Fraud Identification Training Sept-Oct 2022

CASE STUDY 4

THE CASE OF THE LOAN RANGER

Situation:

You are the Examiner in Charge (EIC) of an $85 million 2-rated bank located in a remote area of the state. Four months ago, a $750 million regional out-of-state holding company purchased the bank, but the same management remains. President / Chief Executive Officer Brenda D. Seate has been with the bank for 11 years, controls most phases of bank operations, and is the senior lender. The holding company relies heavily upon bank management, who has been favorably regarded in prior Reports of Examination (ROE). As such, the holding company’s input has been limited to asset/liability management and the internal audit function. The previous ROE indicated a moderate increase in classified assets and loan administration weaknesses as well as the absence of an internal audit program. Additionally, the most recent external audit of the consolidated holding company and its eight subsidiary banks reflected an unqualified opinion. The external auditors performed an internal control review that evidenced various lending and operational deficiencies, but since the review was conducted for the holding company and subsidiaries, it was difficult to determine which deficiencies applied to this bank, if any. With this information in mind, you begin the on-site portion of the examination. Due primarily to the lack of an internal audit program at the previous examination and the internal control deficiencies noted by the external auditors, you instruct the Operations Manager (OM) to perform a thorough review of the bank’s internal controls and account balancing procedures. Since your OM will be reviewing controls for overdrafts, you also assign her the responsibility to discuss and classify the overdrafts as needed. Through discussion with the President, the OM determines that the holding company has not yet completed its initial internal audit. During her internal control review she notes that the President has sole authority to approve overdrafts and NSFs (Non-Sufficient Funds). Ms. Seate also reviews the overdraft and NSF reports, but another individual appropriately reconciles both areas. Additionally, the OM noted appropriate personnel balanced the Other Assets and Other Liabilities accounts daily, but two of the Other Assets account reconcilements did not include descriptions. These accounts were titled ‘Miscellaneous Suspense’ and ‘Miscellaneous Assets’ and represented relatively large balances in comparison to the bank’s asset size. Despite several requests to the head bookkeeper, no listing was provided. What is your next course of action?

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