Accounting information system
Howdid Guy commit the fraud, conceal it, and convert the fraudulentactions to personal gain?
Guy was able to commit the crime by taking irregular loans from thebank. He took bogus loans that were 90-day notes, which did notrequire collateral. He took loans ranging from $10,000 to $63,500.When each loan matured, Guy would apply for yet another loan orsimply rewrite the old load. He used the funds from the rewrittenloans to pay the principal and the interest that was due. He was ableto mask the misconduct by taking advantage of his position in thebank. He was a bank manager, and was trusted to carry out suchduties. He was also able to conceal the crime by using other people’snames, including his wife and friends’. He also used a non-existentname, however, with a real social security number. Guy was able toconcert the fraud to personal gain by taking advantage of the teller,Marciea Price, who trusted him as her supervisor, hence could notsuspect that anything was going wrong. The teller cosigned the checksand he later cashed the checks. At times, he could even get the cashhanded to him directly. He also managed to benefit from the crime byusing his authorization to make consumer loans up to a certain limitwithout the approval of the loans committee.
Goodinternal controls require that the custody, recording andauthorization functions be separated, explain which of thosefunctions Guy had and how the failure to segregate them facilitatedthe fraud.
According to Bessis (2011), segregation of duty is a concept ofhaving more than one individual to complete a banking task. The aimof separation of duties in business is to help the internal controlinstruments curb fraudulent acts and such. This concept is similar toseparation of power in politics and governance (Borio and Drehmann2009). In addition, the segregation of duty allows a bank or norganization to make individuals accountable for their actions aswell as ensure that the organization remains at constant attachmentto the set controls. At Greater Queensland Bank, Guy held thefunction of authorization, as he was the manager. He was allowed bythe bank’s structure to make consumer loans, which however had acertain dollar limit. This means that the loans committee was notinvolved in the task. This is a banking industry standard (Laeven andValencia 2010). Guy’s loan approval limit was $10,000. However, hewas able to bypass this limit and make loan applications which werewell beyond the set limit. It is advisable that a loan applicantproduce their documents for the purposes of identification before theloans committee approves the request (Reinhart and Rogoff 2013). Someof the documents that are needed are a copy of the driver’s licenseand social security number on hard copy. Additionally, instead ofmaking reimbursements in terms of hard cash, the funds are supposedto be transferred into the applicant’s bank account. Incidenceswhere cash is directly transferred to one of the bank’s employeesshould be avoided. Guy received the funds directly from the bank’steller, which was a loophole for the fraud.
Identifythe preventive, detective, and corrective controls at the GreaterQueensland Bank and discuss whether they were effective or not.
The preventive control address the issue of the $10,000 loan limit.It is recommended that the bank’s loans committee approves all theloans. There were not measures in place to ensure that thispreventive control was enforced. Additionally, all the loanapplications are supposed to include the applicant’s credit record.Should this preventive measure have been followed, fake names couldnot have been used to get the funds. Given that the bank had droppedits computer services arrangements with another financial institutionof the same capacity, they were not in a position to ensure bankingeffectiveness. On detective controls, Greater Queensland Bank’sauditors failed to look through all the loans and note the loanswhich were larger than normal. Given that the operations managementdepartment regularly rotated the clerks, follow up became a hardtask. The corrective control identified is the cover of losses by thebonding company. From the president of the bank, down to the manager(Guy) and the teller. Another important corrective control at thebank is supervision and monitoring. This duty is part of themanagement function (Haldane 2011). The bank has policies forsegregation of duties, independent checks and verifications. This isan element of monitoring what goes on in everyday basis. Mr. Guy wasassigned the duty of supervising and monitoring the employees.However, due to lack of sufficient monitoring measures to keep themanagement under check, the fraud took place. Were it not for theanonymous email that Tony Moss, the president of the Bank receivedregarding an employee who was making bogus loans, the bank wouldnever have caught Mr. Guy committing the fraud. As such, the bank didnot have effective and strong control checks as it would havedetected the crime early enough.
Explainthe pressures, opportunities and rationalizations that were presentin the Guy fraud.
Most people are affected by some aspects of their lives, such ashabits and social engagements. According to Fiedler (2011), one ofthe most notorious habits is gambling. In America, there are millionsaddicted gamblers, whose gambling habit has destroyed their jobs andfamilies. Guy’s gambling addiction was responsible for the mountingfinancial pressure. Some winnings were most probably the greatestmotivators to his gambling habit. As such, he may have wanted toinvest more in the gambles, which unfortunately meant that he had tofraud the bank. The main opportunity that Guy took advantage of wasthe trust that the bank, fellow workers and family gave him. None ofthese people would for a second think that he would go out of his wayand act in the way he did. Guy was therefore able to bypass thebank’s internal controls and get a way of avoiding detection by thesystem.
