Guest post by Jay Slagel, Vice President of Risk Management and Claims for Allied Solutions, LLC.
Credit unions have a “watchdog” looking out for their interests, overseeing operations and ensuring their records are maintained with honesty and integrity: the supervisory committee. The committee has a host of tools at its disposal to carry out its purpose. Among them is an annual audit of the credit union.
Information gleaned from this audit assists the committee in evaluating credit union operations and in making recommendations to the board. The supervisory committee may also perform surprise cash counts, review non-financial transactions or reconcile credit union accounts with an eye toward compliance with laws and regulations. All these activities place the committee in a prime position to catch suspicious transactions or behaviors that may indicate fraud.
Fraud prevention is part of the job
The supervisory committee’s scope of influence includes management oversight, guidance and reporting to the board. Its specific responsibilities relating to fraud prevention entail:
- ensuring risk assessments are part of the annual audit planning process;
- creating a “safe” whistleblower program;
- establishing strong and effective internal control systems;
- ensuring that appropriate accounting standards, controls and procedures are in place and working effectively;
- directing active and frequent oversight of the internal audit to ensure transparency in reporting;
- ensuring the credit union’s goals and objectives are ethical;
- assuring members and vendors that the credit union takes regulatory compliance very seriously; and
- providing a trusted advisory role to the credit union board.
Education is vital
Supervisory committee members are required to have the formal knowledge, education or experience to handle their fraud-detection responsibilities. Investment in educational programs focusing on key fraud risks, ethical issues and risk-mitigation strategies is key.
Every member of the committee should work to increase their knowledge of: 1) ethics, including heightened awareness of the potential for fraud; 2) the organizational history relating to fraud and its prevention; and 3) fraud concepts.
Detection requires vigilance
Credit union executives, managers or other employees may anticipate internal fraud, suspect it or even suffer the consequences of such schemes, but they may never actually detect it unless they are looking. There are many factors that may indicate fraud. By understanding and watching out for those, credit union supervisory committees can significantly improve the chances of detection.
The top fraud factors involve:
Accounting anomalies — these entail countless red flags such as cash shortages, excessive loan delinquencies, accounts being out of balance and more.
Internal control weaknesses — these become opportunities for insiders to commit fraud.
Analytical symptoms — when a business function occurs at the wrong time or is conducted by the wrong person, chances are it indicates fraud.
Lifestyle symptoms — employees living beyond their means is the most common red flag of fraud.
Behavioral symptoms — people who stop looking you in the eye, come in earlier or stay later than usual without a valid reason may need to be monitored as potential fraudsters.
Tips and complaints — when employees report actual or suspected incidents of fraud among their co-workers or supervisors, you’ve got good reason to investigate.
The committee should approach fraud prevention with a critical eye. While guiding the internal audit process, the committee should always probe deeper into areas that warrant closer scrutiny. A regular discussion of known risk factors, management override of internal controls, fraud risk assessments, results of employee surveys or hotline calls, and publicized fraudulent activities from other companies all lead to an effective supervisory committee.
NAFCU provides training for directors with credit union-specific information on regulations, risk management, the audit process, effective communication and much more.
For more credit union resources from Allied Solutions, including webinars, whitepapers and contact information, visit www.nafcu.org/allied.
Original article appeared in The Federal Credit Union magazine January/February 2012 issue. Download the article here.