CASE 8.9
SOCIETE GENERALE
Synopsis
In late January 2008, Societe Generale, France’s second largest bank, startled the world’s
capital markets when it announced that it had incurred a 6.4 billion euro loss over the three-day
period January 21-23, 2008. That loss wiped out twenty percent of the prominent bank’s capital.
Even more shocking, Daniel Bouton, Societe Generale’s chairman and CEO, reported that the
huge loss was attributable to the “unauthorized activities” of one “rogue trader.” The securities
trader was a young man by the name of Jerome Kerviel who had been assigned to a small
department in Societe Generale’s large equity derivatives division.
This case focuses on three key issues raised by the Kerviel fraud. First, this case
examines the question of how one low-level employee could circumvent the sophisticated
Finally, this case addresses the surprising decision made by Societe Generale to
“backdate” the 6.4 billion euro loss that resulted from the unauthorized trades made by Jerome
Kerviel in January 2008. Although that huge loss occurred in 2008, the bank included the loss in
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350 Case 8.9 Societe Generale.
Societe Generale—Key Facts
1. In 2000, Jerome Kerviel began his career in Societe Generale’s “back office” where his
duties included monitoring the bank’s securities traders to ensure that they complied with
company policies and procedures.
2. In 2004, Kerviel was promoted to a new position in the bank’s securities trading division;
Kerviel’s new job involved making “plain vanilla” trades involving derivatives.
4. Societe Generale pioneered the development of financial derivatives and developed
5. France’s auditing profession was not firmly established until the late 1960s when its
6. In 2003, France adopted a series of reforms prompted by the Sarbanes-Oxley Act.; these
7. Among other measures, the 2003 reforms mandated auditor rotation, prohibited auditors
8. In France, public companies must have their financial statements audited jointly by two
independent accounting firms.
9. The joint audit requirement has been very controversial; critics claim that it unnecessarily
increases the cost of an audit, while having a minimal impact on overall audit quality.
10. The 6.4 billion euro loss incurred by Kerviel in January 2008 was backdated by Societe
11. Societe Generale’s two audit firms were criticized for endorsing the unusual accounting and
12. Critics of IFRS used the Societe Generale incident to support their claims that nations
Case 8.9 Societe Generale 351
Instructional Objectives
1. To demonstrate how political and social factors influence the development and evolution of
a nation’s accounting profession and independent audit function.
2. To demonstrate that independent auditors within different countries face similar challenges
in their efforts to satisfy their professional responsibilities.
Suggestions for Use
Here is another case that provides students with a brief history of a specific nation’s
accounting profession and auditing discipline. One strategy that I have used in introducing an
international case is to ask for a show of hands among students to identify those that have visited
the nation in question. Then, I ask those students to provide a brief overview of their
experiences in the country including their views on the country’s culture and similarities and
dissimilarities with the United States. I also ask them to share any particular insights that they
Suggested Solutions to Case Questions
1. Consider asking your students to research recent developments impacting the accounting
profession and auditing discipline across the European Union. In particular, you might assign
one or more students to report on implementation issues regarding the new “8th Directive.” The
352 Case 8.9 Societe Generale.
2. Although you may disagree, I believe that most accountants would find little conceptual
support for Societe Generale’s decision to backdate the 6.4 billion euro loss. In fact, I don’t
believe that I found any articles or other sources that explicitly defended that decision on
3. The U.S. accounting profession does have an exception comparable to the “true and fair
override” in IFRS—although this exception is technically not a part of GAAP. This exception,
which is integrated into Rule 203 of the AICPA Code of Professional Conduct, is also
incorporated into the professional auditing standards at AU 508.14. Following is an excerpt
from that paragraph.
“If, however, the statements or data contain such a departure [a departure from GAAP] and
Hypothetical Scenario: Company B has a loss contingency that is both probable and that
can be reasonably estimated. SFAS No. 5, “Accounting for Contingencies” (pre-
codification), requires reporting entities to record a loss and an offsetting liability for such
items. Nevertheless, Company B chooses not to comply with that requirement. Why?
4. Following is a list of key differences between the standard audit report under GAAS (see
AU 508.08) and the audit report shown in Exhibit 4.
Case 8.9 Societe Generale 353
1. The most obvious difference between the two reports is the fact that the French audit
report is much longer than the standard U.S. audit report.
2. Of course, another obvious difference is the fact that the French audit report is signed by
two audit firms, while a U.S. audit report would be signed by one audit firm.
It seems readily apparent that the standard French audit report is more informative than the
standard U.S. audit report. The key information advantage of the French audit report stems from
the inclusion of the “Justification of Assessments” section. That section provides insight on
major challenges or issues that the auditors faced during their engagement and how those
challenges or issues were addressed.
5. Listed next are the three key internal control objectives reported for Societe Generale in this
case:
• To detect and measure the risks borne by the Company, and ensure they are adequately
controlled;
354 Case 8.9 Societe Generale.
Two of Societe Generale’s internal control objectives parallel standard internal control
objectives in the U.S. The “reliability of financial reporting” objective in the U.S. is very similar
to the second of Societe Generale’s internal control objectives. However, notice that the latter
6. Apparently, the only two countries to require that public companies be jointly audited are
France and Denmark although joint auditing is permitted in most countries. According to my
research, several European countries have at least considered adopting a joint-audit system. In
recent years, the most serious initiative to move to a joint audit system has been in Belgium. At
7. Listed next are risk factors common to banks. In parentheses, I have indicated whether the
given item is an inherent, control, or detection risk factor. If you want to expand this question,
you might consider asking your students to rank order these risk factors in terms of their
importance or consequences for a given audit engagement team.
Case 8.9 Societe Generale 355
(Inherent: periodic audits by governmental auditors should decrease the risk of financial
statement misrepresentations; Control: again, governmental regulation and oversight serves
as a “shadow” internal control system for companies in highly regulated industries)
The financial health of the banking industry and of individual banks is significantly influenced by
Large volume of transactions (Inherent: a large volume of transactions increases the risk of a
material misstatement in an audit client’s accounting records; Control: breakdowns in
control systems are more likely when there is a high volume of transactions; Detection: a
high volume of transactions increases the likelihood that misstatements will be missed by