Academic journal article ABA Banking Journal

Seven Steps to Building an Internal Fraud Shield

Academic journal article ABA Banking Journal

Seven Steps to Building an Internal Fraud Shield

Article excerpt

When business is going to hell in a handbasket, there isn't as much fraud. After all, there has to be something to steal, right?

So, it shouldn't be surprising that good times--the kind of times the banking industry is still, pretty much, enjoying--are more likely to breed internal fraud than are bad times.

"Fraud is a more noticeable factor in bank failures when we have prosperity than when we're in a period of widespread banking problems," FDIC's Doreen Eberley told bankers at the ABA's recent National Conference for Community Bankers. Eberley, assistant regional director for the FDIC Division of Supervision's regional office in Atlanta, is a veteran examiner who started out in bank liquidations.

The internal frauds that can hit banks where it hurts include self-serving loans and embezzlement. Ultimately, Eberley said, it is the board of directors' responsibility to protect the bank from such crimes, although the board may delegate the details of implementation. This can be helped by instituting control mechanisms and by bolstering those controls with personnel and systems that ensure their enforcement.

Indeed, Eberley cautioned CEOs and directors against cutting such control elements as audit staff--a temptation when earnings appear threatened. "If you cut your backroom staff," Eberley warned, "you're just opening the bank's back door to fraud." In fact, she advised banks that are in growth mode not to forget to grow their audit functions to keep up.

Besides this basic, Eberley noted other easy-to-implement steps that banks could take to fight internal fraud:

1. Clear limitations on lending and investment authority. No one in the bank should be able to exercise a "blank check" without approval. And all lending and investment activity should ultimately be reflected in reports that the board reviews.

2. Planned--but unannounced--rotation of duties. From the viewpoint of the wrongdoer, one of the difficulties of running an internal fraud is that people not involved in the deceit may be able to spot it. …

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