2 Introduction “ While fraud cannot be totally eliminated, it can be prevented and controlled.”
3 Service Quality………… The major element that creates a bank’s image in the community; Protecting the client’s and stockholder’s stake in the bank is the Best Service you can give.
4 Proper Accounting Records Independent Balancing Division of Duties and Responsibilities Joint Custody Signing Authorities Dual Control Number Control Rotation of Duties Independence of Internal Auditor Direct Verification Other internal control policies1 Basic Internal Controls
5 Proper Accounting Records Banks should establish Recording Systems in accordance to Generally Accepted Accounting Principles Systems must include, among others, the discipline to keep records always updated.
6 Independent Balancing Balances of transactions of one person must be validated by another person. In the cash department, cashier must validate cash balances of tellers. General Ledger balances must be reconciled with Subsidiary Ledger balances.
7 Division of Duties and Responsibilities This refers to separation of authorities and responsibilities. No one shall have complete authority and responsibility for handling all phases of any transaction from beginning to end. Checks and balances from somebody else are a must.
8 Joint Custody Two or more persons shall be equally accountable for the physical protection of particular records and/or items. Persons who are related to each other within the third degree of consanguinity or affinity should not be made joint custodians.
9 Signing Authorities The Board of Directors should formally appoint the official signatories for and on behalf of the bank. Likewise, the extent of each level of signing authority should be clearly defined.
10 Dual Control The work of one person is to be verified by a second person to determine if: - The transaction is authorized - Transaction is properly recorded At least two individuals are involved in the completion of every transaction.
11 Number Control All accountable forms must be marked with serialized numbers for control purposes. A designated person other than the user of these accountable forms should keep a record of all numbered forms issued.
12 Rotation of Duties To avoid familiarity of his/her transactions, bank employees should be rotated on an irregular and unannounced manner. Management should not allow employees to have access to their previous position.
13 Independence of Internal Auditor The internal Auditor should report directly to the Board of Directors. He or she should not have access in the installation or development of procedures and in the preparation of records which he or she normally reviews.
14 Direct Verification Banks should include as part of standard procedures, direct verification of deposit and loan account balances. This is done by the supervisor or internal auditor visiting clients to verify balances. This should include depositors with inactive, dormant and closed accounts.
15 Other Internal Control Policies Procedure for classifying dormant/inactive accounts. Movements of dormant/inactive accounts should be verified Access to signature cards and deposit ledgers should be limited to authorized persons only. Random checking of actual posting date of deposits Spot checking and authentication (I.e. client visits) of loan documents and other securities held as collateral Tellers and other employees should not be allowed to prepare deposit and withdrawal slips for the customers
16 Other Internal Control Policies Sound recruitment policies should be in place as Internal Control Practice begins from the point of hiring. Officers and Employees of the bank should not be allowed to process transactions affecting their own interest or their relatives’ and friends’ interest as well.
17 What is Internal Control? A system that, if followed comprehensively and systematically can prevent and detect errors and fraud, before they become costly to the bank Fraud control is just one type of internal control Definition:
18 Why do Banks Need Fraud Control? It reinforces a person’s sense of right and wrong Ensures accuracy and reliability of the bank’s records Saves the bank from potential financial losses and embarrassment and loss of business
19 Remember: “ An ounce of prevention is better than a pound of cure”.
20 Definition of Fraud A deception deliberately practiced in order to secure unfair or unlawful gain. Fraud originates with clients and/or employees of the bank.
21 Common Types of Fraud There are two types of Fraud that could occur in your banks: A.Internal Fraud B.External Fraud
22 Common Types of Internal Fraud Forgery Employees with access to clients’ signature cards could process fraudulent withdrawals by forging the clients’ signature. Clients who entrust custody of their Savings Passbook to bank employees for a long time are potential victims of this type of fraud. Misposting of Deposits Intentionally Savings Bookkeepers or Tellers could open dummy savings accounts and post some of the clients’ deposits to this account. Clients who do no check on the posting of their deposits are potential victims of this type of fraud.
23 Common Types of Internal Fraud (con’td.) Malversation of Collections Collectors are prone to this especially if the bank’s controls on receipts is very loose and if they are allowed to collect on weekends and holidays. The bank could only detect this when clients start complaining about discrepancies in their deposit and loan balances. Fictitious Loan Accounts Account officers could negotiate with clients to sign up for a loan, the proceeds of which will be used by the AO with the assurance that s/he will pay the loan on due date. In return, the client gets a percentage of the negotiated loan.
24 Common Types of Internal Fraud (con’td.) Ghost Borrowers Some loan clients may never exist. Account Officers could just pick names in the air and process loans using these names. Proceeds are usually deposited in savings accounts owned by the Account Officers. Kickback or Accepting Bribe from Loan Applicants Some AOs approach loan applicants with insufficient requirements and negative CI/BI results. They assure the client that they could do something to have their loan approved. In exchange for this they get either gifts or percentage of the loan proceeds.
25 Common Types of Internal Fraud (con’td.) Over Appraisal of Collateral Some AOs/Appraisers overstate the appraisal of properties offered as loan collateral so that the client will be able to get the desired loan amount. In exchange for doing this, they usually get gifts or percentage of the loan proceeds.
26 Common Types of External Fraud Forgery Clients’ signatures could be forged by their relatives or their trusted employees Misrepresentation This usually involves claims for money transfers. A third party comes to the bank, presents himself as the beneficiary of the money transfer.
27 Common Types of External Fraud (con’td.) Check Kiting Bank officers who easily accommodate checks for encashment are potential victims of this fraud. Perpetrators usually open checking accounts with several banks using different names. They encash checks drawn on other banks and use the money to fund their checks with another bank. In effect, they access cash from your bank at no cost.
28 Common Types of External Fraud (con’td.) Fictitious Loan Documents Some loan applicants present fictitious copies of important documents like land titles, financial statements and business permits. When the worst time comes, the bank can not recover the loan because the documents are fictitious.
29 Causes of Fraud Internal control systems are loose Policies are not being followed Managers and owners run the business on the basis of “trust” rather than “sound internal controls”
30 Effects of Fraud Could cause embarrassment to the bank Clients will lose trust in your bank Banks incur financial losses in fraudulent transactions and in paying for clients’ damages Bank could be subjected to legal sanctions
31 Evaluating your Bank’s Internal Control System Review your bank’s Internal Control System Based on the inputs given earlier, evaluate which particular risk area in your operation lacks the necessary Internal Controls
32 Creating an Action Plan After identifying the improvements needed in your bank’s Internal Control Systems, you will now create a workable Action Plan. This will serve as your guide in implementing the changes and improvements in the next few months.
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