The Greater Providence Deposit and Trust Embezzlement - Coursework Example

Case 6 THE GREATER PROVIDENCE DEPOSIT AND TRUST EMBEZZLEMENT Discuss how Greater Providence Deposit and Trust might improve its control procedures over the disbursement of loan funds to minimize the risk of this type of fraud. In what way does this case indicate a lack of proper segregation of duties? Control policies and procedures should have been in place and implemented rigorously by bank management. Control activities include proper authorization of transactions and activities, segregation of duties, use of adequate documents and records, and safeguarding of assets and records. With regard to the issuance of bank loans by the branch manager, the internal auditor, and perhaps the state regulatory authorities, should make sure that authorization does not extend to recording and documentation or custody of funds. These should be performed by different employees or officers. The auditors will make sure that the branch manager, being the head of the office, does not override the internal control system in order to commit fraud. It will also ensure that the branch manager does not exceed his authorized limit of loans he can extend without head office or committee approval. The branch manager had physical custody of the checks, or had complete, unchallenged access to them, relating to the transactions he had authorized (the release of the loans). He signed the checks (custodial function) in addition to authorizing the loans. The discharge of these two duties by the same person made it possible for the fraud to happen: This was obviously a violation of the principle of segregation of duties within the internal control system. Moreover, the power of the branch manager over hiring and firing, as well as evaluating performance and promoting the employees, also served as a deterrent to the employees to question anything that the branch manager would want to do. In other words, the branch manager, being the top supervisor who was ipso facto not directly accountable to anyone at the bank branch, had absolute control over what took place in his branch relative to any loan or financial transactions. The trust reposed by subordinates on their superior officer is an obstacle to the disciplined application of any management control system, hence there is a need for an independent audit at certain intervals. The internal auditor should make not only regular audits but also surprise audits on the branch and examine all transactions, check and reconcile all records, and interview the employees on the processes and procedures they actually followed in carrying out their part of the loan transactions. Also, as required by proper control policies, these internal auditors should report to the audit committee of the board of directors, not to the accountant or controller, if no such formal arrangement existed in the bank. It is noteworthy the teller could not even remember (perhaps deliberately or out of fear of reprisal) to whom she paid the loan money. Subordinates would not be expected to insist on seeing the credit report relevant to certain loan applications, for example, because of the fear of being rebuked for overstepping her duties or for challenging authority, or because of fear of being fired for other, “manufactured” reasons. Such act of interposing properly belongs to the auditors. Thus it cannot over- emphasized that independent audits, which should cover all loans, not just loans of significant amounts, should be conducted on regular basis in order to prevent fraud. And surprise audits will make sure that the banks branch managers are always on their toes. 2. Discuss how Greater Providence might improve its loan review procedures at bank headquarters to minimize its fraud risk. Was it a good idea to rotate the assignment of loans review clerks? Why or why not? The rotation of bank loan review staff may have been done deliberately by the branch manager in order to erase any trail of his irregular or criminal activity. But there are good justifications for staff rotation which is done in many business organizations - such as to discover possible fraud by incumbent employees, to train employees to be able to perform other tasks in case of sudden exigencies, and generally for staff development. In this particular instance, however, it worked to the disadvantage of any control system that might have been originally installed. It turned out that the rotation of employees assigned to review loans was not a good idea after all. With regard to the loan review procedures, the branch office head should be required by headquarters to make a report of all loans made so that it can be checked whether he fully adhered to his authorized limit. The increase of authorized limit should also be thoroughly examined before it is granted, considering that it can provide an opportunity for abuse. All loans granted of any amount should also be reported to headquarters for the purpose of checking, including all the supporting documents such as credit history and credit record of the borrowers. The fact that the branch manager was able to authorize and release loans way beyond his mandated limit bespeaks of a very loose control system and very lax or negligent management at the head office, and the auditors and executives responsible for such a state of affairs deserve to be investigated, and if found guilty, fired. 3. Discuss whether Great Providences auditors should have been able to detect this fraud. Yes, the auditors should have been able to detect this fraud early enough. Even if the branch manager happened to have an engaging personality and/or wined and dined the auditors, this fact should not make them forget their mandates to do their job with exhaustive diligence; it should not deter them from examining every detail of the branchs transactions, including all the supporting documents and from reconciling all records so that transactions follow the established control policies. While it is true that there are human factors that can influence the behavior of all employees, even auditors, constant reminders of the auditors primary responsibility to safeguard the assets of the business should be practiced. Auditors who do not internalize and practice the discipline that they are required to follow should be subject to sanctions by management. 4. Are there any indications that the control environment at Greater Providence may have been deficient? If so, how could they have contributed to this embezzlement? The control environment includes commitment to integrity and ethical values which should not only be preached but also practiced by everyone especially by the members of management. Management should demonstrate by example as well by its actions in punishing violations and rewarding good ethical behavior of employees. Failure in this area will encourage subordinates to think that it is alright or that it is tolerated to do some circumventing of standards of good ethical conduct. The other elements of the control environment are management philosophy and operating style, organizational structure, the independent audit committee, methods of assigning authority and responsibility, human resources and practices, and external influences. In relation to the issues that arose from the Greater Providence case, some looseness in the management control system and lack of orientation of employees on their roles in ensuring that the goals of the company are pursued can be inferred. Further, the banks management is evidently deficient in terms of instilling the proper ethical values and integrity of officers and employees. It would be recommended that the board look into where in the control environment these deficiencies lie. This writer believes that the deficiency or laxity of the control environment contributed to the embezzlement. With relevance to the control environment, this writer would like to point out a particular aspect that should be looked into – that of installing a code of ethical conduct of employees. Training should be conducted so that employees and officers would be able to make ethical decision in specific situations. Motorola, for example, developed some 80 short cases which training participants had to analyze. They had to make decisions on specific situations requiring ethical judgment. Then these were compared to the decisions made by senior management to determine if these were in keeping with the companys code of conduct. (Verschoor 2003, cited in Hitt et al 2003). Such kind of training can instill the proper attitudes in the employees that can improve the control environment. The fear that employees harbor in their hearts, which inclines them to ignore or gloss over irregularities or violations committed by their superiors, can make it difficult for fraud or theft to be prevented or discovered. An idea that authors Romney and Steinbart may find useful to include in their future editions is that of whistle-blowing. A whistle blower is an employee who discloses illegal or unethical conduct on the part of others in the organization. According to Hitt et al (2005), management should encourage and protect whistle blowers and should indicate internal channels through which they can report violations before these can explode in the media to damage the firms reputation. According to research, valid whistle blowing can be encouraged if management can clearly communicate whistle-blowing procedures to all employees; allow for reporting channels in addition to the chain of command or reporting incidents to ones boss; thoroughly investigate all claims based on a consistent procedure; protect whistle blowers who make valid claims; provide moderate financial incentives or rewards for valid claims; and publicly celebrate employees who make valid claims (Miceli and Near 1992). In the case of Greater Providence, the commission of the fraud by the branch manager may have been prevented if a whistle-blowing policy had been in place. BIBLIOGRAPHY Hitt,M.A., J. Stewart Black, & Layman W. Porter. Ethics and Social Responsibility. Boston, MA: Pearson Custom Publishing, 2005 Romney, Marshall B & Paul John Steinbart. Accounting Information Systems. 9th ed. Upper Saddle River, New Jersey: Prentice Hall, 2003 Miceli, M.P. & J.P. Near. Blowing the Whistle. Lexington,. MA: Lexington Books, 1992 Read More