesin the banks' information and

communication,the result of the record creation and keepingpracticesthat had

evolved in the banks as their operationsbecamemore decentralised,also

contributed to the ineffectivenessof their systemsof accountabilityand

consequentproblemsof weak internal controls and poor decision-making.

First, though the bankshad, in a number of cases,written operatingstandardsand

controls, lack of centralisedcoordination and control over the creation,

distribution and retention of thesedocumentscontributedto inefficienciesin the

communication of this critical dimension of the banks' accountability systems. As

the banksgrew and expanded,lack of coordination and control over thesetypes of

documentsworsened,sinceinscription, transmissionand contextualizationof

documentscommunicatingthe banksbusinessrules becameincreasingly

fragmentedand uncoordinated.

Second,when the banksbeganto decentralise,information about decisionsand

actions also becamemore decentralisedand, indeed,fragmentedbecause

those to

whom work had been delegated for

were responsible creatingand keeping

information related to the decisionsand actionsthey took. For example,records

documentingactions and decisionsdelegatedto staff in the branches,

suchas loan

agreements,were retained in the branches.

349
This situation madeaccessto adequateinformation more difficult in two
ways.
First, it grew more challengingfor the banks' seniormanagementto
pull together

all relevant information from disparatesourcesfor decision-makingor evenfor all

the banks' decisionmakersto know of the existenceof relevantinformation.

Secondly,it openedthe door to record creation and keeping

practicesthat

undernlinedthe quality of the banks' accountingand managementinformation.

The reporting systemsupon which managersrelied for information both to

monitor subordinatesand make effective decisionsdependedupon reliable

recording of the actions and decisionstaken by subordinatesand upon the storage

of evidenceof businesstransactionsin a mannerthat ensuredlater retrieval of

reliable records. This becamea problem in banksthat eventuallycollapsed.

Deliberate and unintentional failure to createrecords,,inaccuraciesand

incompletenessin records causedboth by humanand systemserrors, and failure

to keep records in an orderly mannerin support of information retrieval

requirementsall led to a breakdown in the communicatedmeaningof the banks'

accountsand a skewedpresentationof their financial positionsand risks.

Deterioration of the quality of the banks' accountingand managementinformation

in
cameabout part becausethe banks failed to developrequirementsand standards

to ensurereliable recording of their businesstransactionsand proper storageof

records until no longer for

needed operationaland accountabilitypurposes. In

other cases,although the banks had developed for

requirementsand standards

recording and storing records, becauseof weak managementoversight and

control, bank managersand personnelwere not being held for

accountable policy

350
and procedural compliance. The twin problems of absenceof proceduralcontrols

over someaspectsof record creation and storageprocessesand weak

communication,monitoring and enforcementof any existing controls led to a state

of organisationalrecord keeping anorniethat permitted the banks' officers to

record and store evidenceof businesstransactionsaccordingto their own

motivations, preferencesand standards. Many of thesepracticesunderminedthe

production of the quality of recorded information neededto support effective

internal accountability and control.

In the caseof records creation, as the field researchuncovered,somemanagers

did
and personnel not make records becausethey by
were motivated self-interest

or the desireto take advantageof legal loop-holes; did

some not makerecords

becauseof an inherent cultural-basedpreferenceto transactbusinessorally and

informally; and others recordedunreliably becauseof a lack of training and

understandingof the importance of proper documentationcoupledwith the

to
pressuresof attending other businessfunctions viewed as being more critical.

The absenceof reliably recorded evidenceof business

transactionsundermined

the banks' reporting systemsand, thereby, managers'efforts to monitor the

actions and decisionsof their subordinatesas a meansof maintainingeffective

internal control as well as gatheringthe infonnation neededto assessrisks and

take appropriate action to managethose risks.

to
In the caseof proper storageof records, managers whom decisionsand actions

had been delegatedand who were, by default, responsiblefor the storageof

documentingthose actions and decisionssaw record keeping- associated

records

351
with the storageof paper source documents in
- as unimportant comparisonto the

many other demandson their time and the time of their staff. For the most part,

therefore, they delegatedresponsibility for record keepingto low-level, untramed

clerical staff ill-equipped to in

put place the controls neededto ensurethat the

banks' records were stored properly so that adequateinformation for

accountability and control would be accessiblein an appropriateform when

needed. This preventedthe retrieval of records, suchas sourcedocuments,for

such purposesas accountverification, fraud detection and prevention,and non-

performing loan monitoring and recovery. Here again, the absenceof reliably

recorded evidenceof businesstransactionsunderminedthe banks' reporting

to
systemsand managers'efforts monitor the actionsand decisionsof their

to
subordinates maintaineffectiveinternalcontrol.

At the same time, use of computers was on the rise in the banks. As they

the
expanded, banks had acquired computer-basedtransactionprocessingand core

accountmg systems to improve the efficiency of their transaction processing and

the easewith which they could manipulateaccountingdata for reporting purposes.

Increasinguse of computersfurther decentralisedand fragmentedthe banks'

evidenceof businesstransactions. In addition, poor control

management over

the information technology function in

resulted system limitations that also

the deteriorating of the banks' accounting records. In an

contributed to quality

these the banks' began

managers to rely more on ad
attempt to redress problems,

the information
hoc applicationsto supplement management availablefrom their

The introduction of ad hoc systems the

exacerbated banks5
main systems.

in
information problems that it further fragmentedinformation storesbetween

352
manual and electronic systemsand among different types of electronic systems.

Moreover, managersdid not seeelectronic documentsgeneratedby ad hoc

systemsas records and therefore did not ensurethat thesewere addedto official

record stores. Ironically, therefore, rather than making information retrieval

easier,over the long term increasingcomputerisationin the four failed banks

it
made more difficult for managersto pull together a completeand accurateview

of their banks' financial to

positions and risk exposuresand monitor the decisions

and actions of subordinates. Fragmentationof record storescoupledwith the poor

quality of a great deal of the information in these systemsmeant that managers

had less accessto reliable information as time passed.

As a consequenceof the banks' record creation and keepingpractices,bank

directors and managersand, by extension,shareholdersand regulators,lackedthe

type and quality of inforination they required to know the banks' financial

positions with accuracyand identify and managerisks, particularly fraud, credit

risk, market risk and liquidity risk. As directors

a consequence, and managers,

evenwhen they madea consciouseffort to, were unableto maintainadequate

control over their bank's operations and make effective decisionsabout usmess

This in turn contributed to operationalinefficiencies- suchas a high

strategy.

between
degreeof non-performing assets,mismatches assetsand liabilities and

in
high costs of operation - that, combinationwith other internal management

factors, contributed to a liquidity crisis and erosion of

weaknessesand exogenous

magnitudethat eventuallyresulted in the banks' failures.

capital of a

The poor quality of much of the failed banks' accountingand management

information not only underminedaccountability and, thereby,internal control and

353
decision making in the banks. It also hamperedthe efforts of Bank of Jamaica

regulators in providing effective supervisionof the banks' activities. This allowed

the banks to continue along their path of self-destructionand eventualnon-

viability. Later, the absenceof trustworthy and timely accountingand

information
management also madeFINSAC's intervention into and rehabilitation

of the banks more difficult and hasunderminedefforts to sueor prosecutein cases

of suspectedfraud and corruption.

The Jamaicancasepoints to clear linkagesamongrecord keeping,accountability

and competitive viability. Indeed, it showsthat the way in which a bank creates

and keepsits records affects the quality of its accountsand the effectivenessof its

accountability systems, which in turn affect its ability to maintain internal control

and make effective decisions. Both of theseimpact upon competitiveviability.

As such,the casecalls attention to the needto give greaterrecognitionto

uncontrolled record creation and keeping practicesas a potential sourceof risk for

banks.

The findings of the study are also significant in terms of what they revealabout

the dynamicsof bank failures. Explanationsof bank crisesdrawing upon theories

of information asymmetry focus on lack of transparency in financial transactions

as a source of market imperfection. For example, banks' inability to assesswith

accuracythe risk of default associatedwith a given borrower may tighten up the

supply and reduce economic activity. This study points to how problems
money

information asymmetryand boundedrationality within banks also can

of

contribute to the dynamicsof bank failure. Additional researchmay revealthat

354
these findings are equally applicableto explaining failures of other types of

commercial enterprises.

Drawing Lessons from the Jamaican Experience and Comparing the

Research Findings with Initial Assumptions and Public Sector Research

Generally speaking,the results of this study mirror many of the researchfindings

on record keeping and the effectivenessof pubtic sector reform initiatives and

good govemance. On the basis of the findings of this is

study it possibleto

concludethat, just as Wamukoya, Akotia and the InternationalRecords

ManagementTrust have found to be the casein public sectororganisations,if

important information is not availableto support internal control and decision-

in
making a private sector context, competitive viability is likely to be affected.

The study highlighted a number of critical bank functions and processesthat were

affected negativelyby the record creation and keepingpracticesand the absence

information
of quality accountingand management in failed Jamaican
commercial

banks. Theseincluded decisionmaking; credit risk management;market nsk

cash flow management; cost of operations; liquidity risk

management;

management;capital adequacy;proofing and reconciliation of transactionsand

audit; corruption and fraud prevention;and financial

accounts;internal control and

A detailed is
assessment presented in Appendix 6 of
reporting. operational impact

A
this study. number of thesebusinessfunctions are areasthat the public sector

also pointed to as areasaffected by poor record keeping.

research

355
Ae Importance of Identifying Information and Record Keeping Requirements

Like the public sector findings, the field researchrevealedthat directors and

managersof the failed Jamaicancommercialbanksdid not havea clear idea of the

information required to managetheir risks, especiallyas they moved into new

businessareas. This not only reflected a managementfailure to systematically

assessthe risks arising from new businessactivities but also managementfailure

to determinethe accountingand managementinformation that would be required

to keep those risks within acceptablelin-tits. It also reflectsmanagement'sfailure

to assesswhether there were sufficient record creationand keepingsystems,

including records related accountabilitiesand controls, to generatethe type and

quality of accountingand managementinformation neededto maintaininternal

control and make effective businessdecisions. This finding matcheswith those of

the International RecordsManagementTrust, which concludedthat evenwhen

the
officials understand value of records they often overlook the for
need records

management.The in
situation these failed banks pinpointsone of what is

arguablya frequently overlooked aspectof managementweakness:record

keeping. Lessonsfrom the Jamaicanexperiencestrongly indicatethe needto

establisha systematicmethodology and practice not only for reviewing

information
organisational. requirementsbut also the record creationand keeping

requirementsneededto support the production of appropriateinformation. Any

methodology for doing so, moreover, must entail regular reviews, recognising that

requirements can change quickly in volatile external environments, such as that

experiencedby the Jamaicancommercialbanks.

356
The processof analysinginformation requirementsof businessprocessesand

related record keeping requirementsmust include a determinationof what quality

the
characteristiCs information should bear. For example,what standardof

does
accuracyand completeness the transactionand relatedcontrols and legal

requirementsdictate? What procedural controls are necessaryto achievethe

I -z
quality standardsdesired of the records? That being said, establishingcontrol.

be
can expensive. It is important that the level of control establishedover record

creation and keeping is commensurate

with the level of risk (both in terms of the

likelihood of occurrenceas well as the impact that suchoccurrencewould haveon

the organisation)that is acceptableto the organisationshouldthe recordsbe

unavailableor fail to be of the requisite quality.

The Jamaicanexperiencealso suggeststhat identification of information

interests
requirementsmust assessall organisational in and needfor information,

that is, immediate operational interestsand needsas well as those of

in
accountability support of internal control, decision-makingand compliance

with regulatory requirements. All too often, only immediateoperationalneedsare

for
taken into considerationby those with responsibility creatingand keeping

Ideally such an should

assessment involve all key organisational
records.

in the fact that attitudes and beliefs about

stakeholders, recognition of

for information are likely to vary betweendifferent organisational

requirements

Stakeholderinvolvement will help to forge an consensus

organisational
groups.

information and how best to support these. It will also limit the
on requirements

degreeof influence that individual or group record keepinginterests- which may

be in alignment With interests

organisational - can have on the meaningof
not

357
organisationalaccountsof businesstransactions. Appendix 8 outlinesa model

methodology that organisationsmay use to assistthem in the processof

identifying their information requirementsand assessingthe degreeto which

current record creation and keeping practices support those requirements.This

is
methodology discussedin greater detail below.

During the information requirementsreview processevery attempt must be made

to bring out into the open the hidden assumptionsthat, as revealedin the caseof

the failed Jamaicanbanks, can influenceideasabout the significanceof records

and practiceswith respectto their creation and keeping. The kinds of assumptions

that this study uncoveredecho those uncoveredby the public sectorresearch.

Banking sector officials, with little exposure to records managementas part of

their educationand training in accounting and business,viewed record keepingas

a low level clerical function concernedwith filing or storageand destructionof

paper source documents. In contrast, information, in

associated subjects'n-finds

with computer data not paper records was seenas being useful and its

therefore
management of greater importancethough technicallycomplicated.

Theseconceptualisationswere critical to the information relatedproblemsthat the

banks experiencedbecausethey preventedmanagersfrom seeingthe way that

different records in different media and systemsinterconnectedto affect the

overall quality and meaningof their accounts. Moreover, it diverted attention and

resources from the management of criticaRy important paper records stores, such

as credit files for

and vouchers,with negativerepercussions the function of

reconciliation and credit risk management. The Jamaicanexperienceclearly

358
showsthat any assumptionsabout records that remaintacit may underminethe

production of good quality information neededto support accountability.

7he Importance of Identifying and Establishing Record KeepingAccountabilties

The processof properly documentingbusinesstransactionsalso includes

determiningaccountabilitiesfor record creation and keeping. That is, who will be

responsiblefor creating and keeping the required documentationto set standard

and, equally importantly, who will be responsiblefor defining documentation

standardsand controls as well as ensuringthat theseare met? Accountabilitiesfor

records creation and keeping must be establishedat all levelsof the organisation,

from the employeewho createsa record, to the supervisorwho checksit for

accuracyand completenessand verifies the validity and authenticityof the

transaction,to the internal auditor who ensuresthat employeesand supervisorsare

following establishedcontrols and ensuresthat controls are working as they

should.

There are significant barriers to assigning responsibility and accountability for

records creation and record keeping in contemporaryorganisations. One such

barrier arisesfrom the fact that decentralisationcreatesa situationin which many

managershave an interest in different aspectsof recordsand information

management. For example, in the Jamaican setting, operations managerswere

concernedwith transaction processingrecords, financial controllerswith

accounting records, and information technology staff with recordsgeneratedand

stored electronically.

359
Fragmentationof interestsin the record keeping function can preventproper

control over records. There was a tendencyin Jamaicanbanksto separate

managementof information by medium (ie, responsibilityfor aspectsof managing

records in electronic form fell to a computing departmentwhile paper recordsfell

to a registry or (carchives"under the control of the operationsdepartment)that led

to inconsistenciesand gaps in the managementof the banks"records. Ultimately,

this underminedthe quality of their accountingand managementinformation.

Managersoften are unawareof the dangersthat fragmentationposesin terms of

being able to accessnecessarymanagementinformation. Nevertheless,the field

researchrevealsthat there do exist dangers.

To counteract these dangers most large organisations require an integrating

for
mechanism their record keeping function.' Integration canbe achievedby

meansof assigningresponsibility for oversight and coordination of the record

keepingfunction to a strong internal record keepingregulator. The personor

group most appropriate to taking on the records control function is a matter of

debate,however. As found in the public sector studies,no one individual or group

hasthe capacity to take on the role.

Those responsiblefor what bank officials in the failed banksperceivedas record

keeping lacked the training, educationand organisationalstatureto take on

responsibility for organisationalrecord keeping. Records professionalismin the

failed banks was limited, the function having beenassignedby managers,who

it
thought of as relatively unimportant, to low-level clerical staff untrainedin

360
records managementprinciplesand practices. But evenhad they identified the

needto assignthe function to professionalrecords managers,they would have

found few such personswith the capacityto take on this role due to limited local

in
educationalopportunities the discipline. Being a private sector entity, the banks

had no recourseto cafling upon the record keeping expertiseof staff at the

National Archives either, as somepublic sector entities havebeenableto do.

Similarly, information technology specialistsin the bankswere not equippedto

take on the record keepingrole, sincethey were not concernedwith record

keeping per se but focusedmore on improving the efficiencyof transaction

processingthrough computerisationand on information risks suchas system

failures and securitybreaches.Nor were operationsmanagersideally suitedto the

task, being primarily concernedwith day-to-day transactionprocessing. One of

the failed Jamaicancommercialbanksmadean effort to establisha committeeof

in
stakeholders record keepingprocessescomprisedof the operationsmanager,

financial controller, internal auditor, legal counsel and compliance officer. The

focus of the committee,however, being primarily on paperrecordsretention,was

too narrow to addressmore fundamentalinformation relatedproblems.

