Good internal controls prevent fraud. Good internal controls also prevent errors and help insure better member service. Last but not least, good internal controls assure that the financial statements are accurate and consistent with prior years.

The credit union system appears to be experiencing a problem with internal fraud. The news reports in Credit Union Times about major fraud cases are far too frequent. The fraud at SchoolsFirst Federal Credit Union shows that fraud affects both large and small credit unions. The surprising thing about the fraud at SchoolsFirst is that larger credit unions have the resources to support a strong internal control environment.

According to the NCUA, they have focused their examination resources on the larger credit unions. I think the SchoolsFirst case demonstrates a significant weakness in the examination process. The fraud at SchoolsFirst appears to have been possible because of a very weak internal control regime.

I believe that is clear evidence that the examination process does not give enough emphasis to reviewing and testing internal controls. Thankfully, most larger credit unions have internal audit departments that test internal controls and generally employ sophisticated CPA firms that also test internal controls.

It is no wonder that most of the reported fraud cases have been at smaller credit unions where there is limited segregation of duties. The fraud risk is raised by what I believe is the two-tier examination system in which smaller credit unions are given much lighter examinations.

Further, raising the risk of fraud are weak supervisory committees, low pay for staff, no internal audit function, less qualified CPA firms and a lack of recognition by boards of the risks in their credit union.

The losses paid by the insurance fund and by CUNA Mutual are losses that are shared by all credit unions. Those losses could have helped credit unions build much needed capital. Equally important are the millions of additional dollars that were spent on legal, credit union research and forensic accounting work to document the fraud and convict those who committed the fraud.

Fraud often affects members and it always undermines public confidence in credit unions. Credit unions operate on trust and fraud is a direct repudiation of member's trust.

As long as we have thousands of credit unions with fewer than 10 employees, we will have to rely on the oversight of supervisory committees and boards. In the 35 years I have been a credit union executive, I have seen a dramatic reduction in the work done by supervisory committees.

At one time, supervisory committee members did cash counts, member account verifications, reviewed member complaints and completed an internal control questionnaire that was submitted to the NCUA.

Today, it seems all they do is to hire a CPA firm and give a report at the annual meeting. In a credit union with fewer than 10 employees, the supervisory committee has to be a check and balance to offset the areas where segregation of duties is not adequate.

At the same time, the examination has to include a review to make sure that there are adequate controls to offset the risks with special attention paid to how the credit union compensates for any weaknesses such as a lack of segregation of duties.

Henry Wirz

President/CEO

SAFE Credit Union

North Highlands, Calif.