Derivatives are nowadays widely used globally both for speculative and
hedging purposes. However, as experience shows, inadequate use of derivatives
may cause severe problems and even bankruptcy of firms. Thus, it
is essential to help organizations design a robust proactive governance
and internal control structure, which will help to prevent new financial
debacles and scandals when using derivatives. Taking into account the
frequent use and the growing fraud caused by derivatives, the aim of the
paper is to identify considerations for internal control important to
ensure better governance of firms using derivatives. The main findings
are based on an analysis of interviews that were conducted with experts
directly or indirectly involved with derivatives from different European
countries. The interviews were semistructured following the approach
proposed by Patton (1990). An analysis of the data collected from the
interviews was carried out using a thematic approach. The paper identifies
and analyzes the main “sources” of derivatives misuse, including
poor design and mis-categorization of instruments, convenience to blame
derivatives, unsophisticated players, insufficient regulatory environment,
poorly designed internal controls, inadequate communication, poor firm
culture, etc. It also provides an extensive analysis of the main recommendation
for internal control concerning awareness of derivatives design,
the human aspects, regulations, communication, knowledge, and training.
Sound internal controls could avoid new debacles without adding other
restrictions to the market. Moreover, it provides recommendations for
internal control important to ensure better governance of firms using
derivatives.peer-reviewe
