Scarborough Building Society suspends finance chief and calls in police

The UK banking sector suffered a fresh blow to its credibility yesterday after the Scarborough Building Society revealed it had suspended its finance director and called in the police to investigate suspected misuse of £103,000.

The revelation came six days after Allied Irish Banks shocked the City with news of a $750m (£530m) fraud in its foreign exchange trading operations in a US subsidiary.

Scarborough, which is the UK's second-oldest building society, said Gerald Waterworth had been suspended on Friday after an investigation into the use of funds from an external bank account that was reserved for administrative expenses. It is thought that the funds were usually used for the day-to-day running of the organisation.

No other employees were the subject of the investigation, the society said.

John Carrier, the chief executive, said none of the society's 250,000 members' accounts were involved in the investigation. "I'm not wishing to trivialise the amount of money involved, but in relation to our pre-tax profits, capital and assets, it is a relatively small figure," he said.

Scarborough has £1.2bn of assets and its last full-year's accounts show pre-tax profits of £7m and capital of £74m.

Mr Carrier added that Mr Waterworth had been a "normal" employee, who joined in 1993 and was appointed finance director in 1997. The post carries a salary of about £86,000.

Scarborough, which dates back to 1846, has retained its mutual status. Its difficulties are likely to reinforce doubts about the quality of management controls within the financial services industry. An internal investigation into the failure of controls at Allied Irish Banks is expected to be concluded by the first week of next month, although the bank has already admitted that the subsidiary which suffered the fraud had a different reporting structure to others in the group.