Investigation
It takes an act of Congress to get anything done in Washington, D.C., but it took the act of only one congressman to get an answer from the NCUA’s Office of Inspector General (OIG) on why Nebraska’s Creighton Federal Credit Union was merged last year after posting a $13.5. million loss.
The OIG determined the loss accumulated over two and a half decades because of financial statement fraud perpetrated by the former CFO - not for his personal gain but to make the credit union appear that it was thriving.
That conclusion came to light this week after Congressman Mike Flood of the 1st District of Nebraska wrote a Nov. 15 letter, which references the CU Times article, that requested the NCUA’s OIG to investigate the circumstances that led to Creighton’s financial losses, the effectiveness of the NCUA’s examination and oversight process in detecting and preventing financial irregularities, and the role and performance of external auditors.
By Dec. 17, the OIG responded with its answers in a letter that was made public by Flood on Tuesday. He is a member of the Financial Services Committee and serves as vice chair of the Republican Main Street Caucus.
On Aug. 1, Creighton and the $1.3 billion Cobalt Federal Credit Union in Papillion, Neb., announced the regulatory-approved merger. Cobalt said in its merger Q&A that the reason for the consolidation was the July 31 retirement of Creighton President/CEO Thomas C. Kjar.
But the OIG’s investigation provided another reason.
“In summary, NCUA officials believe the credit union failed due to bad accounting and financial statement fraud,” Inspector General James W. Hagen wrote in his letter to Congressman Flood. “The large deficit was hidden by the former CFO who exploited Creighton’s weak accounting system that allowed back posting, forward posting, deleting transactions and hiding general ledger accounts when generating reports. Because no money was found to have left the credit union through this, NCUA officials believe the former CFO committed the fraud not for personal financial gain, but to make the credit union appear to be thriving in the eyes of its board and membership.”
But this working theory will never be fully confirmed as fact because Creighton’s CFO died in April 2024.
“NCUA officials believe the former CFO used the “Unapplied Data Processing” account as a suspense account (a temporary account that holds transactions that are not yet categorized or classified) for all transactions he did not know how to post,” the OIG’s five-page letter read. “In one instance, the former CFO appeared to not want to show high dividend expenses, so he posted the expense to the Unapplied Data Processing account. In another instance, he used the “77777-No Name” account to offset and hide large deficits when he ran financial statements during annual CPA audits and NCUA examinations.”
What’s more, Cobalt determined that the former CFO understated expenses related to the ATM network to artificially boost Creighton’s income statement to appear to achieve a steady net income. Cobalt surmised that the former CFO was either not booking the monthly ATM expenses at all or was severely understating the expenses.
“Cobalt indicated the ATM costs alone should have been $255,000 each quarter. They determined the CFO booked around $120,000 per quarter to the office operations account,” according to the OIG letter. “Cobalt officials explained to NCUA officials (in early October) that this would account for an approximate $500,000 to $550,000 reduction in net income per year if no other expenses were booked to the office operations account. Cobalt officials explained that over more than 26 years, such an understatement would easily account for the $12.5 million deficit.”
The NCUA also said the reviews of the deceased CFO and his family’s accounts going back more than 20 years indicated no improper transfer of credit union funds to the CFO or his family.
As for the effectiveness of the NCUA’s examination and oversight processes in detecting and preventing financial irregularities, the OIG said his office would first need to conduct an audit.
“The OIG’s 2025 Annual Work Plan includes a planned audit to review the NCUA’s Total Analysis Process (TAP), which will address the effectiveness of the NCUA’s examination and oversight processes,” the OIG’s letter read. “The objective of our audit will be to determine the effectiveness of the NCUA’s TAP in detecting and preventing financial irregularities. We intend to begin this audit in 2025 and will provide you with a copy of the final report.”
In regard to the role and performance and of an external auditor, the OIG said that even though a CPA firm completed a draft of a June 30, 2023 financial statement audit report, the CPA firm did not issue the report because of Creighton’s failure and merger.
“We are unable to assess the CPA’s performance in this case as we have no access to Creighton’s records or access to the CPA firm’s audit records and workpapers,” the OIG said. “However, we learned that Cobalt has retained the services of a law firm and could pursue legal action against the CPA firm.”
In a prepared statement, Congressman Flood said the unexpected financial problems at Creighton raised significant questions that needed answers.
“I want to thank the Office of the Inspector General for their detailed response to my inquiries and I hope that this information provides the credit union’s former members with answers they may be seeking,” he said.
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