Someorganisationshave a chief information officer (CIO) or a chief knowledge

officer (CKO) to which regulation of the record keepingfunction might be

2
assigned. However, the focus of these is
positions often on information

technology infrastructure. This may mean that while ClOs and CKOs may be

aware of the underlying businessinformation requirementsthey may tend to focus

information technology to deliver the required information and fail to

solely on

look more broadly at the needfor to

control systems addresshow information in

361
all forms is createdand kept. To be effective governors of organisationalrecords

control systems,ClOs and CKOs needto broadentheir focus to move beyond

technologicaltools of information managementand a concernwith transaction

processingsystemsto encompassin their thinking concepts,systems,procedures

and behaviourto better control the organisation'srecord keepingprocessesso as

to produce not only accessiblebut reliable evidenceof businesstransactions.

Chief Operating Officers (COOs) within organisationsalso may be well-suited to

taking prime responsibilityfor the record keeping function. Often, they are seen

as being responsiblefor being able to produce an end-to-endauditabletrail of the

transactionsthat make up the whole business.This may entail reproducingfrom

first principles all records and processesto rebuild the businessif all or parts of

the data are polluted or lost. As in the caseof the Jamaicanbanks,however,

COOs may focus too narrowly on transaction records at the expenseof other types

of operationalrecords.

The fact that there is at present no single person or group with the focus, capacity

to
and specialskills required effectively serve as a strong internal regulator of the

record keeping function suggeststhat professionalre-orientation,educationand

362
training are neededto build up capacity. Appropriate training and education,

however, is unlikely to be widely availableuntil organisationalrecognition and

demandof the needfor suchpersonsbecomesstronger.

Whether the person is called a chief information officer, a knowledgemanager,a

records manageror somethingelse,somepersonor body within eachlarge

be
organisationshould chargedwith responsibilityfor identifying the

organisation's information requirementsand ensuringthat there are in place

necessarypeople, systems,standardsand practicesto support theserequirements.

This person or body also must have a fink to the organisation'ssenior

management team to ensure that information requirements reflect and support

changesin businessstrategy, operating environmentor sizeand scopeof business

to
and also ensurethat the person or body wields enoughinfluencewithin the

organisation to to
make any changes record keeping and other systemsthat might

be neededto meet the organisation'sinformation requirementsfor effective

accountability and control. In addition, this personwill needto work closelywith

to
other managers,such as an operationsofficer, ensurethat record keeping

systemssupport the information requirmentsof functions

business and processes.

TheNeed to Establish Clear Record Keeping BusinessRules

.

Having identified boards

records related requirementsand accountabilities, and

must
sernormanagement take stepsto documentprocedural controls and

accountabilitiesfor eachbusinessprocessin clearly written policies and

procedures.Establishingclear businessrules regarding records creation and

363
keeping is a significant part of promulgating a sound record keeping

organisationalculture. This culture should underscorethe importanceof properly

documentingbusinesstransactionsand constrain individualisedrecord creation

and keeping behaviour that contributes to distortions or gapsin the meaningof

accounts. Another important meansof creating a strong record keepingculture is

the provision of ongoing training at all levels emphasisingthe importanceof

soundrecord keeping and the consequencesof poor record keeping.

As directors and managersmay themselveslack an understandingof the

importanceof establishingand ensuringthe effective implementationof clear

businessrules for records creation and keeping, they also may require sensitisation

to the issues. This is likely to be a long term path to achieving organisational

changeas it takes time to shift fundamentaland long-held managementattitudes

and beliefs. This shift is likely only to take place if the education and training that

they receiveplacesgreater emphasison the systems(ie, structures,staff, standards

) to in
etc. needed managerecords effectively all mediaand formats.

Clearly, the reliability of records as evidenceof transactionsdependsto a great

degreeon boards and senior management- to establishbusinessrules requiring

the making of proper records and to foment a culture that encouragesthis practice.

This begsthe question of interest and motivation. What happenswhen directors

and managersare not interestedin what is best for the but

organisation, only in

is best for themselvesor their associates?As commentsby interview

several
what

subjectsand observersof the Jamaicansituation reveal, when this is the case

directors and managersmay avoid establishingand promoting clear businessrules

364
for records creation. In fact, evidencecoflectedfor this study, which is also

supportedby the findings of others writing on the subjectof the link between

record keeping and accountability, indicates that directors and managersare likely

to shunthe making of records of businesstransactionsto avoid implicating

themselvesin the conduct of questionablepractices.3 What then canbe done?

The solution lies in holding directors and managersto accountfor ensuringthat

businesstransactionsare properly documented. As boardsare accountableto

it
shareholders, makessensefor shareholdersto demandaccountabilityin this

respect. However, there are barriers to suchmarket-basedmonitoring and

discipline. Shareholdersmay have inadequateinformation to properly assessthe

degreeto which the businessesin which they haveinvestedare ensuringthat all

businesstransactionsare properly documented. Their main sourceof information

about the state of their investmentsis annualfinancial reports, but banksand other

companiesunder current legal frameworks are not requiredto report on the state

of their record keeping. The statementsof externalauditors sometimesprovide

clues about record keeping practices; however, auditors seldomare concerned

with assessingthe adequacy of record keeping systemsas part of producing

audited financial 4
statements. How be
then could a shareholder expectedto know

whether the bank was failing to document properly?

be
One solution might to require banks to include a statementabout their business

rules for records and information control as part of a wider in

statement their

annual reports on internal controls and corporate governance. Sucha requirement

would be akin to that under UK regulation requiring banksto include a statement

365
on internal control in their annualfinancial reports, though in the UK requirement

there is no specific directive to discussrecord keepingpractices. As in the LTK

5

where the requirementto report on governancesystemshasencouragedmany

banksto adopt better practices and establishtheir internal

own codesof best

practice, not only might a similar requirementfor record controls provide more

information to shareholdersbut it could encouragebanksto better

adopt practice.

While it is believedthat this approachhas merit, it is likely to be long-term

a

strategy for change. Moreover, it doesnot addressthe needto provide guidanceto

shareholdersso that they can assessbanks' businessrules for record keeping

properly, nor does it provide guidanceto the banksas to what kind of business

in
rules put place. Consequently, this study takes the view that there is a role
to

for bank regulators and supervisorsto play in encouragingbestpracticeand

discouraging sharp practice as part of their regulatory and supervisory regimes.

One way of encouragingbetter record keepingpracticesis through the

establishmentof best practice guidelines. The Bank of Jamaicahasestablished

guidelinesthat addressinformation and communicationpracticesin banks. So has

the Basle Committee on Banking Supervision. However, in both these casesthe

guidelinesare too generalin scopeand focus. Provisionsrelatingto policies and

proceduresstate merely that they be for

should established all areasof risk but do

not addresshow their creation, distribution be

and retention should managedto

ensureeffective communicationand compliancemonitoring. In calling for

adequateinternal financial, operational and financial data, the Basle Committee

flamework merely statesthat suchinformation shouldbe part of record keeping

366
and nothing about what those record keeping processesshould entail asidefi7om

addressingrecords retention. The Bank of Jamaicastandardsare similarly silent

on the subject of what appropriaterecord keeping controls entail. Regulatory

authorities need to becomemore specific and prescriptivein terms of the

to
managementof records give banks a better idea of what record keepingcontrols

should include. That being said, however, regulatory guidelinesshouldnot aim to

spell out exactly what controls must be in place as eachinstitution's requirements

will vary with the servicesand products it offers, the type and scopeof its

business,its particular businessstrategiesand the externalenviromental

conditions in which it finds itself operating. Rather, it is suggestedthat it will be

more helpful to provide directors and managerswith a control framework that

they can adopt to ensureeffective managementof records creationand keeping.

To this end, a proposedframework is presentedin the f6flowing section.

How Good Record Keeping can Contribute to the Control of Operational

lnefjficienciesCausedby Growth and Expansion

The study also has shown that rapid organisationalexpansion- both in terms of

size and scopeof activity - helpedto trigger the loss of accountabilityand internal

control leading to the operational inefficienciesexperiencedby the failed

Jamaicancommercialbanks. The experiencesof thesebanks serveto highlight

that organisationsneedto be wary of emergingoperationalproblemsduring

periods of rapid growth and expansion. While such growth and innovation may

it
be necessaryto competitive viability can bring about loss of accountabilityand

internal control and operational inefficienciesdue to problemsof decentralised

information processing,decentralisedinformation and decentralised

incentives. In

367
times of rapid growth and innovation, therefore, it is critical Bor an organisationto

pay particular attention to the effectivenessof its internal controls, an important

is
elementof which accountability. Since, as has been shown,an organisation's

record creation and keeping practicesplay an important in

role the effectivenessof

internal systemsof accountability and control, organisationsmust be especially

vigilant that thesepracticessupport effective operation of suchsystems.

Unfortunately, the sameforces that undermineother internal controls during a

period of rapid growth and expansionare likely to have a similar effect on record

keeping accountabilitiesand controls, as seenin the Jamaicanexample. This

suggeststhat organisationswill need to take time to the

reassess information

required to support their accountability and control systemsin fight of

environmental or organisational changes. They then must take stepsto establish a

set of clear, sharedorganisational

values and standardsof behaviourto encourage

the record creation and keeping practicesthat best meetthe organisation's

identified needsfor information under changingcircumstances.

7hePlace of Good Record Keeping versusRestructuring in Addressing

Information Related Operating Inefficiencies

Organisations often turn to restructuring operations - for example, flattening the

or restructuring of information stores (eg, by

organisational structure -

centralisinginformation stores) to addressthe commoninformation

-

inefficiencies of large hierarchies. If the Jamaican experience gives any

indicationI theseefforts are likely to prove ineffective unless by

accompanied the

establishmentand implementationof clear accountabilitiesand controls over

and keeping in the new arrangement.

organisational As seenin the
record creation

the failed bank which decentralisedits credit administrationoperations,in

caseof

368
the absenceof businessrules and accountabilitiesrelating to the creating and

keeping of loan documentationto support the new arrangement,the bank's credit

related records quickly becamedisorganised,incompleteand untrustworthy

therebyunderminingcredit risk management.In an effort to solvethe problem,

the bank then centralisedits store of credit records. The centralisationexercise

was, however, in
only effective the caseof securitiesfiles becausethe bank also

establishedclear businessrules concerningthe creation and keepingof these

in
records and put place a strong records regulator to ensureadherenceto the

rules. Credit files, on the other hand, for which businessrules were established

only after the collapseof the bank and managementoversightwas weak, remained

in a disastrous state. The findings of the field research suggest that organisations

should assessthe efficacy of their record creation and keepingaccountabilitiesand

controls as improvements in this area may resolve organisational information

inefficiencieswithout resort to disruptive and expensivecorporatereorganisations

of people or records.

7-hePlace of Good Record Keeping versusComputerisationin Addressing

Information Related Operating Inefficiencies

It is possibleto draw a similar conclusionwith respectto the introduction of

computers. Computerisation is
often seen as a panaceafor organisational

as
information problems and, a result, organisationsregularly spenda great deal of

money introducing computensedsystemsonly to be disappointedwith the results.

There are many reasons for the failure of information technology projects. The

the found reasonsfor their

results of this researchsupport one of more commonly

369
failure,,that is, failure to ensurethat businessrequirementsrather than

technological considerationsdrive choice, developmentand implementationof

systems. As discussedin chapter eight, the Jamaicanexperienceindicatesthat this

"disconnect" betweenoperationalrequirementsand technologicalsolutionsoften

results from a lack of knowledge and understandingabout technologyon the part

of operationalmanagerswho then abdicatetechnology decisionsto information

technology specialistswith an insufficient understandingof business

requirements. Ultimately, this disconnect can prevent systemsfrom functioning

optUnallyand createinformation problems during processesof record inscription,

transmission or contextualization, such as the unintentional accounting errors

found in the failed Jamaicancommercialbanks. The findings clearly supportthe

notion that operationalmanagementmust drive the introduction of computer

systems. They also must take responsibility for developing a clear understanding

of the organisation's information requirements. Such an understandingrequires

deliberate,careful and systematicanalysisalong the lines proposedin Appendix 8.

The Jamaicanexperiencealso yielded anotherinsight into the reasonswhy

computerisationoften fails to information

solve organisational problems.

Organisationsgenerallyintroduce thesesystemsin order to increasethe numberof

transactionsand speedwith which they can be processedaswell asthe ability to

conveniently manipulate data for reporting purposes, as was the impetus to

computensetransaction processingand introduce computerisedcore accounting

systemsin the failed Jamaicancommercialbanks. The introduction of these

systemshad that
two unintendedconsequences contributed to the information

problems experiencedby the failed banks, however. First introduction of such

,

370
systems contributed to the problem of decentralisation, or fi7agmentation,of

information in the failed banks. Accounting information becamescattered

betweenmanualaccountingrecords and those in computerisedform, introducing

greater complexity and opportunities for error into the banks' accountproduction

process. Thesecomplexitiesunderminedboth trustworthinessandtimely retrieval

of relevant accountingand managementinformation. As the banks' managersand

employeesbeganto develop ad hoc computer systemsto producemanagement

reports unavailablefrom the banks' larger systems,further fragmentationof

information occurred. Thus, ironically, while intendedto improve information

processingin the banks, thesecomputer systemsunintentionallyintroduced

information problemsthat had the opposite effect.

Second,the introduction of computer systemsrenderedbusinessrules concerning

the creation and keepingof manualrecords obsolete. In manycases,the banksdid

not establishnew accountabilitiesand controls over record creationand keepingin

the new electronic environment. This, too, underminedthe trustworthinessand

timelinessof the banks' accountingand managementinformation. The banksI

computerisedcustomerinformation files, for example,for which there were no

data entry controls were quite unreliable. Similarly, the bankshad no rules for

how records generatedby ad hoc systemsshould be createdand stored.

by it is
By drawing attention to the unintendedproblemscreated thesesystems not

meant to suggestthat those in

involved rehabilitating the failed bankshavebeen

mistaken to make it a priority to improve the banks' information technology

Clearly, improvements to information technology vAll be critical to

infrastructure.

371
the competitivenessof the banksif it leadsto faster and more effective transaction

processingand better managementinformation. However, computerisationshould

move aheadkeeping in mind three important lessonsfrom the experiencesof the

failed Jamaicanbanks. First, managementmust look not only at the impact these

systemswill have on transactionprocessingbut what effect they will haveon the

production of information required to support the enterprise'ssystemsof internal

accountability and control. Second,wheneverexistingbusinessrules for record

creation and keeping are displaced,as they inevitably are when new systemsare

introduced, new accountabilitiesand controls must be establishedin order to

ensurethat record creation and keeping practicessupport the aims,objectivesand

accountabilityrequirementsof the organisationand that the organisation'srecords

do not becomelesstrustworthy or lesstimely - no matter the mediaand meansby

which they are inscribed or stored. Third, sincethe introduction of new computer

systemscan lead to fragmentation of information, managersmust pay close

attention to system integration, including the integration of information in manual

and electronic form.

Along with the trend to rely on computersto solve all information related

problems, it has becomefashionableto think of paperrecordsas cumbersomeand

often uselessand therefore to seekto digitise them. Many of the subjects

interviewed for this study, including those involved in the rehabilitation of the

failed banks, have expressedthis view. From the standpointof improving the

information in support of accountabilityand internal control,

quality of recorded

however, the perception that the establishmentof better control over more

traditional forms of records is of little importanceor even a waste of time showsa

372
lack of appreciationfor how paper-basedsourcedocumentsultimately provided a

critical foundation for the banks' information

management systems. For many

types of transactions,banks still rely on the completion of paperforms, suchas

deposit vouchers, chequevouchersand internal transactionvouchers,to initiate

transactions. Bank officers then use theseforms to post financialtransactionsto

computer-basedtransactionprocessingand core accountingsystemsand, later, to

verify the reliability of those postings. Until banks no longer usethesepaper

source documents,managementmust turn their attention to improving control

over source documentationto ensurethat information derived from their

computer-basedtransactionand accountingsystemsis reliable.

As discoveredin the course of the the

research, low priority given to managing
It1-0

paper records has come from managers'preconceivedideasabout paperrecords

rather than a systematicand rational evaluationof the value of the recordsin

for
relation overall information requirements transactionprocessingand
to

internal accountability and control. Thesepreconceivedideasabout paperrecords

in conjunction with management's tendency to ignore the need to preserve such

records for purposesother than the immediateprocessingof operational

transactionsfed a culture of neglectfor thesetypes of recordsthat, ultimately,

servedas a self-fulfilling prophecy. In contrast to the receivedwisdom, many of

theserecords - credit files, for example- containedinformation critical to

managingthe banks" risks and controlling their financial positions. From this

they were extremelyvaluableregardlessof their paper format.

standpoint,

Management neglect of the creation and keeping of these records affected t eir

accessibility,not their essential

value to the orgarusation.

373
This suggeststhat changingthe fonnat of paper records, in itself, would not have

affected the value of the records, though it may haveimproved their accessibility.

