Exam Failures Helped Enable Former CBS Credit Union CEO Embezzlement to Go Undetected: IG
“The lack of segregation of duties at CBS allowed the former CEO to both perpetrate and conceal the fraud.”
Failures in the NCUA examination procedures allowed the former president/CEO of CBS Employees Federal Credit Union to embezzle $40 million from the Los Angeles-based credit union, the agency’s Inspector General said in a new report.
In its review of the failure of the credit union, required under federal law, the IG said former CEO Edward Rostohar had access to physical and electronic records, the ability to alter the records and the sole responsibility for financial reporting.
None of the credit union’s other employees were permitted to have access to the accounting system, the IG said.
“Based on our review of examination working papers, we determined examiners failed to respond appropriately to the heightened risk, which was caused by lack of segregation of duties and lack of dual controls at the credit union,” the IG said.
The IG added, “The lack of segregation of duties at CBS allowed the former CEO to both perpetrate and conceal the fraud.”
Rostohar was sentenced last year to 14 years in federal prison as a result of the embezzlement.
The embezzlement scheme was uncovered by a credit union employee, not the NCUA.
Rostohar also was a former NCUA examiner and accountant who knew the “red flags” that auditors searched for in examinations.
In addition, the IG said, Rostohar was able to conceal his embezzlement because the NCUA’s examination procedures and timing tended to be predictable from year to year.
The IG said if exam procedures required examiners to perform additional procedures that lack “segregation of duties” and to incorporate some level of unpredictability into the process, the likelihood that the agency would uncover fraud would increase.
Agency officials agreed with the recommendations and said they had formed a working group that is evaluating the Small Credit Union Examination Program and will incorporate recommendations from that group in examination materials by the end of 2021.
The Dodd-Frank Act requires that the IG conduct material loss reviews at all credit unions that cause a loss of $25 million or more to the Share Insurance Fund.
Read the full report here.