Discusshow Greater Queensland Bank might improve its control procedures overthe disbursement of loan funds to minimize the risk of this type offraud. In what way does this case indicate a lack of propersegregation of duties?
Greater Queensland Bank needs to review samples of disbursement ofloan funds on a regular basis so to note any anomalies. According toGorton (2009), missing documentation is one of the most crucialindicators of fraud. As such, the bank needs to review all thedocumentations to gather information about the loan beneficiaries andtheir credit records. Additionally, while disbursing the funds, thereis need to have a supervisor whose function is to regularly reviewthe documentation, and who will notify the authorities and otherthird parties should they realize that there are some irregularities.The bank also needs to review its loan disbursement policies(Boudriga et al. 2009). According to Turner (2009), modern bankingpractices need to have a clear board whose function is to monitor thedisbursement procedures. One of the anti-fraud measures that havebeen implemented by banks is clear segregation of duties (Pozsar etal. 2010). The bank needs to clearly segregate the loan application,approval and disbursement duties to ensure that fraudsters are keptat bay.
Discusshow Greater Queensland might improve its loan review procedures atbank headquarters to minimize its fraud risk. Was it a good idea torotate the assignments of loan review clerks? Why or why not?
Thebank’s president, board and all other top management should ensurethat they design and implement a system for data management. Thissystem is to be used for keeping track of the bank’s outstandingloans and collaborating with the internal auditors to detect anyirregularities. Some aspects such as overlooking the loan’svalidity should be taken seriously. The management also has to ensurethat all loans which have been approved and lack credit report shouldbe cancelled as soon as possible. Additionally, loan applicationswhich exceed the set limits should be identified and flagged down aswell. The banks should also ensure that they create a clearcommunication channel for reaching the customers who have made loanapplications so that they can inform them of any irregularities thatmay be noted. Gerali et al. (2010) say that in many fraud cases, thedetails that are provided are used devoid of the knowledge andapproval of the owners. Physically contacting the persons whosedetails are used in loan applications would help to stop a big numberof frauds. Generally, it is important for the banks to have externalauditors to look into loan records and identify any irregularities.It is not wrong for banks to rotate review clerks (May andArinaminpathy 2010). This is because it helps to stop any furtherfrauds by stationing someone at one place for too long.
Discusswhether Greater Queensland’s auditors should have been able todetect this fraud.
In the contemporary banking world, the function of the bank auditorsis to look into the bank transactions and other forms of moneyexchange (Gelos 2009). For the case of Greater Queensland Bankauditors, they were supposed to inspect loans which exceeded thelimit, which the bank had set. The bank’s loans limit was $10,000.However, Guy, as the manager, was tasked with overlooking all theloans applications. It would seem out of the ordinary if any otherparties were involved in counterchecking the loan application detailsand advising the loans committee on the same. However, due to theprotocol, the auditors had to in the long run look at the loanapplications and advise the bank’s loans committee. Guy was howevergiven the advantage of controlling any loan applications that reachedthe bank’s auditors. He categorically set aside his fraudulentapplications and block the auditors from detecting it. From oneperspective of argument, the auditors were in a position of detectingthe fraud. However, from the realistic perspective, the auditorscould not detect the fraud, as the fraudulent loan applications neverreached them in the first place.
Arethere any indications that the internal environment at GreaterQueensland may have been deficient? If so, how could it havecontributed to this embezzlement?
In banking, Alegria and Schaeckm (2008) stress the need of having aninternal environment which favors effective and smooth flow of alloperations. This is a situation that is categorized by operationsthat follow the federal law to the letter, and one that ensures thatall the employees work with a certain code of conduct. At GreaterQueensland Bank, there are indications that indeed the internalenvironment did not meet the above description, and was thusdeficient. Before Guy’s fraudulent operations were discovered andbrought to the attention of the bank’s president and theauthorities, the bank had been fined $50,000 after accepting thatthey did not make any reports regarding transactions that exceededthe set $10,000 limit. The company was also accused of inflatingtheir assets and consequently overestimating their capital surplus inattempts of misleading the public and authorities that their balancesheet was a strong one. Therefore, Mr. Guy may have noted that indeedthe bank was not dedicated to honesty. According to Schein (2010),organizational culture is an important factor in determining thepersonal conduct of the employees. Should an organization create aculture of dishonesty, this will automatically influence theemployees. As such, Mr. Guy thought that honesty was not a priorityat the bank, and he somehow found a rationalization for hisfraudulent dealings. It is also not certain whether other employeesat the company are taking advantage of the deficient internalenvironment to do exactly what Mr. Guy had done.
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