However improved accessibilityis not necessarilyonly achievedby changing

,
records' format. Digitisation projects often also serveas an opportunity to

establishclear accountabilitiesand controls over paper recordspreviously

neglectedand fragmented. This is one of the ways in which suchprojects can

increasethe accessibilityof records. However, similar resultsmay be achievedby

establishingaccountabilitiesand controls over the recordswithout converting

them into computerisedform. Better organisedrecords storesand the use of

information locating indexes,whether manualor computerised,can improve the

rate of retrieval significantly. Conversely, digitisation projects that fail to

establishappropriaterecords accountabilitiesand controls can reducethe

reliability and accessibilityof records. This is in no way to suggestthat

digitisation of paper records does not offer sometremendousadvantagesin terms

of reintegratinginformation while at the sametime allowing timely local accessto

remote record stores.Nevertheless,in advanceof moving into what are often very

expensivedigitisation projects, organisationsshould explorethe option of

improving managementof the records in their paperformat. In addition,

organisationsare warned that digitisation projects are likely to prove unsuccessful

unlessnew businessrules for record creation and keepingthat work with the new

technology are establishedand implemented.

Ultimately, the solution to the "bothersome" needto organiseand store vast

quantities of paper source documentationmay he in generatingthesedocuments

374
electronically. Certainly, with the growmg trend toward e-commercemore of

thesedocumentswill be produced in digital form in the first instance. Increased

use of technology is likely to raise the bar on the need to control the processesof

record creation and keeping, however, not lower it. Controls be

must established

to ensurethat electronicaRygeneratedtransactiondocumentsare authenticand

reliable, that they are contextually linked to the transactionswhich they document

and that they be

can retrieved as neededto meet operational,accountabilityor

legislative requirements. Technology, such as electronic records management

software, can facilitate the processof control but it will not drive it. Management

must assessthe types of controls that are necessaryto produce recorded

information of an appropriate quality and take steps to implement systemsand

to
strategies ensurethat is
effective control achievedor seethe meaningof their

records disintegrate to distortions.

and succumb system-generated Standards

concerningthe creation and keeping of reliable and authenticelectronicrecords

and the functionality of electronic record keeping in

systemscan assist ensuring

that electronically generated records are more trustworthy, for example, the US

Department of Defense Standard 5015.2-STA "Design Criteria Standard for

Electronic Records Management Software Applications" and the UK Public

Record Office's "Functional Requirements for Electronic Records Management

Systems," to namebut two. 6

Timely accessto relevant information was a significant problem in the Jamaican

The findings of the field researchsuggestthat, whether a records store is

case.

those
manual or computer-based, responsiblefor the designand of
management

must take stepsat early stagesto identify the types of points

access by
these stores

375
 to
which userswill want retrieve information. This requiresongoing consultation

with usersto discussthe ways in which they plan to use the information. It is then

the task of those responsiblefor acquiring or developingthe systemto ensurethat

it possessesthe appropriatefunctionality (eg, fields and/or indexing capacity)to

support the organisation'sinformation 7

retrieval requirements. Sucha

is
consultativeprocess unlikely to work effectively, however, if operational

managementand information technology specialistsare unwilling or unableto

communicate effectively, as was apparently the case in the Jamaicancommercial

banksthat failed.

As it is impossibleto predict all of the ways in which the usersof recordsstores

may want to retrieve information over time, managers should seek to acquire or

develop systemsthat allow someflexibility in how data canbe retrievedand

presented. Clearly, the goal of flexibility is much easier to achieve with

computer-basedrecords storesthan with those in manualform, but managers

should never assumethat computerisationautomaticallymakesinformation easier

to retrieve. Without a sharedunderstandingbetweenmanagersand information

technology staff about information to

required support business
objectives,

retrieval problemswill persist.

To ensure long-term accessibility of quality information for accountability

and final dispositionsfor

purposes,the setting of appropriateretention periods
I

records in electronic fonn also will be necessary.Due to the relatiVevolatility of

records, the earlier that decisionsabout retention and dispositionare

electronic

the greater the likelihood that appropriate records wifl be for

accessible
made

376
future reference. Early considerationmust also be given to preservationmethods,

such as migration to new formats and storagemedia,for those electronicrecords

having long-term significance. Unless these strategiesare decidedupon from the

outset of the record's creation, there will be a greater chancethat the quality of

information neededto support organisationaland social accountabilitywill be

irretrievable. In addition, such strategiesare unlikely to prove effectivein the

absenceof a weH-structuredrecord keeping systemsupportedby a strong record

keepingregulator, as there will be no one to ensurethat migration strategiesare

implementedeffectively and on a timely basis.

The Need to Incorporate Good Record Keeping into Economic Development

Policy and Strategy

Effective corporate governance and oversight by regulatory and supervisory

bodies dependsupon accessto trustworthy and timely informationaboutthe

operations of a commercial enterprise as the Jamaicancase clearly shows.

Organisationslike the World Bank arguethat the availabilityof reliable

accounting information is supported by strong systemsof accountability. In turn,

thesesystemsof accountabilityare strengthenedby the introduction of accepted

accountingstandardsand regular audits, the argumentbeing that thesewill help to

ensurethe reliability of financial information coming from commercial.

enterprises. While accounting standardsand audits will help, this study has shown

that, on their own, they are unlikely to produce the soughtafter degreeof

trustworthinessand timeliness. This is becauseaccountingstandardsand audits

addressand attempt to control only a small part of the total accountproduction

Exploration of the account production process in the f"ed Jamaican

process.

commercialbanks has revealedits complexity and how at

weaknesses any stageof

377
the processof record inscription, transmissionand contextualizationcan have

knock on effects that alter the intended meaningof accountsand reducetheir level

of trustworthiness and timeliness. This suggeststhat policies and strategiesaimed

at increasingthe reliability of managementand financial accountinginformation

coming from commercialenterprises,such as banks, must aim to establish

accountability for and control over all aspectsof the inscription, transmissionand

contextualizationof the account. This is likely to require a major paradigmshift

on the part of economic developmentpolicy makerswhosepolicies and strategies,

to
up now, have tendedto reflect receivedaccountingwisdom about the

accountingprocessrather than a deeperunderstandingof the sourcesof

information related problems arising from the complexitiesand realitiesof

in
accounting the practical circumstances of particular commercial enterprises.

A Record Keeping Control Framework

When we explore the record empirically, as this study hasdone,we seethat the

in
production of meaning records takes shapeover time through the choicesmade

by individuals, including record creators and record involved

keepers, in processes

inscription, transmissionand contex-tualization.The end result can be messy

of

the caseof the failed Jamaican banks,

commercial because
and accidental,as in

often are blind to the implications

overall organisational of their
individuals

decisions. They may be caught up in the daily pressuresof their work and

the basisof cultural values deeply embeddedin their consciousness.

operating on
individuals
In other cases, be in
may acting more consciously their own self-

378
interest at the expenseof the organisation. In large, complex
organisationswhere

there is a multitude of social actors making, keepingand using records

according
to an equal multitude of motivations, it is the chaotic collision of these

motivations and choicesthat producesthe meaningand significanceof the

organisation'saccountsof businesstransactions.

As seenin the discussionof problems experiencedby the failed Jamaican

commercialbanksin the production of accountingand managementinformation,

the accidentalproduction of meaningin records canbe a far cry from what is

necessaryto support the effective operation of organisational accountabilities and

controls (eg, reliable, authenticand accessiblerecords). Unacknowledgedand

uncontrolled social and technical influenceson the creationand keepingof

records distorted the meaningof the banks' accounts. Of course,as already

pointed out, thesedistortions alone did not causethe collapseof six indigenous

Jamaicancommercialbanks. Nevertheless,the researchindicatesthat they were

an aggravatingand contributing factor. It is thereforepossibleto seethat, in

combinationwith other factors, the organisational.and socialconsequences

of

uncontrolled records inscription, transnussionand contextualizationcan be high.

Thus it would appear necessary, in the interests of serving organisational

by to
accountability and control and, extension,viability, attempt the "precarious

structuration of chaos.,8 That is, to aim to introduce accountabilitiesand controls

over record inscription, transmissionand that,

contex-tualization to the extent

to
possible,encourageindividuals make choicesthat in
producemeaning records

379
which serveorganisational(and in many casesbroader social) endsas opposedto

otherinterests.

Ao the function of establishingaccountability and control is the same hether

.1ILa w

to
applied record keeping or wider organisationaloperations,it shouldbe possible

to draw from generalmodels of organisationalaccountabilityand control to arrive

at strategiesand systemsto establisheffective accountabilityfor and control over

processesof record inscription, transmission and contextualization. In 1991, the

Committeeof SponsoringOrganizationsof the TreadwayCommission(a US-

basednational commissionon fraudulent financial reporting henceforthreferredto

as COSO) presented a report outlining an integrated internal control framework. 9

The report was the result of inputs from corporate executives,legislators,

regulators, consultants,auditors and academicson the requirementsfor internal

organisationalaccountability and control. This report later formed the basisof the

Basle Committee's framework for evaluatingbank internal control systems,

discussedin chapterfive.

The COSO report concludedthat when there are accountabilityand control

failures in an organisationthey often result from deficienciesin one or more of

five areas: lack of integrity, or ignoring ethical values on the part of top

management; a weak or negative control environment; failure to link top-level

for
objectiveswith objectives operating and support units; poor communication

the inability to ' 0 On

within the organisation,and understandchangingconditions.

the basis the

of their analysis, Conunittee developedfive interrelatedinternal

control components as Mows: 1) control environment, 2) risk assessment,

380
control activities, 4) information and communicationand 5) monitoring." The

Conunittee arguedthat, working together, thesefive components

result in an

effective internal control system.

Thesesamefive elementscan be applied to establishingaccountability

and control
in the areaof record keeping. Indeed, many recordsmanagementtexts
and

guidefines,such as ISO 15489 an internationalrecordsmanagementstandard,

C7-- 1
Australian Standard4390 on records management,and the InternationalRecords

ManagementTrust's Principles and Practices in Managing Financial Records

recommendsimilar strategies,though they presentthem in a slightly different

format.12 The five elementscan be appliedto record keepingin the following

way:

-Control Environment. The record keeping control environment

comprisesthe set of sharedvalues,beliefs and nonns that define how

records will be inscribed,transmitted and contextualizedthroughout their

existencewithin the organisation. As such,it is the foundation for aH

other componentsof record keeping control, providing both discipline

and structure. Organisationswith effective record keepingcontrol

enviromnents set a positive "tone at the top", hire and retain people with

the requisite records managementskills and competenciesat all levels,

and foster records integrity and control consciousnessthrough ongoing

training and appropriaterewards and sanctions. They set and effectively

communicate,monitor and enforce formalisedrecordsrelatedpolicies and

in
procedures,resulting sharedvaluesand teamwork.

381
-Information Requirementsand Risk Assessment.Risk for
assessment

record keeping first involves the processthrough which management

identifies the type and quality of information requiredto

support

completion of and accountability for all of its businesstransactionsand

the likelihood and impact of risks to the organisationif the

assesses

require riformation is not availableor of adequatequality. it then

entails assessinghow well currently available types and quality of

information match organisationalinformation requirementsand deciding

on the strategiesto be pursuedto rectify any deficiencies. Sincethere is

no practical way to eliminate all risk, managementmust decide how much

risk it is willing to tolerate and determinehow thosetolerancelevelscan

be maintainedthrough appropriaterecord keepingcontrols. The decision

making processwill needto weigh the cost of controlling recordsrelated

risks againstthe cost to the if

organisation the risks are not controlled.

Risk assessmentshouldbe undertakenon an ongoing andregularbasis,

in
especially a volatile external environment. A tool
model assessment is

presented in Appendix 8.

This assessmenttool comprises an eight step metholodgy for evaluating

an organisation's records related risks and requirements. Step one entails

identifying and ranking key business functions. This is followed by

identiffing and ranking the key businessprocessesfor eachbusiness

function. Upon identification of key businessprocesses,theseare

to
assessed determinethe records and information requiredto support

382
them and the qualities that such records and information ideally should

possess(eg, levels of completeness,reliability, timeliness,etc.).

Following this assessment,organisationsshould determinethe degreeto

which these if
quality requirementsare satisfiedand, not being fully

satisfied,the type and degreeof risk that this posesto the organisation.

From these assessmentsit is possible to arrive at a quality level and risk

assessment
profile for eachtype of required information or record as well

to
as calculatethe category of record for it
which will be of the greatest

strategic importance to correct quality deficiencies through appropriately

strengtheningrecord keeping systems.

-Control Activities. Control activities are the policies and proceduresput

in placeto assuremanagement'srecord keepingdirectivesare carriedout.

Control activities should encompassall phasesof the recordsfife cycle,

including prescribingand proscribing the terms of record creationto

ensurethat thesemeet the conditions that produceauthoritativeand

for
trustworthy records needed efficient business
administrationand

accountability. Control activities also must support the and

establishment

maintainance of record keeping systems that appropriately contextualize

records, for in the processand technologiesof contextualizationrecord

keepers minimise the possibility of alternative readings or misreading of

in by fixing original authorial intent in

the meaning records capturing and

distances time. 13 Control activities

the meaning of records over and

the at all levels and in all functions, and

permeate entire organisation,

include a range of possibleactions that 'shouldfit the orgarusation'sneeds

383
 be
and influencedby the way the organisationis structuredand managed,

by
and the type and complexity of its transactionsand commitments.

Though specific control activities must match organisationalrequirements,

the following can be singled out for special attention: 1) organisational

record keeping structure and lines of authority; 2) monitoring procedures

(eg, over the destruction of records to ensurethat unauthorised

destructionsdo not take place; 3) segregationof duties (eg, betweenthose

responsible for designing a system, maintaining it, and transacting

business); 4) authorisation and approval (eg, appropriate authorisation and

for
approvals record creation and destruction); 5) completenessand

accuracy(eg, in documentingall businesstransactions;6) safeguardingof

records; 7) personnel (eg, to ensure that staff have received appropriate

training to perform records control activities and understandthe

importance of these controls).

and Communication. Systems for capturing and

-Information

communicatingrelevant information about how recordsare createdand

kept are an essential component of the records control process. These

systems are essential because they produce reports containing operational

and compliance information to

needed control the record keeping

function. Examplesof the type of information for

required records

file
control include. records managementpolicies and procedures;

classificationplans, registersand indexes;file movementtracking

document and file metadata;systembackup and archiving daily

registers;

3 84
 activity logs; system error reports; system accessaudit logs; records

retention and disposition authorities; and records destructioncertificates.

-Monitoring. There be
should ongoing monitoring of adherenceto records

controls, which occurs during nonnal operations,aswell as separate

evaluationsby managementof compliancewith recordscontrols, often

with the assistanceof the internal audit function.

Even the best efforts to build a dam againstchaosoften fail, however. In other

words, it is not realistic to expectthat eventhe best practiceswill ever result in the

perfect preservation of some inviolate in

original meaning records and that records

be
will ever perfectly reliable and impartial evidenceof either the "facts" of a

transaction or an inscriber's original intendedmeaning. There are simply too

many diversemediationsaffecting record making and keepingover spaceand

time in complex organisationsand record keepersare simplytoo humanand apt to

imposetheir own (often unconscious)interests.

For this reason,attemptsto contain chaosmust be accompaniedby the ability to

give the record a critical reading, a reading basedon an understandingof how

both designedand accidentalsocial and technologicalinfluencesstructurethe

meaning of the record. Only by listening to the virtual clamour of voices making

choices behind the record is it possibleto form impressionsabout and map the

complex relationship and interplay between the act or fact that is the subject of the

record; the inscriber's intendedmeaning;the meaningrequired to serve

organisationaland social ends;and all layers

subsequent of meaningproduced

385
through mediatedprocessesof re-inscription, transmission,contextualizationand

subsequentuse.

Conclusion

This study has sought to demonstratea link betweencompetitiveviability,

accountability and record keepingby presentinga proposedtheory of relationship

betweenthesephenomenaand then exploring this theory empiricallyusing a case

study of the failure of severalJamaicancommercialbanks. While it cannotbe

arguedthat bad filing habits resultedin the collapseof thesebanks,this study has

shown how record creation and keepingpracticesin the failed bankscontributed

to the poor quality of their accountingand managementinformation and how, in

the absenceof good quality accountingand managementinformationthe banks'

systems of accountability could not operate effectively. As a result, directors and

managersin the failed banks to

were unable maintain internal control and make

effective decisions. This, in turn, led to operationalinefficienciesthat, in

combinationwith external conditions, contributed to the banks' collapse. This

information
sameabsenceof good quality accountingand management also

affected the ability of bank to

regulators provide effective supervisionand, later,

complicatedFINSAC's intervention and rehabilitation efforts.

in this chapter, management lessons were drawn fi7omthe Jamaicanexperience

to
and used suggeststrategiesand policies that directors and managersmight

follow in order to avoid the types of records and information relatedproblemsthat

386
underminedthe accountability systemsof the failed banks. Studiesof bank

failures in other developingcountries, though not focusing on records and

information related problems, suggestthat lessonsfrom the Jamaican

experience
be
may equally applicable. For example,studiesof the Nigerian banking crisis

indicate that similar external and internal factors affectedbanksin that country.14

Further researchinto the underlying causesof information relatedweaknessesin

the caseof other bank failures might provide additional support for the

relationshipsamong competitive viability, accountabilityand record keeping

in
presented this study. In addition, the fact that the resultsof the casestudy on

Jamaicanbanks match many of the findings of researchinto the relationship

betweenrecord keeping and public sector reform initiatives suggeststhat the

lessons
management drawn from the Jamaicanexperienceare applicableto a wide

range of organisationalsettingsand contexts. Further researchwill, no doubt,

shedadditional light on the dynamicsof how poor record keepingcan contribute

to the dynamics of other types of business failures.

