Pub. 4 2015 Issue 1

15 S P R I N G | 2015 COUNSELOR’S CORNER • Fraudulent Financial Reporting – falsification of an organi- zation’s financial statements to make it appear more or less profitable A ccording to the ACFE 2014 Report to the Nations on Occupational Fraud and Abuse, asset misappropriations are the most common, occurring in 85% of the cases in the study, as well as the least costly, causing a median loss of $130,000. In contrast, only 9% of cases involved financial statement fraud, but those cases had the greatest financial impact, with a median loss of $1 million. Purpose of Internal Controls The purpose of internal controls is to ensure that clear standards are followed and to ensure the protection of the bank’s assets from waste, fraud, and abuse. However, internal controls in and of themselves are not going to prevent fraud from occurring in your bank. Waste, fraud, and abuse are people issues. It’s people following or not following internal controls on a daily basis. Banks often unknowingly become involved in occupational fraud schemes by failing to follow and enforce their own internal controls. Why Internal Controls Breakdown First, controls impede efficiency since every internal control is an additional layer of time and effort added to an employee’s responsibilities. If an employee perceives that management will not enforce the control, the control may become ineffective. Controls can breakdown due to lack of communication and understanding. Management puts controls in place but does not communicate why the controls are important. If em- ployees don’t understand why the control is important, it will not be followed. Also, internal controls that should be in place are some- times replaced with trust. Trust is not an internal control. Internal Control Objectives Effective internal control provides bankers and examiners reasonable assurance that: • Bank operations are efficient and effective. • Recorded transactions are accurate. • Financial reporting is reliable. • Risk management systems are effective. • Compliance with banking laws and regulations, internal policies, and internal procedures. “Best practice” themes for controls include limits of authorities, safeguard access to and use of records and bank assets, separate and rotating duties, and both regular and unscheduled reviews, including testing. Accordingly, manage- ment should design and tailor its policies and procedures to ensure best practices. Internal control must be consistently applied and well understood by employees if board and management policies are to be effectively implemented. DoriAnn has over 35 years experience in the accounting and auditing field. Prior to joining Smith Elliott Kearns & Compa- ny, LLC, DoriAnn held the position of Senior Vice President/ CFO for ten years at a national bank which was also an SEC reporting company. DoriAnn’s responsibilities include plan- ning and supervising various audit engagements for the firm’s SEC and non-SEC financial institution clients. ADVERTISER’S INDEX Accountants | CPA Firms Design Consultants | Furnishings IT Financial Services Risk Management Cherry Bekaert & Holland 3 Elliott Davis 7 Fowler & Company 13 Smith Elliott Kearns & Company 9 BD & E 2 CoNetrix 22 Secure Banking Solutions 19 ICBA Securities 20 Terrapin Services LLC 24 Yount Hyde & Barbour 4 Credit Risk Management 23