Fraud Identification Training Sept-Oct 2022

CASE STUDY 18

THE CASE OF IT’S ON THE HOUSE !

Situation:

You are the Operations Manager (OM) for a $90 million institution that is owned by a one-bank holding company, which is, in turn, wholly owned by President David Stratton. The bank was assigned a composite CAMELS (Capital Adequacy – Asset Quality – Management – Earnings – Liquidity – Sensitivity to Market Risk) rating of “4” at the previous examination and has been operating under a C&D. Problems primarily result from inadequate oversight by bank management. Other weaknesses relate to loan underwriting deficiencies, a high level of adverse classifications centered in commercial real estate loans, and poor internal controls. President, Chief Executive Officer (CEO), and Chairman of the Board (COB) Stratton is the dominant influence. Only three of the seven Board members are outside directors, all of whom attend Board meetings via telephone. One of your many tasks as OM is to assess the financial status of the institution by reviewing earnings and balance sheet information. On the first day of the exam, you review the previous Report of Examination. The report indicates that the Board has not exercised adequate supervision over the expenditure of bank funds. High overhead expenses significantly reduced the bank’s earnings and contributed to the erosion of the bank’s capital. The lack of adequate monitoring and supervision of overhead expenses by the bank’s management and Board resulted in overhead expenses that were consistently higher than the average amounts reported by its peer institutions. You also scan the Uniform Bank Performance Report (UBPR) and the general ledger (GL) on the first day. The review indicates that overhead expenses continue to climb and have now surpassed net interest income. A review of the GL indicates that the most significant increase occurred in the “miscellaneous expenses” and “officers’ salary” categories. You also note dividends exceed net income and balance sheet composition varies significantly in relation to peer group structure. You note that the dividend payments made not only exceed the bank’s net income but are in excess of the debt payments required on the bank stock loan of the holding company. The previous report also notes that the bank did not have an internal or external audit function at that time, and one of the conditions of the C&D is to hire individuals or firms that would fill these capacities. A review of the preplanning memo for the current examination indicates that the bank has not yet implemented an internal or external audit function. Given the questions raised by the UBPR data, you spread the balance sheet to fully understand the account composition. You note a large amount of Other Assets and decide to balance this account. A listing of the assets comprising the

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