Fraud Identification Training Sept-Oct 2022

CASE STUDY 3

PHANTOMACCOUNTS IN CYBERSPACE Situation:

You are on an examination of a $250 million community bank rated "2" for the past 10 years. The bank has a conservative board and management team who are well regarded by their peers. The bank has an in-house computer system that processes all applications except securities and credit cards. The bank's correspondent processes the securities portfolio reports and holds the securities in safekeeping. The bank issues credit cards with servicing provided by CardPlus of Ocala, Florida. CardPlus is a leading provider of turnkey card processing services for small and midrange financial institutions nationwide. Through a stand-alone CardPlus system, bank employees can process credit card payments, open new credit card accounts, and make other monetary and nonmonetary adjustments to accounts. Assistant Vice President (AVP) Paul Terguyst started with the bank three years ago as a note teller and is now a Junior Installment Loan Officer. His responsibilities include accounting for the bank's credit card program, monitoring construction loan disbursements, and processing SBA (Small Business Administration) loan payments. AVP Terguyst is a very outgoing person who is well liked by the bank's customers and staff. He is a very bright individual and is completing an MBA program while working full time at the bank. Reportedly, he has been very successful in the stock market and maintains a lifestyle that reflects his newfound wealth. You have been assigned to work on the detail/operations portion of the examination. Your assignment is to balance the loan accounts. After reviewing the bank's daily balancing procedures, researching the applicable suspense items, confirming items in process, and verifying other miscellaneous adjustments, you are satisfied that all loan categories balance, except for credit cards. While reviewing the bank's servicer-provided credit card system reports, you notice that the general ledger account does not balance with the report. As you know, the CardPlus system is a stand-alone bookkeeping system and as such, does not require offsetting transactions to the general ledger. Nonetheless, total outstanding credit card amounts should balance with the general ledger. Any difference between the two totals should have a reasonable and supportable explanation. Daily and monthly reconcilements prepared and initialed by AVP Terguyst show that the two ending balances are almost always different with little or no explanation as to the cause. The out-of-balance amounts are generally less than a thousand dollars and are not material from a financial reporting perspective. However, the frequency of the out-of-balance situations and lack of descriptive comments on the reconcilement sheets cause you concern.

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