Pub. 3 2014 Issue 2

l e a d i n g a d v o c a t e f o r t h e b a n k i n g i n d u s t r y i n k a n s a s 24 OCCUPATIONAL FRAUD: IS YOUR BANK AT RISK? F RAUD IS NOTHING NEW IN THE BANKING industry. The occasional loan customer will fudge financial statements to obtain a loan, and you have likely seen a few overvalued appraisals during your career. You have procedures in place for that. But do you have appropriate procedures in place to combat occupational fraud—the use of one’s occupation for personal enrichment through the deliberate misuse or misapplication of the employer’s resources or assets? According to the Association of Certified Fraud Examiners 2012 Report to the Nations, financial institutions suffered a median loss of $232,000 due to occupational fraud. What could your organization do with that missing $232,000? The top three types of occupational fraud committed by bank employees are: Corruption Schemes Corruption refers to an employee’s misuse of his or her influence in a business transaction in violation of the duty owed the employer in return for a personal benefit. A common form of corruption in the banking industry involves the payment of kickbacks to loan officers from loan proceeds. Corruption can be particularly difficult to detect as the “benefit” may not run through the bank’s financials and is paid in cash. Therefore, you need to pay attention to close relationships between loan officers and specific borrowers. Be cognizant of evidence that an employee’s lifestyle is beyond the reach of his or her paycheck. Cash Schemes Cash schemes involve an employee’s theft of cash kept on the bank’s premises. Such schemes can involve stealing large sums of money out of the bank’s vault or in the account opening process for depository accounts. To combat cash schemes, surprise audits are a must. Also, look closely for violations of dual control and segregation of duty requirements. Make sure to review any stale items in suspense or seldom-used general ledger accounts and take a look at vault reconciliations to see if the amount/denominations of cash and coin make sense. Billing Schemes In a billing scheme, the employee causes the bank to issue a payment by submitting invoices for fictitious goods or services, inflated invoices or invoices for personal purchases. Often, the employee sets up a shell company and bills the bank for goods or services not actually received. The employee also may set up the fictitious company as a pass-through vendor or intermediary between the bank and the actual vendor. In this scheme, the employee inflates the cost of the actual good or service and takes a cut. A common billing scheme involves charging personal items to the bank, disguised as business expenses. This can be particularly prevalent in travel expenses and reimbursement. When it comes to billing schemes, detailed reviews and common sense go a long way. Does the purchase makes sense—is there a business need for the purchase? Pay attention to employee travel reimbursement requests that coincide with vacation time. In addition, you need good vendor and accounts payable controls to combat this type of fraud. Look for the following: • Invoices for unspecified consulting or other services • Unfamiliar vendors • Vendors whose addresses match the address of an employee • Vendors with PO boxes and no available physical address • Multiple monthly billings • Invoices for round dollar amounts When it comes to occupational fraud, vigilance in these areas can make a significant difference. However, the one antifraud control that no bank should be without is a fraud or ethics hotline. The Report to the Nations indicates occupational fraud is more likely to be detected by a tip from an employee than by any other method … including internal audits, management reviews or external audits. So, give your employees a way to alert you to any potential fraud or unethical behavior. An appropriately implemented, confidential hotline service makes your employees part of your fraud prevention/detection program and can result in significant reductions in the frequency and magnitude of potential frauds. The Report to the Nations indicates hotlines help detect frauds 12 months faster and result in a 44 percent reduction in median losses. In addition, confidential third-party hotlines are available at cost- effective pricing structures for even the smallest institutions. Occupational fraud should be of concern to every bank, regardless of size. Again, what could your organization do with that missing $232,000? This information was written by qualified, experienced BKD professionals, but applying specific information to your situation requires careful consideration of facts and circumstances. Consult your BKD advisor before acting on any matter covered here. Article reprinted with permission from BKD, LLP, bkd. com. All rights reserved. Shauna Woody-Coussens is a managing director with the Forensic & Valuation Services practice of BKD, LLP, a top-tier national CPA and advisory firm. In the financial services industry, her practice focuses on fraud investigations, forensic loan reviews and litigation support engage- ments, given her background as a BHC/bank examiner. By ShaunaWoody-Coussens BKD