Pwc Case Study

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Investigation into foreign exchange losses at the National Australia Bank 12 March 2004

Mr David Krasnostein Chief Legal Counsel National Australia Bank Limited Level 24 500 Bourke Street Melbourne Vic 3000 12 March 2004 Dear Mr Krasnostein Report on investigation into foreign currency losses Please find attached PwC’s report resulting from our investigation into foreign exchange losses at the National Australia Bank. Your faithfully PricewaterhouseCoopers

Craig D Hamer Partner

P G Rivett Partner

About this report and our investigation
This report presents the findings of the PricewaterhouseCoopers investigation of the $360 million foreign exchange losses (the losses) incurred by National Australia Bank (the National), which were announced to the market in January 2004.

The scope of our investigation
PricewaterhouseCoopers (PwC) was appointed by the National’s Chief Executive Officer which was ratified by the Principal Board. PwC provided status updates to the National’s Principal Board Risk Committee. The terms of reference were to: investigate the sequence of events and trading activities that led to the losses prepare an analysis of the losses and how they occurred, with an initial focus on foreign currency option transactions entered into on or after 1 October 2003 identify key policies, procedures, systems and control failures within the foreign currency options trading business responsible for the losses investigate whether any customer of the National or other third party incurred a direct or indirect loss as a result of the events. During our investigation we provided periodic updates to the National’s Chief General Counsel, the Chief Executive Officer, the Chairman of the Board and the Principal Board Risk Committee. We also liaised closely with APRA and from time to time with Australian Federal Police and ASIC. We were not asked to establish the amount of the losses. This task was conducted by management and audited by KPMG. We were asked by management to perform a limited review to ensure the procedures used by management were reasonable. Our investigation was confined to foreign currency option transactions as described above. We did not review the transactions of any other desks within the National’s trading activities.

Our investigation
The findings of our investigation are based on facts and, where appropriate, our opinion. We used a number of different methods to obtain the evidence supporting the facts, including: analysis of trading records forensic acquisition and analysis of electronic data analysis of other records, including minutes, internal and external audit reports and communications with regulators interviews with staff, directors and third parties analysis of telephone recordings. Our investigation involved conducting formal, recorded meetings with over 45 National staff, some of the National’s directors and former directors. We conducted many more informal interviews with National staff and third parties, and reviewed several thousand emails, numerous reports and a database of some 10,000 transactions. In addition, we accessed and analysed the National’s tapes that contained recorded telephone conversations of the foreign currency options traders in the dealing room.

(i)

Given the limited time in which we were required to complete our investigation, we made judgements as to how to focus our attention and allocate our resources among a number of issues. The people we interviewed were not under oath or legal compulsion, and we made judgements as to their credibility and the weight that should be assigned to their views and recollections. We have not sought to verify our findings with any of those interviewed, and instead have relied upon the evidence. However, we have confirmed with key people that we have been provided with all relevant reports and information relating to the trading losses. Due to the sensitivity of the matters in this report and the timeframe of...
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