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  • Many bank owners, senior bank officers, and regulators of the banking industry are very critical about “microfinance” because of the following issues: It is very labor intensive, It is very costly to manage and, It is very risky (has lots of internal control issues to address) The first two issues are very much related to financial aspects , and can be addressed by the bank owners during the financial projection activity conducted during the product designing stage. The third issue is the most challenging of all since it involves the entire operations of the bank’s microfinance unit. This training module is intended for MF consultants, officers, owners of MFI’s and staff. At the end of this training, it is expected that the participants are made fully aware of the risks facing their microfinance operations, the necessary internal control measures that could mitigate risk and the importance of putting these measures in place all the time. Next slide
  • Banks and other institutions dealing with finance are highly exposed to fraud originating from clients and/or employees. While this cannot be totally eliminated, management should aim at preventing and controlling fraud to protect its assets and reputation.
  • Today’s discussion is specially designed for Branch and field officers, Executives and Internal Auditors/Compliance Officers. Its main objective is to enhance your awareness of the importance of sound Internal Controls in your bank. Secondly, we hope to remind you once again of the damage that fraud can do, especially to the bank’s image. Finally, we hope that at the end of this workshop, participants will be able to evaluate the internal control systems of their respective branches. The major output for this workshop is a workable Action Plan that each bank will agree to follow in implementing and/or improving their Internal Control Systems over the next few months.
  • The following is a list of basic internal controls: Read the list…
  • Read slide… Provide examples
  • Read slide and then explain: Provide examples
  • Read slide…. Provide examples
  • Read slide… Provide examples
  • Read slide and give examples…
  • Read slide and give examples
  • Read slide and give examples
  • Read slide and give examples.
  • Read slide and give examples. It is important to check on inactive document and closed accounts as well to ensure that fraud is not being committed in classifying or managing these accounts.
  • Read slide and give examples
  • Restrictions in hiring relatives of directors and officers of the bank and those applicants who are strongly recommended by valued clients must be strictly observed. Officers and employees of the bank should be restricted from processing transactions of their relatives and friends. A very classic example is the processing of loan applications of bank employee’s relatives.
  • All banks have existing Internal Control Policies. But the big problem lies in the implementation. It is management’s primary responsibility to see to it that the day-to-day operations of the bank are being guided by sound policies. Perpetrators know very well which banks are easy to manipulate on the basis of its existing policies. Once they get the impression that your bank has very tight controls, they won’t dare to try. Your very own employees will never be tempted to defraud their own bank if Internal Controls are in place.
  • Now, what can fraud do to the bank? Read bullets one by one. After the last bullet: As we can see, a business could suffer both financial and non-financial damages, if fraud hits its operations. Depositors will take out their money if they know that bank employees could run away with their deposits. Loan clients will also stop paying if they know that collectors could run away with their loan payments. If the fraud involves big sum of money, victim clients sue the bank not only for direct reimbursement but with some remuneration for damages. Having seen the magnitude of the bad effects of fraud to the bank, would it still be prudent for the bank to do microfinance? As mentioned several times, the absence of controls in the micro credit process is only a perception. Under the MABS approach of doing microfinance, proper internal control systems are integrated into the entire credit process. There are interventions done by another individual in between steps, to review and validate the work of the AO’s. Next slide…
  • Just like a dreaded disease, fraud if detected in its very early stage can be treated. But if detected too late, it can bring your bank to the edge of bankruptcy.
  • Read slide. Internal fraud is caused by employees of the bank while external fraud is caused by clients.
  • Read slide and give examples
  • Read slide and give examples
  • Read slide and give examples
  • Read slide and give examples
  • Read slide and give examples
  • Read the slide.. Then add: If tolerated, this usually becomes a vicious cycle for some businessmen until it reaches a point when they can no longer accurately monitor their checks in circulation.
  • Read slide and give examples
  • Read slide and give examples
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B3 Fraud Intrnl Cntrl Presentation Presentation Transcript

  • 1. Fraud & Internal Control
  • 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:
            • Internal Fraud
            • 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.