There are also severalother areasthat this researchsuggestsmight be worth

further investigation. First, the researchrevealedhow bank directors and

managers'ideas about records, information information

and management systems

shapedtheir record creation and keeping practicesand their understandingof and

solutions for the banks' information related problems. Thesefindings highlight

the fact that root causesof information problemsare often misunderstoodas a

result of preconceivedideas. Further researchcomparingideasabout the sources

of organisationalinformation problemswith actual on-site investigationsof those

may shedadditional light on the causesof suchproblemsand, thus, lead

problems

387
to more effective solutions. For example,many managersassumethat

information related problemsarise from poorly structured organisationsor

inadequatecomputerisation. Corporate restructuring and computerisationare

therefore popular businessstrategiesfor dealingwith information related

operational inefficienciesassociatedwith decentralisationand specialisation.This

however,
study suggests, that attention to record creation and keepingpractices

must accompany restructuring and computerisation if these strategies are to be

effective. Moreover, expensive restructuring and computerisation exercisesmay

be unnecessaryif good record keepingpracticescan be usedto IMprovethe flow

and quality of information supporting internal control and decision-making.

Causesof market imperfectionsis another areathat this researchindicatesmay be

worth further investigation. Many current econon-fictheories focus on information

related market imperfections arising from information assymetry between an

to
enterpriseand agentsexternal it. This study supportsthe idea, however,that

information assymetry and bounded rationality within an organisation created by

poor record keeping equally may render an enterprise less competitive and thereby

contribute to market imperfections. This study suggeststhat further researchalso

could be done into the "objectivity" of accountingdata. Current policy usually

focuses on the reliability of accounting and financial reporting as being influenced

by accountingrules about the presentationof data and the quality of report

auditing and not on how that data is inscribed,transmittedand contextualized

throughout the accounting process. In contrast, this study suggeststhat record

creation and keeping practices are factors determining reporting quality and

reliablity and therefore that businessand economicdevelopment

policy and

strategy aimed at improving the quality and reliability of financial reporting must

388
ensuregood record keepingpractices. Further researchinto the relationships

among competitive viability, accountability and record keepingmay assistin

revealing the limitations of a number of existing businessand economic

developmenttheories and, thus, lead to more effective business

and economic
developmentpolicy and strategy in the future.

End Notes

' Thomas Stewart wrote in the mid-1990s about the emerging role of the knowledge integrator
[Thomas A. Stewart, "Managing Corporate Brainpower" Fortune, 30 October, 1995,221 quoted in
Jan Duffy, Harvesting Experience: Reaping the Benefits ofKnowledge Prairie Village, Kansas:
ARMA International, 1999,183.

2 Seeon this subject, Duffy, Harvesting Experience, 183

-199.
' See Sue McKenunish, "Recordkeeping, Accountability and Continuity: The Australian Reality,"
Archival Documents: Providing Accountability Through Recordkeeping, edited by Sue
McKernmish and Frank Upward (Melbourne: Ancora Press, 1993), 9-26.

4 For example, accountantswill sometimes resort to a technique called "Incomplete

using
Records" to derive approximate figures if records are not available [SeeFrank Wood, and Alan
Sangster. BusinessAccounting 1,8thEd (London: Financial Times ProfessionalLtd., 1999)].
Akotia cites the use of this technique in the preparation of Government of Ghana final accounts
[Pino Timothy Akotia, "The Management of Public Sector Financial Records:The Implications
for Good Government," diss. University of London, 19971.

5 Corporate governance, the systemby which companies are managedand controlled, is a topic of
increasing interest in the UK. Over the last few years, guidelines and codeshave been developed
by the Cadbury, Greenbury and Hempel Cominittees. This processresulted in the publication in
June 1988 of the Combined Code - Principles of Good Governanceand Code of Best Practice.

6 United StatesDepartment of Defense, DoD 5015.2-STA, "Design Criteria Standardfor

Electronic Records Management Software Applications, " Revision 1, October 2000, Online,
Internet http: //l60. l49.176.119/docs/5015.sl)t.doc 11 September,200 1. Seealso, United
Kingdom Public Record Office, "Functional Requirements for Electronic RecordsManagement
Systems," Online, Internet http: //www. l)ro. gov.uk/recordsmanagement/eros II September,2001.

' The need to extract data from multiple_businessapplications and organise it in different
presentations that are meaningful to the business has given rise to "data warehousing" products
that comprise tools and application software that support design, development and implementation
of data retrieval and reporting solutions. For more information see Jan Duffy, "The Tools and
Technologies Needed for Knowledge Management" The Information Management Journal 35.1
(January 2001): 65.

8 len Ang, "In the Realm of Uncertainty: The Global Village and the Capitalist Postmodernity,"
Communications Theory Today, David Crowley & David Mitchell eds. (Stanford, Calif.: Stanford
University Press, 1994). 206.

389
9 Committee Sponsoring Organizations of the Treadway Commission, Internal Control
of -
Integrated Framework, Exposure Draft, March 12,1991 (New York, N. Y.: The Committee of
Sponsoring Organizations of the Treadway Commission, 1991).

1()Ibid, 1.

11Richard M. Steinberg, "Internal Control integrated framework: landmark

- a study," CPA
Journal Online (June 1993), Online, Internet htti): //www. luca.com/ci)ajoumal 12 March, 1998.
Seealso, Committee of Sponsoring Organizations of the Treadway Commission, Internal Control
-Integrated Framework, 6-7.

12 International Standards Organisation, ISO 15489: Information

and Documentation - Records
Management, Parts I&2 (Geneva, Switzerland: International StandardsOrganisation, 2001).
This standard has been based on the Records Management Standard (AS 4390.1/1996) produced
by Standards Australia [Standards Australia, Australian Standard AS4390-1996.- Records
Management. (Homebush, NSW: Standards Australia, 1996)]. Seealso, Kimberly Barata, Piers
Cain and Dawn Routledge. Principles and Practices in Managing Financial Records:A Reference
Model andAssessment Tool (London: International Records Management Trust, 2001).

13Brien Brothman, "Declining Derrida: Integrity, Tensegrity, and the Preservationof Archives
from Deconstruction" Archivaria 48 (Spring 1999): 80-8 1.

14Indeed, a paper by Dr. M. O. Ojo on the Nigerian banking crisis indicates that, as in the Jamaican
case,Nigerian bankers experienced a loss of control over their balance sheetsdue to inadequate
information systems [see M. O. Ojo, "Deregulation in the Nigerian Banking Industry: A Review
and Appraisal, " Deregulation in the Nigerian Banking Industry: Directions, Challenges,Problems
and Prospects: Proceedings of the Bank Directors Seminar, 1991 (Lagos: Financial Institutions
Training Centre, 1991), 104-120.

390
 Table of Appendices

A -M
AppendixI- Interview QuestionGuide 392
. ............................................
Appendix 2: Methodological Notes 402
..................................................
Appendix 3: Records Management Review Form 409
.................................
Appendix 4- Table of Assumptions 423
..................................................
Appendix 5- ComparatiVe Analysis of Neo-Classical Economic,
New Institutional Economic and Old
Institutional Economic Theories 432
......................................
Appendix 6: Operational Impact Assessment of Records
Creation and Keeping Practices in Failed
Jamaican Commercial Banks 435
..........................................

AA
ppendix 7: Summary of Records Management Policies and
Procedures in Studied Jamaican Commercial Banks 438
...............
Appendix 8: A Record Keeping Risks and Requirements
Self-Assessment Tool 440
...................................................

"191
 Appendix 1

Interview QuestionGuide

The following list of questionsand the order of their presentation

wereusedas a guidelineIn
conductinginterviews for this study. The exact wording and order of presentationwas changedto
suit particular circumstances(eg, the orgarusationalstructureof a particular bank or the
circumstancesof an interview).

To ensurethat the questionsdealt with the initial assumptions

with which the studybegan,as part of
the interview questiondesignprocesseachassumptionwas assigneda code(seeAppendix 4). The
codesmatching the assumptionabout which the questionwas designedto gatherdataappearin
bracketsat the end of eachquestion. However,by allowing interview
subjectsscopeto elaborateon
points, questionsdirectedtowards supplying data for particular questionsalso supplieddatafor other
questions. Those questionsmarked 'facilitative' supportedthe processof data collectionandwere
not intended to provide data in support of particular assumptions.

It should be noted that someof the questionsprovided data directly aboutthe

assumption,while
others aimedto collect data relatedto an assumptionmdirecdy. The choiceof direct versusindirect
questioningdependedupon the degreeto which it was thought that a direct questionwould yield a
reliable answeror that the respondentwould know what answerto provide. Whenit was thoughtthat
the respondentwas unlikely to know the answeror the answerwould be unreliable,the questions
were framed with a view to gatheringdata that are indicative (ie, questionsaboutfile loss explorethe
factors contributing to high incidentsof file loss,,suchas poorly organisedfiling areas).

A. Banks

Various banks were approachedto participate in the study. As part of the researchprocess,the
researcheroffered to produce a confidential report assessingthe level of businessrisk ansmgfrom a
bank's information managementpracticesIn order to convincethe banksof the benefit of
participating III the study. Use of the data for the purposesof the study was negotiatedwith each
Chief Executive or their delegate.In eachcaseit was agreedthat the bankswould not be identified
specifically and that the study would rely on using only generalreferencesand aggregatedata(eg,
one of four banks surveyed... or one headof internal audit statedthat ... ).

The strategyfollowed in conductingthe interviews was to begin with the Chief Executiveor an
executive level managerwho was askedto identify the bank's key legal units, businessumts and
geographicareasand markets. Preliminary researchinto the bank's structurewas donePrior to the
interview using information from annualreports and statementsof accountso that the information
that the Chief Executive or executivemanagerprovided confirmed and/orclarified information from
other sources.

Once the key legal units, businessunits, etc. were identified, the remaininginterviewswere
scheduled. In frammg the guidelme for the interview questions,it was envisionedthat important
information relating to the assumptionsto be testedin this study could be gatheredEroma non-
executive director, an audit committee; a chief financial for
officer responsible overseeingthe
treasury managementfunction; a headof branch operations;a headof risk management(In some
casescredit risk management is dealt with separately from other risks andother risks may be
392
 by
managed an Assets and Liabilities Management Group; however,the samequestionsare
appropriate); a head of internal audit; a head of complianceresponsiblefor ensuringthat the bank is
complying to all legislative and regulatory requirements;a headof humanresources;anda headof
information technology. A standardset of questions,outlined below, was developedfor eachof
thesehypotheticalmanagersand the functional areasof the bank's operationsfor which theare
responsible. The questionsand the order of their presentationwas altereddependuigon the
organisationalstructureand governanceof a particular bank.

A. 1 Chief Executive or other Executive Level Manager

Can you provide a brief overview of your background? Has any of the formal traming andeducation
you have taken ever focusedon information If
management? so, can you recall what topics were
covered? (HC I, HC2)

2. Identify the key legal units, business units, geographic areas and markets. (Facilitative)

3. What role do you see information playing in tei s of the competitive viability of the bank? Explain.
What about information technology? Explain. (HB I, HB4, HE I)

4. What arethe bank's current strategiesto ensurethat this information is available?(HB2, HB3, HB5,
HB6)

5. What kinds of information do you rely on to meetyour own managementinformation requirements?

In what form is this information when you receiveit? From whom do you receiveit? What do you
do with it whenyou are finished with it? If it is kept, where andwho is responsiblefor keepingit?
(HA2, HA3, HD7, HD8, HE5)

6. Are you satisfied with the quality of the management information you receive from the bank's
business units, etc? If not, how are you addressing the situation? (HAI, HA8, HD7, HD8)

7. Is there someonein the bank and,,if so who, responsiblefor: (HD 1; HD 11; HD 12; HD 14)

-IT systems development and/or procurement

-IT systemsimplementation
backup
-IT systemssecurity and
the operation of IT systems
-auditing
-writing policy manuals
-distributing policy manuals
-version control of policy manuals
-mamtaining and storing master copies of policy manuals
fiIMg systems for paper records
-designing
filing systemsfor paper records
-implementing
of filing systems for paper records
-security
the operation of filing systems for paper records
-auditing
systems and distribution
-mail
-deciding on records retention policy
disposal
-records
-records storage
-disaster preparedness and recovery
393
8. What policies, if any, has the bank establishedrelating to information creationandmanagement?
Are thesepolicies part of a broaderpolicy (eg, a credit policy or support servicespolicy). (HA2,
HA9, HD 1)

9. Do you view information failures or gaps as presenting a source of business or operational risk to the
bank? If so, why and to what do you attribute the cause of these information failures or gaps" Have
you proposed policies or standards to address these? (HB 1; HD23)

A. 2 Non-Executive Director

Can you provide a brief overview of your background? Has any of the formal training and education
you have taken ever focused on information If
management? so, canyou recall what topics were
covered?(HC I, HC2)

2. What role do you see information playing in the competitive viability of the bank? Explami.
Information Technology? Explami. (BB 1, HB4, HE 1)

3. What kinds of information do you rely on to meet your own managementinformation requirements?
In what form is this information when you receive it? From whom do you receive it? What do you
do with it when you are finished with it? If it is kept, where and who is responsible for keeping it?
(HA2, HA3, HD7, HD8, BE5)

4. Are you satisfied with the quality of the managementinformation you receivefrom the bank's
managementand business If do
units, etc? not, what you think should be done to addressthe
situation? (HAI, HA8; HB5)

5. Do you viCW information failures or gaps as presenting a source of business or operational nsk to the
bank? If so, why and to what do you attribute the cause of these information failures or gaps? Have
to
you proposed policies or standards address these? (HB 1; HD23)

A. 3 Chairman of the Audit Committee (if an Audit Committee exists)

Can you provide a brief overview of your background? Has any of the formal training andeducation
you have taken ever focused on information management? If so, can you recall what topics were
covered? (HCI, HC2)

2. What role do you see information as playing In internal control of the bank? Explain. Information
technology? Explain (HB 1, HB4, HE 1)

3. What kinds of information do you and the other Committeemembersrely on to meetyour

information requirements? In what form is this information when you receive it? From
management
do it? What do you do with it when you are finished with it? If it is kept, where
whom you receive
and who is responsible for keeping it? (HA2, HA3, HD7, HD8, HE5)

4. Are you satisfied with the information you receivefrom the bank's managementand business units,
from the of the Audit Commuce's information requirements?If not, what do you
etc perspective
think should be done to the
address situation? (HAI, HA8; HB5)
394
5. Do you view information failures or gaps as presentinga sourceof businessor operationalrisk to the
bank? If so, why and to what do you attribute the causeof theseinformation failures or gaps? Have
you proposedpolicies or standardsto addressthese?(HB I; HD23)

A.4 Chief Financial Officer and Head of Branch Operations

Can you provide a brief overview of your background? Has any of the formal training andeducation
you have taken ever focused on information If
management? so, canyou recall what topics were
covered?(HCI, HC2)

2. What role do you seeinformation as playing in the competitive viability of the bank? Explain.
Information technology? Explain. (HBI, HB4, HEl)

3. What kinds of information do you rely on to meetyour own managementinformation requirements?

In what form is this information when you receiveit? From whom do you receiveit? What do you
do with it when you are finished with it? If it is kept, whereand who is responsiblefor keepingit?
(HA2, HA3, HD7, HD8, HE5)

4. Are you satisfied with the quality of the managementinformation you receivefrom the bank's
managementand business If do
units, etc? not, what you think should be done to addressthe
situation? (HAI, HA8; HB5)

5. What kinds of recordsdo you generatein the courseof performmgyour daily bus. essandcore
operations?(RAI, HD 18)

6. In what form are these records kept? (Eg, paper or electromc) (HE3, IHD9)

Who is responsiblefor keeping theserecords? (Eg, central filing unit or clerical staff) (HDI, HD3)

8. On average,how often do departmentalstaff refer to theserecords(eg, onceper week) andfor what

purpose?(HD 16, facilitative)

