Introduction
The case study in this paper is based on Greater Providence Deposit and Trust in which an employee in management embezzled funds in loan disbursement.
This discussion focuses on the improvement of control procedures in disbursement of loan funds, loan review procedures and the role of segregation of duties in this fraud as well as the auditors in detecting the fraud and the control environment of greater providence in terms of deficiency.
Improvement of Control Procedures in Disbursement of Loan Funds
Greater Providence Deposit and Trust needs to be aware of the fraud risks it faces especially in its dealings with loans. This will require the improvement of its internal control systems to be able to identify, detect, mitigate and prevent fraud (KPMG, 2006). There is need for proper authorization of transactions and activities in light of loan disbursements.
This calls for the proper controls in the authority of loan disbursement whereby when authority is given there are measures to ensure that the limit of authority is actually followed. It is recommendable for the segregation of duties in ensuring proper authority (Romney & Steinbard, 2009).
This will require that although the branch manager has the authority to make consumer loans, the limit is reduced and revised while the actual processing of such transactions is checked by another person. Further, the authority needs to be improved by increasing the number of people that can authorize loans and making provisions for double signatures from the authorities (KPMG, 2006).
It is necessary to ensure the changes and rotation of top management in positions of authority such as branch management over certain periods with other requirements of vacations regularly to allow the review of their work (Romney & Steinbard, 2009). The actual requirements for loan eligibility have to be adequately followed. This will require the checks for security with the scrutiny of the records of the client credit history.
Greater Providence also requires the proper screening of the background of employees especially if they are considered for management positions and for opportunities that can lead to fraud such as accessibility to loans (KPMG, 2006). This scrutiny is for the financial records, criminal records, past employment and lifestyles that can pose as fraud risks.
There is need for regular and periodic audits for the whole loan process and not just few transactions with the inclusion of external audits. The company should also engage in effective fraud detection systems and software and create a fraud mitigation culture while encouraging employees, customers and other independent bodies to report such frauds.
This fraud case reveals the lack of proper segregation of duties for the company. This is because there is no follow up to ensure that the branch manager does not exceed his limit. The responsibility of the checking of the credit history of the consumers as required from an independent firm seems to have been ignored (Broady & Roland, 2008).
Further, the authority and duty of the head teller and consignment clerk seems to have been overridden by the branch manager and thus follow up and reporting is not stipulated. Further, the internal auditors are not conclusive in their audit and as such raise questions on their duties in the auditing of the firm (Broady & Roland, 2008).
Improvement of Loan Review Procedures
The minimization of the fraud risks is possible through the improvement of the loan review process. This requires the actual segregation of duties of the review clerks. Further, there is need for improvement of the control of the review process where more than one loan clerk evaluates a loan with an overall supervisor to ensure the loans are valid (Romney & Steinbard, 2009).
The company also requires the improvement of the independence of the clerks and authorities such that they are not limited by the management from carrying out conclusive review. The loan review process can also be improved by focusing on good documentation and mandatory data entry with provisions of back up information for follow up purposes (KPMG, 2006).
The actual rotation of the review clerks is important to mitigate the opportunities of fraud risk. The rotation of the loan review clerks was a good idea. This is because it allowed for the scrutiny of a loan by other clerks to ensure that all the elements of fraud were noticeable. Further, this rotation lowers the opportunity of fraud by the clerks to ensure that there are no personal considerations of gain.
Ability of Auditors to Detect the Fraud
The internal auditors of Greater Providence Deposit and Trust had the opportunity of detecting the fraud at an earlier date. This is because as auditors they were aware of the risks of fraud in terms of bad loans from the loan disbursement (Broady & Roland, 2008). This would have encouraged them to focus on all the loans. Contrary to this, they focused on large loans yet the fraud risk entails the accumulation of small bad loans.
Further, their independence was affected since the branch manager had worked with them. Thus, due to his ability in audit, they would have required the full audit of the loan process.
The lack of follow up on the credit history of the customers should have encouraged adequate review of the process. Further, the frequency of auditing is also an issue since in case frequent auditing was done the auditors would have been able to disclose the fraud.
Indications of Deficiency in the Control Environment
The case of Greater Providence raises indicators that point to the deficiency of the control system. For instance, the authority of the branch manager in making consumer loans of less than $10,000 had been increased with no reports on his work. Further, there were no controls over the extension of the set limit. This provided the opportunity for the branch manager to allow the loans of a higher value.
There were set requirements on provision of a credit history for a client from an independent firm for the issuance of a loan yet this was not checked (Kostrezewa, 1988). It thus provided the opportunity to set up fictitious clients for the issuance of a loan (KPMG, 2006). This was not verified and hence provided the motivation for more fraud.
The checks on audits are not sufficient specifically on completeness and small loans. The controls are also deficient in terms of record keeping which provides grounds for fraud since no supporting documents would be found.
The controls are also deficient in the devolvement of staff which increases the opportunity for fraud since one is too familiar with the position. The control measures on appointment are also deficient due to the lifestyle of Guisti and the position he held which gave him the reasons for carrying out the fraud (Romney & Steinbard, 2009).
Conclusion
This paper has analyzed the Greater Providence Deposit and Trust case on improvement of control procedures in disbursement of loan funds, loan review procedures and the role of segregation of duties in the fraud. It has also examined the ability of the auditors to detect the fraud and the control environment of the company in terms of deficiency.
Reference List
Broady, D., & Roland, H. (2008). SAP GRC for Dummies. New York: Pearson.
Kostrezewa, J. (1988). Charge Embezzlement. Providence Journal Bulletin, 6, F-1.
KPMG. (2006). Guide to preventing workplace fraud: Taking action to reduce Business crime exposure. New York: KPMG International Inc.
Romney, M., & Steinbard, P. (2009). Accounting Information systems: 2010 custom edition. Upper Saddle River, NJ: Pearson