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Control Activities

Control activities refer to policies and procedures that ensure the implementation of the instructions of the management. Control activities take place at all levels and in all functional units of an enterprise. In investment banks in mature international markets, control activities include authorization, performance evaluation, information processing, physical object control, and segregation of duties. Table 8.9 shows the contents of the work on each of these fronts.

Due to the large number of business units and complex relations within an investment bank, segregation of duties is especially important. It is the first line of defense against insider trade. Without exception, investment banks in mature international markets require strict segregation to avoid conflicts of interest and insider trade. The segregation affects the investment banking business, proprietary business, entrusted investment management business, securities research, and securities investment counseling business in terms of staffing, information, accounts, and office sites.

Information Communication

Information processed in an investment bank includes internal information and external information. Internal information includes external regulation information and industrial information. Information communication in an investment bank includes lateral communication between employees in the same division, vertical communication between employees at different levels of the hierarchy, and cross-communication between different divisions. Thanks to the rapid progress of computers and relevant information technologies, investment banks in mature international markets currently conduct their information communication through excellent computer, cell phone, or other multimedia platforms efficiently and without obstruction. Therefore, information communication does not constitute an internal control issue requiring much attention from investment banks. All employees of an investment bank should understand their respective positions in the corporate structure and their relations with each other. They must also conduct effective communication with people from outside groups such as clients, regulators, and shareholders.


The previous discussion about the governance structures of investment banks in mature international markets mentioned that effective supervision is an indispensable safeguard for the sound development of the company. In U.S. markets, the role of the board of supervisors has been increasingly diminished. Most investment banks in the United States don't have a board of supervisors, and the duty of supervision is left to the audit committee or the risk-management committee under the board of directors. However, because the number of board of directors meetings is limited, and most of the directors are outside directors, it has become impractical to timely and effectively track the operation of the company. To a great extent, this has magnified the decision-making power of the management of the company. Lehman Brothers amassed a deficit of USD 2.8 billion in the first two quarters of 2008, but it wasn't until then that the discontent of the investors over the deficit forced the company to reshuffle its management and

TABLE 8.9 Overview of Control Activities of Investment Banks in Mature International Markets

Overview of Control Activities of Investment Banks in Mature International Markets

dismiss several international business executives. Therefore, how to enhance internal supervision is a question that needs to be addressed urgently, even by investment banks in mature international markets. Under current supervision systems, it is worth considering to raise the frequency of audit committee or risk-management committee meetings or to strengthen the duties of outside members of the board of directors, among other measures.

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