9. Do staff of any other departmentever refer to theserecords? If so, how often andfor what purpose?
(HD 16, HD2 1, facihtative)

10. How long doesthe departmentgenerallykeeptheserecords? Is therean establishedpolicy which

for be How areretentionperiods decided?
setsout the period which theserecordsmust retained?
Who authonsesthem? (HD3; HD15, HD22)

Do you view information failures or gaps as presenting a source of business or operational risk to the
do information failures Have
bank? If so, why and to what you attribute the cause of these or gaps?
to these? CFiB I; HD23)
you proposed policies or standards address

A.5 Head of Risk Management

Can you provide a brief overview of your background? Has any of the formal training andeducation
have taken ever focused on information management? If so, can you recall what topics were
you
covered? (HC I, HC2)
395
2. Identify the risks that you seeas being critical for the bank to manageeMetively order to remain
competitive. (Facilitative)

3. For eachmajor categoryof risk (eg, credit, liquidity, interest rate), how is information used 'inthe
managementof that risk? (HAI)

4. From what source(s)is this information gathered(eg, bank's mainframe)?(HD9, HE3, HE4)

5. In what form is the information (eg, verbal, paper, electronic)?(HD9, HE3, HE4)

6. Are you satisfied with the quality of the managementinformation you haveat your disposalfor the
purposesof risk management?If not, what do you think needsto changein order to bring
improvement?(HAl, HB2, HB3, HB5, HD7, HD8)

What kinds of recordsdo you generatein the courseof performing your daily businessandcore
operations?(HD 18, facilitative)

8. In what form are theserecordskept? (Eg, paper or electroMc)(HD9, HE3, HE4)

9. Who is responsiblefor keepingtheserecords? (Eg, central filing unit or clerical staff) (HD1, HD3,
HDI 1)

10. On average,how often do departmentalstaff refer to theserecords(eg, onceper week)andfor what

purpose?(HD 16, facilitative)

Do staff of any other departmentever refer to theserecords? If so, how often andfor what purpose?
HD 16, HD2 1, facilitative)

12. How long doesthe departmentgenerallykeeptheserecords? Is therean establishedpolicy which

setsout the period for which these be
recordsmust retained?How areretentionperiods decided?
Who authonsesthem? (HD3, HD 15, HD22)

13. Is it possible and, if so, how easy,for you to pull togetherviews of the financial statusof individual
customers, branches and businessareas? (HA7)

14. Do you view information failures or gaps as presenting a source of business or operational risk to the
bank? If so, why and to what do you attribute the cause of these information failures or gaps? Have
to
you proposed policies or standards address these? (BB1, HD23)

A. 6 Head of Internal Audit

Can you provide a brief overview of your background? Has any of the formal training andeducation
you have taken ever focusedon information management? If so, can you recall what topics were
covered? (HC I, HC2)

2. do
What types of audits you perform (eg, branch, businessfunction, IT)? (HB 1, facilitative)

3. Briefly describe (HB6,

your audit methodsand procedures. facilitative)
396
 For each type of risk category (eg, credit, liquidity and interest rate), what kinds of information do
you rely on to monitor compliance with policies and standards and the effectiveness of internal
control structures? (HAI, HAIO)

5. Where or from whom do you obtain this information? (IHE3,HE4)

6. In what form is the information? (Eg, verbal, paper or electronic?(HD9, HE3, HE4)

7. Are you satisfied with the quality of the information you have at your disposal for the purposes of
conducting internal audits? If not, what do you think needs to change in order to bring improvement?
(HAI, HB2, HB3, HD7, HD8)

8. To whom do you report your findings and in what form? (Eg, Audit Committeein the form of a
report). (HAI)

9. Do you viCW information failures or gaps as presenting a source of business or operational risk to the
bank? If so, why and to what do you attribute the cause of these information failures or gaps? Have
to
you proposed policies or standards address these? (HD23)

10. Do any of the standardsand policies you monitor concernrecordsand/orinformation (including IT)?
If so, can you give examples? What is the level of conformancewith thesepolicies?(HA9, HD1,
HD3)

Do any of thesestandardsconcern how records are to be kept (Eg,

or managed? is
who responsible
for their safekeepingor how long they are to be retained?) (HDI, HD2, HD3)

12. it if
Is possible and, so, how for
easy, you to pull togetherviews of the financial statusof individual
branches
customers, and businessareas?(HA7)

13. Describethe major categoriesof recordsthat you createm conductinginternal audits?(HD 18,
facilitative)

14. In what form aretheserecords kept? (Eg, paper or electromc)(HD9, HE3, HE4)

15. Who is responsiblefor keeping theserecords? (Eg, central filing um or clerical staff) (HD I, HD3,
HDI 1)

On average,how do departmental to theserecords(eg, onceper week) and for what

16. often staff refer
purpose? facilitative)
(141316,

Do staff of any other department to theserecords? If so, how often and for what Purpose?
17. ever refer
(HD 16, HD2 1, facilitative)

18. How long does the department generally keep these records?Is there an establishedpolicy which sets
for be How are retention periods decided? Who
out the period which theserecordsmust retained?
them? (HD3, HD 15, HD2 2)
authonses

information failures or gaps as presentinga sourceof businessor operationalnsk to the

19. Do you view
397
 bank? If so, why and to what do you attribute the causeof theseinformation failures or gaps? Have
you proposedpolicies or standardsto addressthese?(HB I, HD23)

20. Are you satisfied that all significant bank transactionsand decisionsarebeing adequately
documented?(HD 18).

A.7 Head of Comphance

Can you provide a brief overview of your background? Has any of the formal training andeducation
you have taken ever focused on information management?If so, canyou recall what topics were
covered? (HC I, HC2)

2. What role do you see information playing in terms of the competitive viability of the bank? Explain.
Information technology? Explain. (HBl, HB4, HE I)

3. What kinds of information do you rely on to meetyour own managementinformation requirements?

In what form is this information when you receiveit? From whom do you receiveit? What do you
do with it whenyou are fniished with it? If it is kept, whereandwho is responsiblefor keepingit?
(HA2, HA3, HD7, HD8, HE5)

4. Are you satisfied with the quality of the management information available to you? If not, what do
you think should be done to address the situation? (HAI, HA8, HB5, HD7, HD8)

5. Do you view information failures or gaps as presenting a source of business or operational risk to the
bank? If so, why and to what do you attribute the cause of these information failures or gaps? Have
to
you proposed policies or standards address these? (HB I, HD23)

6. Are there any legal, regulatory or industiy to

standardsrelating recordkeepingto which the bank
must adhere? (HD 15)

A.8 Head of Human Resources

Can you provide a brief overview of your background? Has any of the formal training andeducation
you have taken ever focusedon information management? If so, can you recall what topics were
covered? (HC I, HC2)

2. What role do you see information in terms of the competitive viability of the bank? Explam.
playing
Information technology? Explain. (HB 1, HB4, HE 1)

3. What kids of information do on to meet your own management information requirements?

you rely
In what form is this information when you receive it? From whom do you receive it? What do you
do with it when you are fuiished with it? If it is kept, where and who is responsible for keeping it?
(HA2, HA3, HD7, HD8, BE5)

the information available to you? If not, what do

4. Are you satisfied with the quality of management
be done to address the situation? (HAI, HA8, HB5, HD7, HD8)
you think should

5. Does the bank offer internal training to

prograrnmes its stafv. If so, do any of those training
to creation/documentation or record keepmig9
programmescontain a component(s) relating records
398
 If so, which ones?(HC 1, HC2, HD 1, HD2, HD3)

6. Describe the major categoriesof recordsthat you createm peiforming

your coreftuictions? (HD 18,
facilitative)

7. In what form are theserecordskept? (Eg, paper or electronic) (HD9, HE3, HE4)

8. Who is responsiblefor keepingtheserecords? (Eg, central filing

unit or clerical staff) (HDI, HD3,
HDI 1)

On average,how often do departmentalstaff refer to theserecords(eg,

onceper week) andfor what
purpose?(HD 16, facilitative)

10. Do staff of any other departmentever refer to theserecords? If so, how often andfor
what purpose?
(HD 16, HD2 1, facilitative)

How long doesthe departmentgenerallykeeptheserecords?Is there an establishedpolicy

which sets
out the period for which theserecordsmust be retained?How areretentionperiodsdecided?Who
authonsesthem? (HD3, HD 15, HD22)

A.9 Head of IT

What is your view on the role of information and information technology Miterms of the competitive
viability of the bank? (BB 1, HB4, HB6, HEI)

2. What percentageof total information holdings in the bank are in electronicform? (BE3, facilitative)

3. Are you In the process of converting any manual systems/records into electronic form? If so, have
specific procedures for data conversion been developed and documented? (HE3, ITE6, HE8)

4. What systemsand applications are in use III the bank for transactionprocessing?For the provision
of management information? Have thesesystems/applicationsmostly beendeveloped in-houseor
purchasedfrom external agents?(HE5)

5. What is your impression about how the new computer systems and applications have changed work
processes (eg, more/less centralised)? (HA6, HA7, HE4, HE8)

61 What lessonshave you learnedfrom the implementationof thesesystems?(Facilitative)

7. What is the level of integration betweenexisting systems?Are you satisfiedwith this level of system
integration? (HE3)

8. Have you establishedstrategicIT objectivesfor the bank. If so, what arethey?(HAI, HB6)

9. Have you establishedbank-wide computing standards?If so, m what areas?(HD I, HD3, HE4, HE8)

10. What is the level of centralisation/decentrahsation of IT development, procurementand

implementation in the bank? Is this a situation that has evolved over time or is this a conscious
policy objective? (HD 12, HD 11)
399
11. Can you give some examples of some of your recent IT projects? (HB6, HEI, facilitative)

12. Within the businessunits, what is the decisionmaking processfor the developmentor procurement
or
of new computersystems software? What is the implementationprocess?(HE2, HD 12)

13. Is systemsecurity and integrity an important objective? If so, how is this being achieved(eg, what
checksand balanceshave been built into systems)? Do you think that executivemanagementshares
your attitudestoward systemsecurity and integrity? (HB6, HE7, HE8)

14. Do you view linking new systems with paper source data as an important objective? If so, how is
this being achieved? (HE6, HB6)

15. Do you have any areas of responsibility that are not specifically IT related? If so, what are they?
(HDI)

16. With whom or what units in the bank do you liase most often? For what purpose?(HD 1, facilitative)

17. Oncesystemsare set up, who is responsiblefor the managementof the data m them? (If not the IT
unit) Is this an areathat IT
you view as appropriately an responsibility? (HDI, HDI 1)

18. Who is responsible for designing systems for the orgarusation and retrieval of non-electromic
idormation systems? Is this an area that you view IT as having any responsibility for? If so, M what
way? (HD 1, HD 12)

19. Who is responsiblefor the managementof that percentageof information that is not in electronic
form? Is this an areathat you view IT ashaving any responsibility for. If so, In what way? (HD I)

20. Are proceduresin place for data archiving. If so, provide details.(HD I, HD3, HD20, HE4)

B. FINSAC Officials

What is your view on the role of information in terms of the competitiveviability of a bank? In
In
terms of risk management? terms of effective internal control? In terms of fraud prevention.?
What about information technology? (HE I, HG I, H142)

2. What areyour generalobservationsabout information managementin Jamaican banks?

commercial
(HA4, facilitative)

3. What managementinformation from banks have to

your requiredin order perform your functions?
Has this information beenreadily available to you on a timely basis? What is your view of the
information (eg, it (HAI 0, HF I, HF2)
generalquality of this is reliable)?

CA Bank Supervisors - Proposed Questions

Can you provide a brief overview of your background? Has any of the formal training and education
have taken ever focused on information management? If so, can you recall what topics were
you
covered? (HHl, HH2)

400
2. Can you provide a generaloverview of Bank of Jamaica'sbank supervisionpractices?(Facilitative)

3. What kinds of information do supervisorsuseto determinethe health of a bank (eg, supplied

financial information, information from external auditors,etc.) (HAIO, HFI, HF3)

4. What is your generalassessmentof the quality of this information? (BY I)

Do supervisorsever refer directly to the raw data for suppliedfinancial information, that is, the
bank's own information.and records?(Facilitative)

6. How commonis it to find that supervisorshave inadequateinfo to make a proper assessment.

Why"
(IfF I, HIF2)

7. What areyour generalobservationsabout information managementin Jamaicancommercialbanks?

(HA4, facilitative)

What is your view on the role of information in terms of the competitiveviability of a bank? In
terms of risk management?In terms of effective internal control? In terms of fraud prevention?
What about information technology? (HEI, HGI, FIF12)

C.2 Bank Supervisors - Actual Questions

As interviews were not permitted with Bank of Jamaicasupervisoryauthorities,the researcherobtained

to
permission submit a list of written questionsto Bank of Jamaicaofficials. A reply to some,but not all, of
the questionswas later received. The questionssubmitted are as follows:

Can you provide a brief outline of the Bank of Jamaica's supervisory practices for the period 1993-
1998 with particular reference to the type of financial information required from commercial banks?

2. Can you provide an assessmentErom the point of view of the supervisory authorities of whether the
absenceof adequate financial information was a problem for supervisors in terms of being able to
adequately supervise commercial banks during the period 1993-1998?

3. Can you provide an assessmentof other factors that poseddifficulties for supervisorsMitermsof
being able to adequatelysupervisecommercialbanks during the period 1993-1998?

4. What measureshave beentaken to address/correctfactors that posedpreviousdifficulties in

supervisingcommercialbanks?

5. To what extent did the Bank of Jamaicacarry out on-site inspectionsof commercialbanksduring the
period 1993-1998?

6. To what extent did the banks comply with financial reporting requirements? Can you provide an
assessmentof the supervisory authority's confidence in the financial reportsthat were received?

7. What was the quality of information and documentationthat was availableto the inspectorsfrom the
failed banks throughout the period 1993-1998?

401
 Appendix 2

Methodological Notes

1. Use of Qualitative Data Analysis Software (QSR NLJD*IST) in the Study

This study utilises,qualitatiVe data analysissoftware known as QSR NUD*IST, which

standsfor Qualitative Solutionsand ResearchNon-numericalUnstructuredData

Indexmg Searching and Theorizing. QSR NUD*IST is a computer packagedesigned

to aid users in handling non-numerical and unstructured data in qualitatiVeanalysis,by

supporting processesof coding data in an index systen-searchingtext or patterns of

coding and theorising about data.

QSR NUD*IST supports the managementof qualitative sourcesof evidence.Those

used in this study include: verbatlM transcriptions of tape recorded interviews and

conference proceedings; researcher'sinterview notes; notes on bibliographic sources;

full text online journal articles and web pages;notes on and excerpts from standards,

policies, procedures, regulations, and statutes; and researcher'sana ic notes.

QSR NUD*IST also consists of an indexing system. The indexing systemis

for thoughts about the data. Nodes

comprised of nodes, which serve as contamers

by the researcherand by the system.Within the

store the index categories constructed

402
node is stored informationsuchas its title, definition, a memoof ideasaboutit, and

referencesto the parts of documentscodedat the node.

There are four types of nodes M QRS NUD*IST. Free nodes and Index Tree nodes

are constructed by the researcher,while Text Searchand Index Searchnodesare

system generated. The index system can contaln any number of nodes,at which the

researchercan do any amount of coding of documents and sorting of ideasby:

-Creating Free Nodes (nodes which are free of structure) for unconnected
ideas. Free nodes support the application of a Grounded Theory methodology
by allowing the researcherto create as many new nodesas necessaryto reflect
emergent themes in the research data.

-Storing ideas in a hierarchical Index Tree to help data,

orgam'Se clarify
concepts and store their relationship. For example,this researchproject used
the assumptionsoutlined in chapter one as the basisof the first generationof
Index Tree nodes.

The process of analysis included several distinct steps. First, it involved importing all
g ---

sources into the database,which then contained the full text of the document or

annotations of ft. The researcherthen read and analyseddocuments in order to code

parts of them (usuaffy paragraphs) at an existmg node in -theIndex Tree or create a

new node in the Free Nodes area, as appropriate. The coding stagealso entailed

recording emerging theoretical understanding and explanationsin memosat nodes.

The next stage entafled a restructuring of the midex. This processwas made easyby

the fact that QSR NUD*IST is designed for flexible reorganisation as ideasemerge

403
and codes are rethought in relation to the data. The researcherfirst conducted a

further analysis of aH parts of documents coded Free Nodes

at m order to incorporate

them logically into the hierarchical structure of the Index Tree. Next the
researcher

reviewed all coding done at Index Tree nodes to deternunehow they fit together to

support a coherent argument. Once their relationsl-iipwas determined,the Index Tree

was restructured again as nodes were grouped under appropriate and related chapter

headmgs.

The final stage, which was ongoing from the point of the initial restructuring of the

index, MV01vedsearchingand exploring text and coding.QSRNUD*IST hasa

wide

set of searchtools to explore either the text of imported documentsor the coding done

by the researcheror the system. These tools are also linked and allow the researcherto

build cumulatively on discoveries by saving the results of searchesfor further

exploration.

