Tools for Preventing Internal Fraud

The last five embezzlement reviews I have performed all had similar characteristics. The embezzlement had been going on for years, but was not detected. I was asked to assist in a review for what examiners thought were some minor irregularities. All the credit unions had been examined by federal and/or state examiners at least three times, and contracted individuals performed agreed upon procedure exams at least twice or three times. Some of the credit unions were getting their AUP exam every 18 months. All of the resulting bond claims filed were in the six figures. When we started, we were told there might be a little problem. Two of the claims exceeded the credit union’s bond coverage limits. But the similar characteristic they all had, was that there were fraud warning signs in a lot of different areas that were ignored, not followed up on or not discovered.

In all of these cases, if some basic minimum procedures had been performed by the supervisory committee, treasurer of the board, or some responsible individual at each credit union, these activities would have been caught early on. For the credit unions that had to be merged, these procedures may have saved the credit union and its members from their merger fate. In most credit unions, some of the procedures discussed below are being handled by the internal auditor or a contracted individual. The definition of a small credit union has been increased to $100 million in assets, and these comments are geared toward the small credit union audience. However, they should be considered for inclusion in every credit union’s control procedures.

Small credit unions for many reasons do not have the benefit of an internal control framework. Because of their lack of controls, or controls that can be easily overridden, the need for an independent set of eyes by default gets delegated to the supervisory committee. This oversight function is extremely important and must be diligently performed.