LIBOR Scandal: SEC, UBS, and Failed Auditor Oversight
This paper examines the accounting irregularities and missing internal controls that enabled the LIBOR (London Interbank Offered Rate) manipulation scandal, with particular focus on the role of UBS and its external auditors. The paper traces how banks collaborated to manipulate benchmark interest rates affecting hundreds of trillions of dollars in global securities and loans. It analyzes the SEC settlement with UBS, the internal control deficiencies identified by regulators, and the obligations of external auditors under GAAP, IFRS, and Sarbanes-Oxley. The paper argues that Ernst & Young, as UBS's external auditor throughout the scandal, failed to flag material weaknesses in internal controls despite years of documented criminal activity within the bank.
- Introduction to the LIBOR Scandal: LIBOR's global role and origins of manipulation
- Banks, LIBOR, and the Mechanics of Manipulation: How banks colluded to alter benchmark rates
- UBS and the SEC Settlement: SEC charges and UBS structured notes fraud
- Internal Control Failures and Regulatory Requirements: DoJ settlement terms and required internal audits
- External Auditor Negligence: Ernst & Young's failure to flag misconduct
- Conclusion: Auditor accountability and unresolved oversight gaps
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What makes this paper effective
- Uses direct primary-source quotations — including SEC statements, FSA findings, and the DoJ settlement terms — to ground its argument in documented regulatory record rather than secondary interpretation alone.
- Connects the specific misconduct at UBS to broader auditor obligations under GAAP, IFRS, PCAOB standards, and Sarbanes-Oxley, demonstrating awareness of the regulatory framework.
- Maintains a clear analytical throughline: the scandal was enabled not only by internal actors but also by external auditors who failed their oversight duty.
Key academic technique demonstrated
The paper effectively integrates block quotations from regulatory and legal documents to support its claims. Rather than paraphrasing settlement terms, it reproduces the DoJ and SEC language verbatim, allowing the sources to speak directly to the argument about inadequate controls. This technique lends legal and institutional authority to what could otherwise be a purely descriptive account.
Structure breakdown
The paper opens with a contextual introduction explaining LIBOR's function and global significance, then narrows to the mechanics of manipulation. It next presents the UBS–SEC settlement as a case study, followed by analysis of the specific internal control requirements imposed by regulators. The paper concludes by indicting Ernst & Young for failing to identify and report material weaknesses during five years of documented criminal activity. The argument flows from general context to specific case to accountability.
Introduction to the LIBOR Scandal
The London Interbank Offered Rate (LIBOR) was the recent subject of collusion among some of the world's largest banks to manipulate benchmark exchange rates. No one knows for certain when these banks began manipulating the rate, but some reports indicate these activities began as early as 2003, or possibly much earlier (McBride, Alessi, & Sergie, 2015). The LIBOR rate represents a benchmark interest rate at which banks lend to one another in the London interbank market. The rate is calculated daily based on submissions from between eleven and eighteen banks, each of which submits its average borrowing rate for the day.
The LIBOR rate was considered a fairly reliable benchmark for determining interest amounts used in short-term transactions, and it carried indirect implications for a wide range of international economic activity around the globe. For example, hundreds of trillions of dollars in securities and loans are based on the published LIBOR rate, including everything from government and corporate debt to auto loans, student loans, and mortgages (McBride, Alessi, & Sergie, 2015). This analysis examines the role of banks' external auditors and their negligence in overseeing internal controls with reference to the LIBOR rates that UBS submitted.
References
Debevoise & Plimpton. (2015, May 20). United States of America v. UBS AG. Retrieved from SEC: https://www.sec.gov/divisions/corpfin/cf-noaction/2015/ubs-ag-052015-506d.pdf
McBride, J., Alessi, C., & Sergie, M. (2015, May 21). Understanding the LIBOR scandal. Retrieved from Council on Foreign Relations:
McKenna, F. (2012, July 6). Where was auditor PwC when its client Barclays gamed LIBOR? Retrieved from American Banker: http://www.americanbanker.com/bankthink/where-was-pwc-when-barclays-gamed-libor-1050689-1.html
SEC. (2015, October 13). UBS to pay $19.5 million settlement involving notes linked to currency index. Retrieved from SEC: https://www.sec.gov/news/pressrelease/2015-238.html
Treanor, J. (2012, December 19). Two former UBS employees charged in U.S. over LIBOR. Retrieved from The Guardian: http://www.theguardian.com/business/2012/dec/19/ubs-1bn-libor-payments-to-brokers
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