Most of the analysis of the data was done by meansof an exploration of the

documentation associatedwith each node or cluster of nodes. However, in some

it to
cases also proved useful conduct a full text by
searchor search index terms to

gather supporting evidence relating to a particular argument and to test the validity of

emerging ideas. Both text and index by

searchesare automatically saved the systemat

Index and Text Search nodes to provide an audit trail of hypothesisdevelopment.

404
Text searchesproVided the researcher with a way of asking questionsabout the

contents of documents, such as words people are using, recurring themesand the like.

This facility was used to explore data to pursue hunchesand test emergmigtheories or

hypothesesas well as to gather material about a topic for browsing and recoding.

QSR NUD*IST can conduct a slMPle string search (for a string of specified

characters), for example the characters m the word "record" or the word "cheque", M

order to discover what the data reveal about these objects of analysis.Additionally, it

to
can perform any of a wide variety of complex pattern searches ask for occurrences

of any of a range of wild cards or to seek alternate spellings. This proved useful In

testing hypotheses. For example, the search (record/paper) found all parts of

documents containing either the word record or paper and was used to find out if

inter-viewsubjects tended only to use the word record in referenceto documentation in

paper forrm

Index searchesprovide ways of asking questions about categoriesof ideas in nodes.

The index search tools in QSR NUD*IST offer an extensiVeset of tools for asking

questions about the coding at nodes in the index systern'The index searchtools will

perform the full range of Boolean searches,but they also provide ways to:

up material on a related topic to rethink and recode. For example, an

-Collect
intersect Search (eg, find all documents coded at lack of documentation and
treasury function) could be used to find all text units coded at all of a given set
of two or more nodes.

405
 -Analyse themes by using search operators that pull apart and establishpatterns
of coding in data. An Intersect search also could be used to test a hypothesLis
that can be expressedin terms of the coding at two or more nodes.For
example, the search in the example above was particularly useful M finding
examples of how poor quality information affected dffferent aspectsof banks'
treasury operations.

There are seventeendifferent search operators offered by QSR*NUDIST; however, a

need was found only to use the Intersect and Union searchesfor the purposesof this

study.

2. A Discussion of the Validity of Observations about Interview Subjects' Values

and Beliefs

A.S.chapter eight explores social actors' motivations, it raisesquestionsabout the

to
extent which the field research data, mainly interviews, be
can relied upon to reveal

underlying motivations, beliefs and attitudes. The analytical approachtaken in this

chapter is grounded in the tradition of interpretive social science,which can be defmed

as the systematic analystsof socially meanirigful action through the direct detailed

observationof peoplein naturalsettingsin order to arrive at understandings

and
'
interpretations of how people create and maintain their social worlds. This approach

be
can traced back to German sociologist Max Weber (1864-1920) and German

pHosopher Wilhem Dilthey (1833-1911). In his work, Einleitang in die

Geisteswissenshaftenantroduction to the Human Sciences),published in 1883,

Dilthey argued that human sciencesrely upon an empathetic understanding,or

Verstehen, of the everyday lived experience of people in specific historical settings.

406
Thus, the arguments In this chapter come from the perspectiVethat the field research

data can be used to gain an empathetic understandmigof the motivations behind

individuals' record creation and keeping practices in Jamaicancommercial banks.

Positivists accustomed to hard facts and observablephenomenoneasily reducedto

statistical representationsmay have some difficulty with this approach, sincethey

consider an explanation to be true if it can be replicated. In contrast, the interpretive

approach holds that a theory or description is accurate if the researcherconveysa deep

understanding of the way others reason, feel, and seethings. An interpretative

explanation describesa social actor's point of view and attempts to translate it into a

form that readers can understand.' Clearly, then, the interpretiVeapproachrests upon

an analysis of social actor's own descriptions of their context and the meaningthey

ascribe to it. For the purposes of this chapter, such descriptions derive from the

interviews conducted with a wide range of social actors in the Jamaicanfinancial

sector as outlined in the introduction to this study.

4
Nevertheless, interviews are not seenas an ideal researchmethod Questionnaires
.

and participant observation generally are viewed as being more reliable and valid.

Despite this, interviews represent one of the most fleXible types of information as they

be
can used to ask people about, or reveal, their attitudes, beliefs and motives, which

be directly. ' Critics of this method point out, however, that this data
cannot observed

may be neither valid nor reliable. Respondents may lie, forget, or sunply not

be
consciously aware of their feelings, motives or behaviour. Furthermore, their

407
answers may be influenced by the presenceof the researcheror they may consciously

or unconsciously be directed by the interviewer to give certain responses. In an effort

to addressthese shortcornings, the researchermust remain constantly vigilant and, In

analysingthe data, ask such critical questions as: does this subject have a reasonto lie;

how doesthis subject'saccountof motivesand eventsmeshwith other subjects'

does
accounts; this subjecthaveall the informationneededto give a full accountof

events; and did the interview question or the researcher'sresponseprompt this

particular answer from the subject? Every effort was made during the interview

process and the data analysis carried out for this study to keep these questionsfirmly

in nund. Despite the flaws, interview data in generaL and the interviews conducted for

this study in particular, stil-Iprovide critical and valuable insights and perspectiveson

how social actors view and order their social world.

End Notes

' W. Lawrence Neuman, Social ResearchMethods: Qualitative and Quantitative Approaches,4hEd.

(NeedhamHeights, NIA: Allyn & Bacon, 2000), 70.

Ibid.

' W. Lawrence Neuman, 74.

4 M. Haralarnbosand M. Holborn, Sociology: ThemesandPerspectives (London-.Harper-Collins,

1996), 839-843.

' The University of the West Indies, Introduction to Sociology: Reader, Vol. I (Bridgetown,
Barbados,University of the West Indies, 1998,23.

408
 Appendix 3

RECORDS MANAGEMENT REVIEW FORM

This form was used during the field researchas a guide and aide de memoire in the
coflection of information about Jamaican commercial bank record keeping systems. The
researcherobtained answers to the questions listed on the form either during site visits at
the banks or through interviews with bank officials. The alphanumericalcodesappearing
to
next questions on the form are keyed to the central assumptionsexplored in the study.
The particular assumption assignedto each code appearsat Appendix 4.

Dept/Business Unit.:

1. Contact Names Contact Positions

2. General Problem Areas: (HAI, HA8)

409
 3. Perceived Needs: (HA2. BB59 IRB6)

4. Major Records Series (IIID18)

A. Transaction Processing

1. Manual or Automated? (HE3)

If Manual, go to section B. If Automated,

go to section C. If mixed, complete both
sections.

B. Manual Transaction Processing

1. Centralised system (eg, riles stored together in a Yes/No?

registry)? (HE3) Yes/No
If yes, evidence of breakdown (eg, riles should be
stored in registry but officers keep some)?

2. Mixture of centralised and decentralised? Yes/No

If yes, are there linkages between systems? Yes/No
(HD9, HE3)

3. Level of duplication between record stores (eg,

410
do the contents of registry files and files retained by
officers overlap)? (BE3)

4. Classification system? (HAI, HD2. HD3. HD99 None/Partial, Registry

)
HD18, HD20) onlyAPartiaVrotal
5. Type of classification system? (Obtain sample)
(IEID9)

6. Age of classification system? (HA5)

7. Observations re: retrieval problems? (HA1,

HD5, HD6, HD9)

8. Indexes?(Obtain samples) (1][Al. Numerical/Alphabetical/Other:

9. Data elements included in indexes? (HA1, HD9, File title/Part No./Part

HA7) datesALocation/Retention and
Disposal information

10. Indexes cover both active and inactive files? Yes/No

(HA19 HD9)

11. Indexes are automated? (HAI, HA9) Yes/No/Partial

12. Number of Registry/File Clerical staW. (1EID11,

facilitative)

13. Describe positions and classification level:

(HD 11)

411
14. Job descriptions? (HDI) Yes/No

15. RM training? (HC3) Yes/No

If yes, number of staff trained, where and when?

16. Staff turnover? (HD4, HD7) Yes/No

17. Registry/Filing area physically tidy? (Proxy for Yes/No

HA4, HA5)

18. Type of storage equipment/supplies? (Proxy for Registry:

HA4, HA5, HDIO)

Other:

19. Condition of storage equipment/supplies? Registry: Good/Fair/Poor

(HA4, HA5, UDIO)
Other: Good/Fair/Poor

20. Security? (EUD13, HD21) Registry:

Other:

21. Comments:

412
 Automated Transaction Processing

1. System Description (eg, platform,

operating system, application software,
version, network configuration)
(Facilitative)

2. Age of system? (Facilitative)

3. In-house development? (IRE5) Yes/No

4. System inputs (Facilitative)

5. Input procedures or protocols? (IRD17, Yes/No

HE8)
Describe:

6. Regular training on input procedures? Yes/No

(HD17,1EIE8)

7. Daily volume of transactions?

(Facilitative)

413
 8. Transaction logs and reports? Describe.
(BD17, HE8)

9. Regular checking of transaction

reports?
HD17, HE81

10. System outputs (including regular

printouts and feeds into other systems?
(HE8, facilitative)

11. Types of queries allowed (HA7, HE3)

12. Use of passwords? (HD19, HD21, IIIE7) Yes/No

How changed:

13. Use of data encryption? (HE7) Yes/No

14. Backup procedures? (HD14, HD22) Yes/No

How often:
Location of backup tapes:

15. If backup procedures are in place, are Yes/No

backup logs maintained? (IRD14, HD22,
HE8) Observations:

16. System usage audits? (IEID13,HE3) Yes/No

17. If system is linked to external Yes/No

organizations via network, are there
in
system security measures place (eg,
L rI rewalls)? (HD13)

414
D. Management Information

1. Describe (BE5, facilitative)

E. Automated Management Information System

1. System Description (eg, platform,

operating system, application software,
version, network configuration)
(Facilitative)

2. Age of system? (Facilitative)

3. In-house development? (ILIE5) Yes/No

4. System inputs (Facilitative)

5. Input procedures or protocols? (IRD17, Yes/No

HE8)
Describe:

415
 6. Regular training on input procedures? Yes/No
HD 17, HE8)

7. System outputs (including regular

printouts and feeds into other systems?
(HE8)

8. Types of queries allowed

(HA7, HE3)

9. Use of passwords? (HE7) Yes/No

How often changed:

10. Use of data encryption? (IFIE7) Yes/No

11. Backup procedures? (IHDI4) Yes/No

How often:
Location of backup tapes:

12. If backup procedures are in place, are Yes/No

backup logs maintained? (HD14, UE8)
Observations:

13. System usage audits? (HD13, BE8) Yes/No

14. If system is linked to external Yes/No

organizations via network, are there
system security measures in place (eg,
firewalls)? (HD13)

F. Mail Management

1. Man uaUAutomated/Mixed?
manual. go to section G. If automated,
_ff

416
 go to section H. If mixed, complete both
sections.
(HE3)

Manual Mail Management

1. Mail Handling System Description:

(HD4, HD7)

2. Mail registers? (HD4) Incoming/Outgoing/Other:

3. Data elements in registers? (Obtain Date of mail/name of sender/name of

sample) (HD4) addressee/subject/file number/action
officer/date of action/date action
completed/other:

4. Indexes automated? (HD4)

5. Comments:

H. Automated Mail Management

1. System description (HD4, HD7f

417
 Facilitative)

2. Email policy? (HD1, HD39 HE4) Yes/No

3. Use of Passwords? (IRE7, HD13) Yes/No

How often changed:

4. Use of Encryption? (HE7, HD13) Yes/No

5. Network security? (HD13) Yes/No

Describe:

6. Integration with manual records (eg,

print off copy for file)? (HE3, HE6)

L Manual Information Distribution and Tracking

1. File Tracking System? Yes/No

If yes, compass of system? All/Partial, registry only/Partial/Total
(IRD2)

2. If yes, system description:

(HD2)

3. Tracking is automated? (HD2) Yes/No

4. Loan limitations? (HD2, IRD6) Yes/No

5. Evidence of breakdown? (HD2, HD6) Yes/No

6. If yes, describe problem areas:

_(HD2,

418
 Comments:

J. Management and Storage of Semi-current Manual Records

1. Criteria for rile closure? (11AI, HD3, Yes/No

HD20)

2. Span of documents on rde? (HAI, IFID3. File No:

)
HD20) File Title:
Dates:

File No:
File Title:
Dates :

File No:
File Title:
Dates:

3. Evidence of space constraints? HD5, Yes/No

HD6, HD20-, facilitative) Observations:

4. Designated closed file area(s)? Yes/No

If yes, where? Location(s):
(HD5, HD6, HD20, facilitative)

419
 5. Physical condition? (Take photos if Good/Fair/Poor
possible) Observations:
(HD5, HD6, HD20)

6. Files regularly and systematically Yes/No

transferred to closed file area(s)? (HD3)

7. Records in closed file area(s) well Yes/No

organised? (HD5, HD6, HD20)

8. Standardised storage containers used? Yes/No

(HAI, HD5, HD6, HD20)

9. Tracking system? (HAI, UD5, HD6, Yes/No

HD20)

10. Listings available? (HAI, HD5,111D6, Yes/No

HD20)

11. Indexes? (HAI, HD6, HD20) Yes/No

12. Comments:

K Off-site Storage

1. Is there an off-site storage area(s) Yes/No

(HD22)

2. If so, leased facility? (1HD21, ]EID22) Yes/No

Location:

3. Assigned responsibility for operation? Yes/No

(HD21, HD22)

4. Procedures for operation? (HDI, HD3, Yes/No

HD21, HD22)

5. Procedures for records transfer? (HDI,

420
HD3, HD21, HD22) Yes/No

6. Access controlled? (HD13, HD21) Yes/No

7. List or index to holdings? (IL4,1, IJD22) Yes/No

8. Turnaround time for retrieval (IIAI,

HD22)

L. Non-Current Records

9. Appraisal is systematic? (HD3, HD21, Yes/No

HD22)

10. Retention scheduling in place? (11ID3, Yes/No

HD21, HD15, HD22)

11. If yes, for which records? (HD3, HD21,

HD22)

12. If yes, who approves? (HD3, HD21)

13. If no, are retention periods applied at Yes/No, ad hoc

all?
If yes, how? (HD21, HD22)

14. Destructions? (HD2 1, HD22)

15. If destructions have taken place, who

approved? (HD21)

16. Transfers to Archival storage? (HD22)

17. Comments:

421
M. Disaster Preparedness and Recovery

Plan in place? Yes / No

Covers Documents and Records? Yes/ No/ Partial

Comments:

N. Policy Management

1. Policies documented as a matter of Yes/No

course?
(HAI., HA2, HA9)

2. Assigned responsibility for policy Yes/No

management?
(BA1, HA2, HA9)

3. Procedures for policy distribution and Yes/No

updating? (HAI, HA2, HA9)

4. Regular policy review? (HAI, HA2, Yes/No

HA9)
II

422
 Appendix 4

TABLE OF ASSUMPTIONS

This table fists the alphanumericalcodes (used in Appendix I and 3) andthe particular
to
assumptions which they relate. It also showsthe sourcethat was usedto gather
data about the assumption. For example,QA. I indicatesthat answersto interview
question (listed at Appendix 1) A. I provided data relatedto this assumption,while
SBA indicatesthat the RecordsManagementSurveyForm (seeAppendix 3) question
BA provided relevant data.

Code Question Data Source

HA Banking Operations - RecordsAvailability and

Use in Risk Management,Assessmentof Financial
Position and Fraud Prevention

HAI The necessaryinformation is availableto manage QA. I -Q6; A.2-Q4;

risk, prevent fraud and accuratelyassessa bank's A. 3-Q4; A.4-Q4,
financial position Q5, Q6; A. 6-Q41,
A. 6-Q4; A. 6-Q7;
A. 6-Q8; A. 7-Q4;
A. 8-Q8.

SO.1; B.4; B. 7;
B. 8; B. 9; B. 10;
B. 11; J.1; J.2; J.8)
J.9; J.10; J. 11; K. 7;
K. 8; N. 1; N. 2; N. 3;
NA

H_A2 Bank shareholders, directors, managers and QA. I -Q5, Q8;

know what information they need A. 2-Q37-A. 3-Q3-1
supervisors
A. 4-Q3; A. 7-Q31
A. 8-Q3.

SO.3; N. 1; N. 2;
N. 3; N. 4.

HA3 Shareholders, directors, managers and supervisors A. I -Q5; A. 2-Q3;

for decision-making, to manage risks, A. 3-Q3; A. 4-Q3;
use records
financial position and monitor banking A. 7-Q3; A. 8-Q3.
assesstheir
practices

423
HA4 Banks in good financial standinghave better record All HD and HE
keeping practicesthan those that have failed
or are questions,plus B2.
in poor financial health C7 andD5.

All survey
questions.
HA5 Banks with foreign connectionshavebetter record All HD and BE
keepingthan those that are local
questions
comparinglocal
bankswith banks
with foreign
connectionsand
with UK data.

A comparisonof
the surveydata of
local with foreign
connectedbanks.
HA6 Completefinancial transactionscan be tracked QA.9-Q5.
easilythrough records
All survey
questions.
HA7 Information providing an integratedoverview of QA.5-QI3; A. 6-
customer,branch and businessunit positionsis Q12; A. 9-Q5.
easily accessibleand reliable
SB.7; C. 11; E.8.
31
HA8 Due to tight regulatory control banking QA.6-Q7; A.2-Q4;
administrativestructuresare hierarchical,with A. 3-Q4; A. 4-Q4;
highly structured vertical flows of information and A. 7-Q4- A. 8-Q4.
consequently information often reachesthe
executivelevel of the organizationtoo slowly or in SO.2
too digesteda form to be of use.

HA9 Internal accountability systemsare clearly defined, QA. 1-Q8; A. 6-Q10

well-documented, implemented and specifythe
types of records that must be kept to sustainthem SB.8; B. 11; N. 1-4.

HA10 Records are more critical in dealingwith situations QA.6-Q4; B-3;

of greater risk (eg, high end loans or valuation and C.3; D. 1.
saleof assets in the caseof a faltering bank).

HB Banking Operations -Attitudes to Records Useand

Management

424
 Shareholders, directorsandbankmanagers QA.I -Q3; A. I -Q9)
the
understand importanceof good information A.2-Q2;A.2-Q5;
management in
practicesand, particular,good A.3-Q2;A.3-Q5;
recordkeepingM termsof establishing A.4-Q2;A.4-Q11;
accountabilityto managerisks,preventfraudand A. 5-Q11;A-6-Q2;
monitor their financialposition A.6-Q19;A.7-Q2-
A.7-Q5;A. 8-Q2;
A.9-Q1.
BB2 Keepingrecordsis not an issueasbankmanagers QA.I -Q4; A.5-Q61
andemployeeswill automaticallywant recordsto A.6-Q7.
be kept that documenttheir actionsanddecisions

BB3 No specialsystemsneedto be put in placeto ensure QA.I A. 5

-Q4; -Q6;
that, oncedocumented,informationaboutactions A.6-Q7.
and decisions
is in
maintained a retrievableand
reliableform

HB4 Attitudesandapproaches to accountabilityand QA.I -Q4; A.2-Q2;

record keeping arethe sameat all levelsof the A.3-Q2;A.4-Q2;
organizationalhierarchy A.7-Q2;A.8-Q2)
A.9-Q1.
HB5 Introductionof automatedtechnology,that is, more QA.I -Q5; A.2-Q4;
computers,will automaticallysolveinformation A.3-Q4; A.4-Q4;
for
problems commercial banks and their regulators A. 5-Q6;A. 7-Q4;
A. 8-Q4.

SO.3.

HB6 Usefulinformationis seenasbeingin automated QA.I -Q4; A.6-Q2;

form, while the term recordsconnotesinaccessible A.6-Q31A.9-Q1*7
hardcopy papers. Similarly,information A.9-Q8;A.9-Q11;
is in
management seen termsof computerization A.9-QI3- A-9-
andsomethingof valueto the strategicpositionof Q14.
the organization,while recordsmanagement seenis
as beingprimarily to do with filing andas.an SO.3
organizationaloverheadcostwhichmaynot yield
value.
HC Banking Operations- Training of Bank
Professionals

HC1 Trainingof bankingprofessionals influences QA.I -Q1; A.2-Q1;

attitudesandapproaches to the useand A.3-Ql; A.4-Ql;
management of informationandrecords in banking A.5-Ql; A.6-Qll
operations A.7-Ql; C.I-

425
HC2 Training of banking professionalscovers QA. I-Ql; A. 2-Ql;
managementcontrol systemsand their relation to A. 3-Q 1-7A. 4-Q 1-1
information management(both allocative and A. 5-Ql; A. 6-Ql;
authoritative aspects) A. 7-Ql; A. 8-Q1,
C. 1.
HC3 Staff responsiblefor record keeping have SB.15
appropriate qualifications and training (eg, suitable
training in records management)

HD Banking Operations and Records

- -Information
ManagementPractices

HD I Responsibilityand authority for record keepingis QA. I -Q7; A. I -Q8;

clearly designated and documented at all levels and A.4-Q7; A. 5-Q9-,
thesepolicies are being implemented A. 6-Q 10; A. 6-
Q11; A. 6-Q15;
A. 8-Q5; A. 8-Q8.
A. 9-Q9; A. 9-Q15;
A. 9-Q16; A. 9-
Q17; A. 9-Q18;
A. 9-Q19; A. 9-
Q20.

SB.14- H. 2; K. 4.

HD2 File control and tracking procedureshavebeen QA.6-Q11; A. 8-

articulated, documented and implemented Q5.

SB.4; 1.1;1.2- 1.3:

1.4;1.5;1.6.

HD3 Guidelineson the creation, maintenance,use and QA.4-Q7- A.4-

disposition of records havebeenarticulated, Q10; A. 5-Q9; A. 5-
documentedand are being implemented Q 12; A. 6-Q10;
A. 6-Q11; A. 7-
Q15; A. 7-Q18;
A. 8-Q8; A. 8-Q11;
A. 9-Q9; A. 9-Q20.

SB.4; H. 2; J.1; J.2;

J.6; K. 4; K. 5; L. 9;
L. 10.

HD4 Correspondenceis delivered,actioned and filed SB.16; G. L) G.2

promptly G.3; G.4; H. 1.

HD5 Incidents of misfiling are low and of little SB.7)-J.3; J.4, J.57-
consequence J.7; J.9; J.10; J.11. I

426
HD6 Incidents of file loss are low and of little SB.7; IA; 1.5; J.3;
consequence J-4; J.7; J.8; J.9;
J. 10; J. 11.

HD7 Information flows with ease through the QA. I A. I

-Q5; -Q63
organization A. 2-Q3; A. 3-Q3,-
A. 4-Q3; A. 5-Q6;
A. 5-Q7; A. 7-Q3;
A. 7-Q4; A. 8-Q4.

SB. 16; G. 1; H. 1.

HD8 Officers appropriately share relevant information QA. I -Q5; A. 2-Q3;

and information systems support such sharing A. 3-Q3; A. 4-Q37
A. 5-Q6; A. 6-Q7;
A. 7-Q3; A. 8-Q3.

HD9 Valuable information can easily be retrieved using QA. 4-Q6; A. 5-Q4;
one integrated in
source one medium A. 5-Q8; A. 6-Q6;
A. 8-Q7.

SB.2; BA; B. 5;
B. 7; B. 9; B. 10.

HDIO Poor or unethical organizational culture spawns All questions in

poor or unethical record keeping subcultures. comparison with
Alternatively, poor and unethical record keeping is data indicative of
a sign of poor or unethical organizational cultures fraud or other
unethical behaviour
from other sources
(eg, newspaper
reports).

HDI I The organizational structure is designed with a QA. I-Q7- A. 6-

clear distinction between specialist record keeping Q153-A. 8-Q87A. 9-
staff and users Q10; A. 9-Q17-

SB. 12; B. 13.

HD12 The organizational structure is designed so that at QA. I -Q7; A. 9-

is
the operational level there a separation between Q 10; A. 9-Q 12;
keeping, custody of assetsand system design A-9-Q18.
record

HD13 Systems and procedures are in place to prevent SB.20; C.6-,C. 17;
E. 13; E. 14; H. 3,
unauthorized accessto record stores
H. 4; H. 5.

427
HD14 Disaster preparednessand recovery plans are QA. I -Q7.
clearly defined and documented
SC.14; C. 15; E. 11;
E. 12; M. 1-3.
HD15 The bank is compliant with legal and administrative QA.4-QlOi A. 5-
for
requirements record keeping and has an Q12A. 6-QI8
awarenessof best practicesfor their businesssector A. 7-Q6; A. 8-Q 11.

SL. 10.

HD16 Record keeping systemsare exclusivelyemployed QA.4-Q8; A. 4-Q9;

in the normal course of business A. 5-QIO; A. 5-
Q1I; A. 6-QI6;
A. 6-Q17; A. 8-Q9;
A. 6-Q 10.

Data from
newspaper reports
relating to
fraudulent
activities.

HD17 Record keeping systems process information in a All SB questions;

fashion that assuresthat the records they create are C.5; C.6; C. 8; C.9;
credible E. 5; E. 6.

HD18 The bank creates records to document all business QA. 6-QI3; A. 6-
transactions so that that documentation is Q20.
identifiable, complete and meaningful
SOA

HD19 Only authorized persons originate records for Only the

particular transactions probability of this
assumption can be
tested. All
questions related to
assumption HD 13
should provide
relevant data.

HD20 Records continue to reflect content, structure and QA. 9-Q20.

context over time
SJ.3; J.4; J.5; J.9;
J. 10; 111; J.20.

428
HD21 Records are preservedin a mannerwhich protects QA.4-Q9; A. 5-
them from accidentalor intended damageor Q11; A. 6-Q17;
destruction and from any modification over time A. 8-Q10.

SB.20; L. 9; L. 10;
11) L. 12; L. 131
14; L. 15.
HD22 Records are preservedin a mannerthat pern-iits QA.4-Q10; A. 5-
their use over time Q12; A. 6-Q187
A. 8-Q11.

SC.14; C. 15; K. 1;
K. 2; K. 3; K. 4; K. 5;
K. 77 K. 81 L. 10;
L. 11; L. 13; L. 14;
L. 16.
HD23 Risk associated with organizational record keeping AA. I -Q9; A. 2-Q5;
practices are known and have been assessed A. 3-Q5; A. 4-Q 11;
A. 5-Q14; A. 6-
Q19; A. 7-Q5.
HE Banking Operations Information and Records
-
Management Practices Technology Use
-
BE I Introduction of computer technology is more QA. I -Q3; A. 2-Q2;
focused on the allocative aspects of information and A. 3-A2; A. 4-Q2;
records (eg, information as resource to improve the A. 7-Q2; A. 8-Q2;
overall efficiency and effectiveness of the business) A. 9-Q 1; B. I
than on the authoritative aspects of information and
records (eg, information as evidence of business
transactions in support of internal management
control and accountability)
HE2 New computer systems have been introduced as QA. 9-QI2.
separate projects and as a result there is little
coordination between them

BE3 Fragmentation of data stores (both electronic and QA. 4-Q6; A. 5-Q5;
hard copy) makes it difficult to pull together A. 5-Q8; A. 6-Q6;
important information A. 6-Q14; A. 7-Q3;
A. 8-Q7; A. 9-Q2;
A. 9-Q'3; A. 9-Q7.

SA. 1; B. 1; B. 2;
B. 3; C. 11.

170
HE4 Bank managementand employeescreate and QA.5-Q4; A. 5-Q5;
in
managerecords electronic form accordingto A. 5-Q8; A. 6-Q5;
their own practices A. 6-Q6; A. 6-QI4,
A. 8-Q7; A. 9-Q7;
A. 9-Q5; A. 9-Q9.
A. 9-Q20.

SH.2.

HE5 MIS systemstend to be ad hoc and user developed QA.3-Q3; A. 2-Q-");

and implemented A. 3-Q3; A. 4-Q3;
A. 7-Q3; A. 8-Q3;
A. 9-Q4.

SC.3; E.3.

HE6 Computer systems,particularly MIS, are linked to QA.9-Q3; A. 9-

the paper-basedrecords from which their data are Q. 14.
drawn so that the data may be verified easily
Surveyquestions
relatedto
automated
transaction
processingand
NUS.

HE7 Personaluser security systemshavebeen QA.9-QI3.

established
SC. 12; C.13; E.9;
E. 10.

HE8 Appropriate input, processingand output controls QA.9-Q3; A. 9-Q5;

have beenclearly established A.9-Q9; A. 9-QI3.

SC.5; C.6; C.8;

C.9; E.5; E.6; E.7;
E. 12; E. 13.

HF Banking Supervision - RecordsAvailability and

Use

I-IFI The necessaryinformation is availableto effectively QB. 31 C. 3; C.61

banking operations to the D. 1; D. 2.
monitor commercial
extent required under Jamaicanlaw

HF2 Bank inspectors/supervisors/auditors experience QB.2; C.6; D. 3;

the information to D.4.
problemsin accessing necessary
monitor commercial banks, in particular to verify
the integrity of financial reporting

430
IBT3 The existing Jamaicanbank supervisionframework Legislation and
is sufficiently explicit on the subject of sourcesof regulatory
information to support effective supervision documentation
coupledwith data
from QB.33,C.3.

HG Bank Supervision -Attitudes to Records Useand

Management

HGI Bank inspectors/supervisor/auditorsare awareof QB. 1 C.81D. 7.

11
the importance of good internal information
managementpractices,particularly good record
keeping, in commercialbanks in terms of managing
risks, preventing fraud and monitoring the bank's
financial status

HH Banking Supervision - Training of Supervision

Professionals

HHI Training of banking supervisoryprofessionals QC.I.

influencesattitudes and approachesto the use of
management information and records in banking
operations
BH2 Bank supervisorsseepoor records and record QC.2.
keeping as an important aspectof operationalrisk
which they must monitor

431
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 Appendix 6

Operational Impact Assessment of Records Creation and Keeping Practices

in Failed Jamaican Commercial Banks

This appendix summarises the discussion in chapter 7 relating to how the failed
banks' record creation and keeping practices affected their accountability
systems,
operations, and competitive viability.

Decision Making The quality of managementdecisions

was weakened by the fact that record
creation and keeping practices
undermined the creation of records
needed to support the effective
operation of accountability systems.
Directors and managersdependedon
these systemsfor accounting and
management information on which they
could base their decisions.
Credit Risk Management Weaknessesin the documentation and
communication of policies and
procedures undermined effective credit
risk management. Credit risk
management also was weakened by
failure to book loans and guarantees,
which presented a distorted picture of
the banks' assetportfolios. Gaps and
errors in customer information files also
prevented banks from keeping adequate
track of customers" credit exposures
and histories. System related errors
in
resulted additional distortions due to
accounting errors that undermined the
banks' efforts to track past due and
non-performing loans. NEssing and
incomplete loan documentation made
recovery of credit-related losses
difficult to impossible.
Market Risk Management The banks' managementinformation
systemswere not geared toward
tracking the impact of interest and
foreign exchange rate fluctuations on
their financial positions and risk
exposures. Even so, the unreliability
and lack of timeliness resulting from
the banks' records creation and keeping
practices undermined the degree to
which the banks' accounting and

435
 .
management ormation could be used
to managemarket risks.
Cost of Operations Cost of operationswas pushedup due
to ineffective cashflow management,
which was itself as a result of poor
quality accountingand management
information. Failure to manage
liquidity effectively resultedin non-
compliancewith statutory reserveratios
for which there were substantial
financial penaltiesand excessexpenses
incurred by having to purchasefundsto
cover liabilities at higher rates. In
addition, poor documentation of
investments,loans and guaranteesall
resulted in direct losses for the banks.
Cash Flow and Liquidity Risk Due to weaknessesin accountingand
Management management information that prevented
the banksfi7ommonitoring the financial
positions and risk exposurescoupled
with lack of sophisticatedreporting in
support of assetand liability
management (ALM) - which was a
function both of managementfailure to
establish ALM processesand system
limitations - it was difficult for them to
assess the level of liquidity they
required to cover operatingexpenses,
daily liabilities and,very importantly,
unexpected liabilities due to operating
losses.
Capital Adequacy Lossesdue to ineffectivelymanaged
risks eventuallyate into the banks'
capital bases.
Proofing and Reconciliation Proofing and reconciliationof
transactions,necessaryto ensurethe
integrity of-the banks' accountingand
management information, was
hamperedby missingor irretrievable
source documentation. One
manifestation of this problem was the
high numberof suspenseand
unreconciledaccounts discovered in the
failed banks.
Internal Control and Audit The results of this study provided no
specific examplesof internal auditors
not being ableto completean audit due
to the absenceor poor quality of
records, as in Akotia's public sector-
basedresearch. However, it is easyto

436
 surmise that internal in
auditors the
failed banks must haveexperienced
such difficulties because the banks'
policies and procedureswere either
missing or disorganised and source
documentsoften were a mess. Auditors
tendedto point to areasof concernsuch
as a high numberof suspenseaccounts,
lossesdue to fraud or in connection
with trades, which they attributed in
art to i)oor record
Corruption and Fraud Prevention As in the public sector, the results of
this study show that prevention of
corruption and fraud is weakened by
ineffectively managedrecords creation
and keeping practices. Increasing
decentralisation of information
processing, information and incentives
created a situation in which it was
difficult for directors and managersto
keep track of all the banks' transactions
and commitments and to monitor
whether these in
were compliance with
policies and procedures. Creation,
distribution and storage of policies and
procedures had deteriorated as the
banks grew, creating confusion about
what was acceptablepractice and
making it more difficult to hold
officials to account. Moreover, in many
cases directors and managerssimply
could not obtain the management
information they neededto monitor
subordinates effectively. Gaps, errors
and inconsistencies in the creation of
source documents and entry of records
of transactions in manual and
computerised accounting systems
rendered much of the information on
which directors and managersrelied
untrustworthy and inaccessible on a
timely basis. In addition, functional
limitations of computer systems
directors and managers from
prevented
obtaining with easemanagement
reports that might have revealed
ftaudulent activity. The general
disarray of records and fragmentation
lent
of records creation and storage
itself to transactional irregularities. It

437
 also practically guaranteedthat
perpetratorswould not be detected.
Casesof failure to createdocuments
and deliberatedestructionof records
clearly indicatethat there were no
mechanismsin placeto ensurethat
transactionswere properly documented
and that that documentation was
safeguarded.Finally, microfilining
led
practices to n-fissingcopiesof
chequesthat preventedthe banksfrom
.ng casesof fraud.
Financial Reporting Here againthe resultsof this study
match those of the public sector studies.
Financialreports relied on the same
accounting data as management
reporting. Consequently, the same
problemswith trustworthinessand
timelinessthat affectedmanagement
information also affected financial
reporting to shareholdersand
regulators. The quality of this
information determined what
shareholdersand regulatorsunderstood
about the banks' In
operations. many
cases, the information was quite
misleading though, as discussed in
chaptereight, not necessarilyalways
deliberatelyso. The quality of financial
reporting highlights the dangers if
regulatorsrely solely on this type of
information in their supervisory
practices.

438
 Appendix 7

Summary of Records Management Policies

and Procedures in Studied Jamaican
Commercial Banks

Area of Coverage Bank A (Failed Bank B (Failed Bank C (Failed Bank D (Failed Bank E (Viable
Bank) Bank) Bank) Bank) Bank)

Date of Policy July 1996 May 19917 May 1996(Note Draft policy only June1991-
that this policy is a datingfrom Administrawn
direct copy of BNS October1998 Policy on Records
Canada'spolicy) aridFiles
Scopeof Coverage customerrecords operationshard recordsof vouchers,registers, Prunerecords
and internal bank copy recordsonly branches,Data credit customer only, definedas
transactions- CentreandGeneral serviceandother essentialrecords
hard copy only Manager'sOffice departmentfiles,
microfilms, video
cassettes,
computer
reports,computer
tapes/cartridges

Responsibilities "It is the No "Branch Yes - extensive "SeniorBranch

responsibility of Managem/Departm statementto the OperationsOfficer
eachBranch and ent Headsmust effectthat adopting responsiblefor
Department designatean andmaintaining ensuringthat
Managerand individual to be recordsretention currentandnon-
Operations responsiblefor proceduresrests currentrecords
Personnelto filing and the with the receiveproper
becomefamiliar departmentheadto
orderly care"andfor
with the Typesof maintenanceof all be coordinatedby establishinga
recordsgenerated recordsandensure designated schedulefor
mid their that the filing department records
appropriate systern/records employees.Role
handling" management of internalauditors CountryCorporate
proceduresis andcompliance Officer responsible
reviewedon a officers alsostated for making
quarterlybasisfor adequate
compliance. - provisionsfor the
storageof old
records

Records Creation No No No No No

Filing while Active No Yes - vouchersto No No Yes - storageand

be filed in accessonly
numericalorder

Retention Yes Yes Yes No Yes- policy

Scheduling providesfor the
establishment of a
RecordsandFiles
Comrmttee.Fairly
extensivewith an
emphasison legal
compliance.Also
of note: only bank
to havespecified
the documentation
andcontrolof
retentiondecisions

Transfer of Inactive Yes - including No Yes Yes - not as Yes

Records detailed detailedas Bank A
proceduresfor andB
boxing, labelling
and useof
TransmittalForm

438
Operation of
Secondary Storage Yes - including No Yes - thoughnot as No Yes
Facility operationof a extensiveasBank
RecordsCentre A
Databaseand for
the conductof a
periodic record
centreaudit

Retrieval of Yes - including No Yes No Yes

Records from useof Records
Secondary Storage RequestForm

Destruction of Yes - including a No Yes - including use Yes - not as Yes

Records statementthat the of forms for detailedasBank A
recordowner requestingand andB
mustauthorize authonzing;
destructionby destructions
signingoff on a
Quarterly
Branch/Departm
ent Retention
Report

Mcrofibuing of No No No No Yes- extensive

Records provisions

Security of Records No No No No Yes

Vital Records No No No Yes Yes - separate

Protection policy on business
resumption-
specifies
duplicationby
microfilming

Sanctions for Non- only for causing No No No No

compliance RecordsCentre
overflow and
congestionwhich
wereto result in
chargesto the
Branch/Departm
ent

439
 Appendix 8

A Record Keeping Risks and Requirements Self-Assessment Tool

Introduction

The author originally developeda version of this assessment tool during a records
for
managementconsultancy Grace Kennedy & Co. Ltd of Kingston, Jamaica. Over
the course of the researchfor this study, the usefulnessof sucha tool in assessingthe
information requirementsof banks and other types of organisationsbecame
increasinglyapparent. Subsequently,, the author hasmademodificationsto the
assessment tool basedon information derived from the field research,ongoing
consulting experienceand feedback fi7omthe staff of Barclay's RecordsServiceson
the usefulnessand layout of the tool.

It should be noted that the International RecordsManagementTrust alsohas

developeda records managementassessmenttool as part of its Principles and
Practices in Managing Financial Records.' The ER_MT assessment tool and the
tool
assessment presented below be
are complimentaryand can usedin conjunction
with one another. It is recommendedthat the assessment tool presentedbelow first be
used to determine organisationalrecords-relatedrisks and requirements.The ERMT
assessment tool then be
can used to determineif organisationrecord keepingsystems
possessthe appropriateinfrastructure and resourcesto meetidentified organisational
information and record keeping requirements. As the IRMT assessment tool was
developedfor public sector agencies,someadaptationmay be requiredto apply the
tool in private sector contexts.

The AssessmentMethodology

The board and managementof a commercialenterpriseultimately are responsiblefor

the
assessing enterprise'saccounting and management information requirements.
Such an assessment becomesparticularly critical to the competitiveviability of an
is
enterprisewhen the external environment volatile or if the is
enterprise expanding
the size or scopeof its business. Although the board and managementof an enterprise
for
are ultimately responsible assessing its information it
requirements, more is
manageable to have key in
staff eachof the enterprise's business areasconductan
information requirementsand risks review, facilitated by an appropriatememberof
senior management.

Steps in the Self-Assessment Worked ExampleQ.

Step 1. Senior management should The f6flowing shows possible rankings
identify and rank key business functions. for a hypothetical set of bank business
Business functions ranked most important functions-

1 KimberlyBarata, Piers Cain and Dawn Routledge. Principles and Practices in Managing Financial
Records: A Reference Model andAssessinent Tool (London: International RecordsManagement Trust,
2001).

440
 be
should given a score of five and those
that are least important should receive a Business Function Ranking
Internal Audit 3
score of one. Note that this step may be Branch Banking 5
if
skipped managementwishesto Operations
concentratethe self-assessment on a Commercial Credit 5
business function. Financial Control 5
specific Treasury Mgmt. 5
Planning and Budgeting 4
Accounting and 4
Analysis
Human Resources 3
Analysis
General Services 2
Legal 3

Step 2. Step 2 entails identifying and The following shows possible rankings
ranking all of a business function's key for the above-fisted Commercial Credit
businessprocesses. The relative area:
importanceof the businessprocessshould
be ranked from one to five on the basisof Business Process Ranking
Credit Poticy Admin. 5
how critical that processis to the Credit Extension 5
realisationof the aims and objectivesof Credit Servicing 4
the businessfunction. Businessprocesses Credit Collection 3

ranked most important should be given a

score of five and those that are least
important a score of one.

Step 3. Following identification of key The following lists possible types of

business processes, the records/ information neededto meet the
information required to support these information requirements of the Credit
processes should be assessedin terms of Extension businessprocess. Note that the
the type of information required to (1) bulk of this information should be found
complete all transactions associated with in the Credit File.
the business process and (2) effectively
internal Details of eachtransaction,including the parties to
support and external
the loan, advanceor other credit exposure(Note:
accountabilities and controls for those must be careful to ensurethat the parties are
transactions. The type and quality of identified as this may affect the ability to recoveron
a non-performing asset. Also must obtain full name,
records required will vary according to info for borrowers
addressand contact all which
the type of commercial activity in which must be kept up'to date) and also whether and, if so,
the enterprise is engaged and the to whom sub-participated,the amount and currency,
in it its the contract, roll-over, value and settlementor
particular manner which conducts dates; the interest rates of an
repayment contractual
business. Directors and managers of interest rate transactionor commitment,the
commercial enterprises therefore can only contractual exchangerate for a foreign exchange
industry transaction or commitment; the contractual
rely to an extent on guidelines or
commission or fee payableor receivabletogether
standards to determine their information payment or receipt; the nature
with any other related
for
requirements, as these may overlook and current estimatedvalue of any security a
loan or other exposure;the physical location and
important requirements that are specific
documentaryevidenceof such security; the nature
to their particular enterprise. and book value of any assetupon which the loan or
other credit exposure is secured, information about
for
margins of securities accepted collateral as a
ratio of assetvalue to value of security. All
securities documentation must be 100% perfect

441

Step 4. For each type of information or
record, assessthe quality characteristics
that are required to meet the requirements
of completing and controlling the
transaction. This step will entail ranking
the relative importance of the quality
characteristic from five for most
important to one for least important. The
list
worked example offers a of possible
quality characteristics though these may
not reflect the requirements of particular
organisations and therefore should not be
taken as representing a definitive list of
quality characteristics.
Information indicating the full extent of credit
facilities extended to eachindividual client and the
status of those facilities; also information relating to
the full extent of credit guaranteedby a single
individual
Details of any off-balance sheetassetorigination,
sale and servicing of various types of credit,
including contractual fee arrangements
Details of credit limits authorizedby management
that are appropriate to the type, nature and volume
of the businessundertaken. Where relevant the
limits should include counterparty,industry sector,
country, settlement,liquidity, interest rate mismatch
and securities position limits.
Information concerningthe factors considered,the
analysis undertakenand the approvalor rejection by
managementof a loan or other credit facility
On a memorandumbasis, details of every
transaction enteredinto m the nameof and on behalf
of another party on an agencyor fiduciary basis
where it is agreedthat the bank is not legally or
contractually bound by the transaction
Reports to managementon the number, type,
industry, counterparty,amountand other details of
credit facilities grantedto track variousrisks
The following shows possible quality
characteristics and rankings for Credit
Files:
Quality RanIdngof Quality
Importance
Created 5
Completeness 5
Accuracy 5
Authenticity 5
Accessibility 4
Comparability 2

Step 5. For each quality characteristic, The f6flowing shows possible levels of
identify the degree to which it is satisfied satisfaction with the degree to which each
by current record creation and keeping quality characteristic is being met:
systems. Those quality characteristics
Quality Ranking of Ranking of
that are fully satisfied should receive a Quality Level of
ranking of five, while those least satisfied Importance Satisfaction
should receive a ranking of one. Time
Created 5 4
should also be taken at this stage to
Completeness 5 3
analyse the underlying reasons why Accuracy 5 3
quality characteristics are not being Authenticity 5 4
if the Accessibility 4 3
satisfied this is case.
Cnmnairahilitv 2

Step 6. Step 6 consists of identifying and The foHowing shows possible types of
the to the organisation if risk and the ranking of those risks for
assessing risks
the information required to transact and each quality characteristic_,.

442
 control the area's businessprocessesis
Quar" Type of Risk Ranking Ranking
not availableor of the desiredquality.
of Con- of
Each risk should be given a ranking of sequence Probabflit
from one to five basedon the perceived Y
Created Potentialfor
consequencesto the areaor the Legal Risk as
5

organisationas a whole, with one being loan is

the least consequential(eg, minor loss) effectively
non-existentif
and five being the most (eg, devastating not
loss with extremelyhigh impact). documented.
Also Credit
Additionally, eachrisk should be ranked Risk asloan
in terms of its likelihood of occurrence, cannotbe
trackedor
from five for most likely to occur to one monitored
for least likely.
Complete- Legaland 5 3
ness CreditRisk
againare
possibleif
documentation
is not
complete.Eg.,
canleadto
uncertainty
aboutthe
partiesto a
loan,theterms
of the loanand
an inability to
track or
monitorthe
loan
Accuracy Sameasabove 5 3
Authenti- Documents 4
city maybealtered
afterthefact
andmy not be
suitableas
evidencein a
legaldispute
Accessib- If file cannot 5
ility befoundthe
partiesto,
termsand
statusof the
loancannotbe
determined
whichcan
resultin loss
dueto Legal
andCredit
Risk, slow
retrievalwill
affect
customer
service
Comparabil Canleadto 3
-ity uncertainty
aboutthe
quality of the
loanandits
legalstatus

Step 7. Step 7 is a calculation to arrive at

the Quality Level and Risk Profile for The following shows a worked example
each type of information or record. First, based on the data supplied above-

443
add up the rankings for all identified
quality characteristicsat Step 4. Next, A) Rankingsfor Qualities
add up the rankings for the degreeto 5+5+5+5+4+2=26
which the quality characteristicsare Minus
satisfiedat Step 4. Subtract the total for Rankingsfor Level of Satisfaction=
the degreeof satisfactionfrom the total 4+3+3+4+3+4=21
for the quality rankings. This will
provide you with a figure that indicates 26-2 1=5 (Quality Level)
the gap betweenthe importance of the ------------------------
information/record quality characteristics Multiplied by
and the level to which theseare being ------------------------
satisfied. Next, add up the rankings B) Rankings for Risk Consequences
assigned in Step for risk consequences 5+5+5+4+5+3=27
.6
and risk probability. Add thesetwo Plus
figures together to obtain the risk profile. Rankings for Risk Probabilities
Then, multiply the figure indicating the 1+3+3+1+4+1=13
by
quality gap the figure for the risk
in
profile order to arrive at the Quality 27+13=40 (Risk Profile)
Level and Risk Profile for each
information/record type. 5x4O=200(Quality Level andRisk
Profile)
Formula: (Sum of Rankings for
Quality Characteristics at Step
4- Sum of Rankings for Level
of Satisfaction at Step 4) x (Sum
of Rankings at Step 6) = Quality
Level and Risk Profile for Each
Record Type

Step 8. Step 7 involves multiplying the The following shows a worked example
ranking for each business function based on the data supplied above-
assigned at Step 1, the ranking for each
business process assigned at Step 2, with Ranking for Commercial Credit =5
the Quality Level and Risk Profile score Ranking for Credit Extension 5
arrived at for each record in Step 7. This Quality Level and Risk Profile 200
figure will result in the Overall Priority
Profile for each type of information, a 5x5x2OO=5000(Overall Priority Profile)
score that will indicate the category of
record for which willit be of the greatest
strategic importance to ensure adequate
record keeping systems and controls are
in place because of the high overall
importance of the business function and
process with which the record is
associated, the low satisfaction with the
current quality of the records and
information in relation to required quality
high risk to the organization due
and the
to failures to meet quality requirements.

444
Using the Results

The Overall Priority Profile provides an indication of the level of risk associatedwith
a particular type of information or record, based on the significanceof the business
function and processin relation to the strategic objectivesof the enterprise,the level
to which the qualities required of the information/record to meetbusiness
requirementsare being met, and the impact and probability of the risks associated
with failure to meet information requirements.

Once the Overall Priority Profile hasbeen determined,the managementof an

enterpriseshould then analysewhether the level of risk is acceptable.This task can
be achievedby preparing a Risk Acceptability Matrix, as outlined by Barry I
2
Terenna. The processinvolves assessingwhether, for eachof the risks associated
with failure to meet a particular required information/record quality characteristic,the
level of risk is acceptableor unacceptable.

If the level of risk is deemedunacceptable,usually becauseof high risk of loss evenif

there is a low probability of occurrence,stepsmust be taken to bring the level of risk
to an acceptablepoint. Note that managementshouldbegin to addressunacceptable
levels of risk for information/recordswith the highestOverall Priority Rating. The
work of lowering levels be by
of risk can achieved reviewing the work done to
identify the possiblereasonswhy quality characteristicsare not being met (at Step 5)
and working out possiblesolutions to deficienciesin recordsand information systems
and controls. The IRMT assessment tool can be used to assistmanagement in the
processof identidng areasof record keeping deficiency. Once solutionsare
identified, they should be implementedand their impact assessed and regularly
monitored.

2 Barry J. Terenna, "Risk Business: Proactive Strategies Help ReduceRecords-relatedrisks," Infopro

3.1 (March 2001): 28.

445
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